No, there is nothing fun about taxes when you’re self-employed. Well, almost nothing. While it is certainly true that dealing with taxes, receipts, payments and so on can be challenging and exhausting, there is one part of the process that is at least somewhat enjoyable: finding deductions that lower your tax bite.
After all, who doesn’t like to save some money? The good news is that, as a self-employed individual, there are a lot of potential deductions available to you. The bad news is that many of them are easy to miss.
That’s where we come in. We have compiled a list of 10 of the most overlooked tax breaks for the self-employed. Some will save you a little, while others can save you a lot. When combined, they should make tax time at least a tad more enjoyable.
1. Startup Costs
If you are in your first year of business, costs you incurred before you began operations are deductible, up to $5,000. If you spent more than $5,000, the costs can be amortized over time.
2. Health Insurance Premiums
This is a deduction that is simply not available to employees. Because you are self-employed, in all likelihood, you buy your own medical insurance. If this is the case, you can deduct 100% of what it costs you to cover yourself and your family.
In this time of rising healthcare costs, this is a significant deduction.
3. Medicare Premiums
A similar expense that older self-employed individuals are eligible for are the premiums paid for Medicare as well as the cost of supplemental Medicare policies.
4. Self-Employment Taxes
When you are self-employed, you are both an employer (of yourself) and an employee (of your business). As such, 50% of the Social Security and Medicare taxes you pay can be deducted on your personal IRS Form 1040 using Schedule SE.
5. Retirement Plans
This is probably the most profitable deduction of all for the self-employed. Your contributions to IRAs and 401(k) plans benefit you in two ways:
- First, for 2016, 401(k) contributions up to $18,000 and 25% of net income are deductible. Even better, up to $53,000 can be socked away and deducted into a SEP IRA.
- Second, because this money is tax-deferred, the government is rewarding you for creating your own retirement plan by not taxing you on the income until you withdraw the money down the road.
6. Interest Payments
Interest paid for business expenses (credit cards, loans) are a great, and far too often overlooked, deduction.
7. Capital Expenditures
Large items that you buy for your business (e.g. autos, computer systems, etc.) are typically depreciated over time, but not always. There is an exception for small businesses that allow deductions to take place in a single year, for up to $250,000.
Be aware that if you claim depreciation for an automobile in a given tax year, you cannot switch back to claiming the standard milage rate for the following tax year. We’ll discuss each briefly below.
8. Vehicle Costs
Speaking of cars, a deduction that a lot of self-employed people don’t know about is the business auto expense deduction. Most people use their car part-time for work and part-time for personal use. Well, the business percentage is a business expense and is therefore a legitimate deduction.
You can claim it by keeping a log of all miles driven as part of your business for the year, then multiplying that by the standard mileage rate of $0.575 per mile. You can also track actual expenses and hold onto receipts for everything from oil changes and maintenance to gas and depreciation, but your deduction will likely be bigger by using the standard mileage rate.
9. Education and Training
The cost of training classes, webinars, books, magazine subscriptions, other research material, educational fees, travel and other expenses related to business education and training are fully deductible.
10. Home Office Deduction
This last deduction is a great one and too often missed. Indeed, only about 33% of all self-employed individuals claim it. Usually, they avoid using this nice deduction because there are a lot of catches to it, and therefore they think using it can trigger an audit. But in reality, the IRS applies a simple two-part test:
- One, the dedicated space in your home must be used as your principle place of business, or it must have some other acceptable business purpose, and
- Two, it must be used regularly and exclusively for the business.
If you meet these two criteria, then the applicable percentage of homeowners insurance, utility bills and so on can be deducted. Should you decide to claim this deduction, you will have to decide on which method you’ll use to claim it. For more information, read our guide to choosing between the Simplified and Regular Home Office Deduction methods.
So yes, tax time doesn’t have to be so painful after all. Keeping good records and using expense tracking software can make it easier come April, or taxman forbid, even later from an audit.
But if the pain of taxes still stings after reading this, we have your remedy. Check out our complete guide to self-employed deductions, which details everything you need to know about deducting expenses from your self-employed income. We also have a complete list of freelancer-friendly deductions, as well as lists made for ridesharers, consultants, cleaning professionals and construction workers.