The 9-to-5 grind is not for everyone. In fact, there are millions of taxpayers who choose to brave the business world on their own terms. More commonly known as entrepreneurs, these self-employed individuals are typically go-getters and become easily accustomed to a different style of working. While the environment you hustle in may change from day-to-day, so does the way you approach your taxes. Each year you could be required to file a bit differently than the last, meaning there is no cookie cutter method for recording your business expenses.
If you’re a self-employed entrepreneur, you receive your income firsthand without any taxes being withheld by an employer. While this may sound awesome, when tax season arrives, it’s your obligation to pay the government a percentage of your earnings. As one might assume, this requires significant organization and keeping track of all operational costs. Fortunately, there is a major upside to filing this way. One of the biggest being the number of write-offs you can claim as an entrepreneur.
What tax advantages are there for entrepreneurs?
The IRS offers several tax breaks for qualifying entrepreneurs, specifically those who fall under the self-employed category. Similar to real estate agents and contractors, entrepreneurs can deduct car-related expenses. While mileage tracking often garners the biggest savings on your tax return, there are other ways to increase your benefits each year.
For those looking to take advantage of all the available tax benefits for self-employed entrepreneurs, here’s a list of the top five options to consider:
Home office deduction
Compared to W-2 employees, most entrepreneurs conduct the majority of their managerial tasks and operations from the comforts of their home. How do you qualify for the home office deduction? Easy: if you have a designated office space in your home, the IRS allows you to deduct certain expenses that are connected. For example, with the home office deduction you can claim:
- Interest
- Insurance
- Home utilities
- Repairs
- Depreciation
The way you claim home office expenses is done in two ways: the simplified option (here you multiply the set standard deduction rate of $5 by the square footage used for business purposes) or the regular method (here you deduct the actual expenses).
Retirement savings
Another great tax benefit for budding entrepreneurs comes from saving for retirement. If you have an IRA set up, you may be able to deduct certain contributions. According to the IRS, your contributions can be up to $5,500 if you’re under the age of 50. The amount increases to $6,500 if you’re 50 years or older. While it might not seem like much, any write-off is worth taking advantage of to augment your earning savings.
It’s important to note, this type of tax deduction for entrepreneurs only applies to traditional IRAs. Roth IRAs are not tax deductible. If you choose to use this tax deduction, make sure to read the fine print on the limitations that apply.
Out-of-Pocket Health Insurance
Out of all the benefits on our list, this one happens to be the most useful for entrepreneurs. Because health insurance comes at a costly expense nowadays, you’ll want to look for a qualifying tax break that can reduce the financial impact. Types of insurance that may be deductible include:
- Medical
- Dental
- Long-term care
In addition to personal insurance expenses, you may be entitled to deduct the insurance costs for your spouse or dependents too. Due to the complexities of insurance policies, we recommend speaking with a licensed tax professional to make the most of this tax break.
Choosing the right entity
As an entrepreneur, you have several directions in which you can take your business. But did you know the entity you choose can have an effect on your taxes too? In particular, the amount you’ll need to pay to the government. That is why it’s important to choose the right entity for your business, and typically speaking, a licensed CPA will be your best guide in that department. The types of entities to consider as an entrepreneur include:
- Sole proprietor
- Partnership
- Limited liability co. (LLC)
- S corporation
- C corporation
Each direction comes with its own set of pros and cons in regards to tax filing. Review all your options to ensure you can benefit as a qualifying taxpayer.
Separate personal and business finances
While this advice doesn’t qualify as a tax deduction per say, it does make a significant difference on how you allocate your finances. As a golden rule, separate your business finances from your personal ones. We suggest opening up a new business account with a specific bank to house all your business income. There you can choose to open a cash saving credit card and structure a pay schedule that makes claiming taxable income easier.
Start saving for your future
Being an entrepreneur means you get to run your business exactly how you please. While these qualifying tax breaks are crucial to maximizing your tax savings, they do require some work. These top five benefits are sure to lead you in the right direction when the time comes to file as an entrepreneur. Interested in learning more? Read our guide on mileage tracking for sales professionals.
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