What does it mean to be self-employed and what does that mean for your tax deductions?
Being self-employed means starting your own business, whether it is a sole-proprietorship (like this blog), or a big company with many employees. To start your own business, you have to apply for a business EIN from the IRS. You can do this for free. When you sign up for a business EIN you have to declare what type of company it is, whether it is a sole-proprietorship, LLC, S-Corp, etc. Once you do that you can get started and actually making the business and being your own boss!
Once you are your own boss you face some different tax implications than you would if you were a regular W-2 employee. But, at the same time, you are now capable of taking advantage of tax deductions that you never could before that can help you save on your tax bill!
What Are Some Tax Deductions You Can Take If Self-Employed?
There are several different expenses that people have that, if used for the sake of your business, can be deducted from your total taxable income for the year. These include credit card interest, home office expenses, training and educations expenses, health insurance premiums, car mileage, and more!
Tax deductions from credit card interest, a business needs to make any purchase that is “ordinary and necessary” for operating the business, like cell phone, internet, meals, salaries, wages, rent, utilities, and interest.
For home office tax deductions you can’t take it if you work for a company. However, if you’re self-employed and use part of your home for a business you may qualify to deduct these expenses, even when renting. You can claim these tax deductions using one of two methods, which are the simplified option and the regular method
To qualify, the office must be used only for business purposes and should be your principal place of business meaning you have meetings and complete work there.
For the simplified option, you simply multiply your office’s total square feet by $5 (up to 300 sq. ft.)
For the regular method, your tax deduction is based on the percentage of your home that your home office occupies. First, you have to divide the home office sq. ft. by your home’s overall sq. ft. Then, multiply the percentage you get by the sum of your home’s total allowable expenses to get the allowable deduction.
With home office deductions, you can only deduct expenses like rent, mortgage, interest, insurance, taxes, utilities, and other costs.
In order to claim training and education expenses on your tax deductions, you must pay for an education that maintains or improves your skills in your current line of work. Unfortunately, if it’s for a new job or type of business then it’s not deductible. Some education-related expenses you may be able to deduct are tuition, books, supplies, fees, transportation costs, etc.
To claim self-employed health insurance premiums as tax deductions, you must pay for health insurance premiums out of pocket, and then you can deduct the premiums you pay for yourself, your spouse, dependents, and any children under 27.
To use health insurance deductions, you have to report a net profit for the year. If you didn’t you can still claim your premiums as an itemized deduction on your form 1040 federal tax return, Schedule A.
In order to claim business car mileage deductions you have to use your car for work and you can deduct your mileage from your taxes. If you use it for both personal and business uses, you can only deduct the business mileage.
There are two methods you can use to claim this type of deduction which are the standard mileage and the actual expense method.
The standard mileage rate is a rate you can multiply against the business mileage you drove for the year. For the year 2021, the standard mileage rate is 0.56 cents per mile. To use the standard mileage deduction, you must own or lease the car, you must operate 5 or fewer cars at one time, and you must not have claimed depreciation on your cars.
If you use the standard method for a leased car then you need to use it throughout the entire lease.
When using the actual expense method, it allows you to deduct the actual business costs of operating a car. This includes things like gas, insurance, licenses, registration fees, tires, lease payments, depreciation, etc.
There are other business expenses that people have that they might not think about but are in fact deductible expenses.
Some of these types of expenses include:
- Data Storage – Like iCloud, Dropbox, Google Drive, and etc.
- Websites, Logos, and LLCs – when you pay the fees necessary to form and run a website, make a logo, and the expenses needed to form an LLC are all tax deductible
- Cameras, lights, and computers – Most everyone know you can make money being a YouTuber or social media influencer. If you pay for these items to use in your business you can deduct them from your taxes
- Payment processor fees – If you run an online business and use services like PayPal, Shopify, Stripe, or others you can deduct any fees you pay when using these types of services
- Software/Subscription fees – when running a business, you will most likely need to purchase one or two pieces of software in order to do so and some of them might be subscription based services which you can write off of your taxes
Disclaimer: I am not any sort of investment or financial professional giving any sort of legal advice. I’m just some guy trying to teach other people about how they might navigate the financial world.