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15 02 2022
15 Self-Employment Tax Deductions
Working for yourself comes with the opportunity to claim a variety of tax write-offs.
Being your own boss gives you access to tax incentives not available to other workers. These include self-employment tax deductions for a home office, vehicle expenses and internet service.
While these deductions can save you money, don't expect them to wipe out your tax bill completely, says Kristen Anderson, founder and CEO of Catch, an app designed to make it easier for self-employed workers to set aside money for taxes and benefits such as retirement and insurance. "Finding out you owe $10,000 in taxes instead of $15,000 is a big win, but not if you don't have anywhere close to $10,000 set aside," Anderson says.
Once you've made a habit of setting aside money for taxes, you can keep more of it in the bank by claiming the following self-employment tax deductions.
- Qualified business income.
- Mileage or vehicle expenses.
- Retirement savings.
- Insurance premiums.
- Office supplies.
- Home office expenses.
- Credit card and loan interest.
- Phone and internet costs.
- Business meals.
- Business travel.
- Startup costs.
- Continuing education.
- Subscriptions and memberships.
- Advertising.
- Self-employment taxes.
Qualified Business Income
One of the most lucrative tax deductions to come out of the 2017 Tax Cuts and Jobs Act was the creation of the qualified business income deduction, also known as the QBI deduction. It allows owners of certain pass-through businesses, such as sole proprietorships, partnerships and S corporations, to deduct up to 20% of their business income on their personal tax return.
"This is a new concept and not everyone is aware they can claim it," says Eric Bronnenkant, head of tax for online advisory firm Betterment. However, there are income limits on who qualifies for a QBI deduction. Only individuals with a 2021 taxable income at or below $164,900 will be eligible, although married couples filing jointly can have a combined taxable income of $329,800.
Mileage or Vehicle Expenses
Self-employed taxpayers can deduct either their actual operating expenses for using a vehicle for business purposes or claim a standard mileage deduction. For the 2021 tax year, the standard mileage rate for business is 56 cents per mile.
"It's really easy to take those deductions if you keep receipts and records," says Jeffrey Wood, certified public accountant and partner at Lift Financial in South Jordan, Utah. If the IRS conducts an audit, it will want to see receipts for actual expenses or a travel log, which should include the date, destination, miles driven, odometer readings and purpose of each trip. You could record trip information in a notebook kept in your vehicle or use a mileage app such as MileIQ or TripLog.
Retirement Savings
Don't overlook the significance of a deduction for retirement savings. "I'm amazed at how many times I run across someone who is self-employed and doesn't have a SEP IRA or a solo 401(k)," Wood says.
All workers younger than age 50 can deduct up to $6,000 in contributions made to a traditional IRA in 2021. For workers age 50 and older, up to $7,000 is deductible. However, self-employed individuals can use a SEP IRA which lets them contribute – and deduct – as much as 25% of their net earnings, up to $58,000 for tax year 2021.
Read more: https://money.usnews.com/money/personal-finance/taxes/articles/self-employment-tax-deductions
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