The Tax Benefits of Being Self-Empoyed

For many people, self-employment comes with its share of risks. For example, if you're a sole proprietor, your business assets are considered personal assets (and vice versa) for legal purposes. Plus, you may not have the stability of a steady paycheck nor the benefits that come with an employer-sponsored retirement plan.    Enough gloom and doom! Working for yourself can be incredibly freeing, and it allows you to set your path and to be creative. There's no boss breathing down your neck, and your co-workers might be your adorable cats and dogs. Also, there are some considerable tax benefits. Here's a look at some self-employment tax deductions.

Home Office Deduction

Perhaps the most talked-about tax deduction is the one for a home office, but it is fraught with limitations. In fact, this deduction is misunderstood and over calculated. For example:    You must use the office ONLY for business. If you fire up the printer in your office every once in a while to run off your favorite knock-knock jokes for personal use, you're technically violating the exclusivity rule.    You must do a significant part or all of your business there. For example, if you are a tutor and often drive to meet students at their homes or libraries‚ and you don't use your office except to maybe print and store study materials‚ then you might not qualify for the deduction. On the other hand, if you use the home office to type lesson plans, do administrative work and scout for prospective students to tutor, then the office can likely be considered a principal place of business.  Taking the home office deduction used to be complicated, and it can still be. However, the IRS introduced a simplified option that cuts down on the recordkeeping that taxpayers must do.

Vehicle Expenses

One of the benefits for self-employed people is the ability to claim tax deductions for vehicle use. For example, if you are a tutor, keep track of your mileage when driving to tutoring sessions. You'll also have to account for the dates of these trips and their purpose, so try a mileage tracking app.  Other vehicle-related expenses you can claim include repairs, insurance, oil changes, registration, and gas. You can also claim partial deductions.  Suppose that 50 percent of the time when you drove your car, it was for business use, and your overall car expenses for personal and business use combined are $5,000. You could claim $2,500 in tax deductions or 50 percent of $5,000.  

Retirement Plans

It can be a major-league bummer not having an employer match your contributions to a retirement fund. That's a lot of free money you're potentially missing out. Fortunately, one of the top tax deductions for contractors and self-employed people has to do with retirement plans. Your contributions to solo 401(k)s, SEP-IRAs and SIMPLE IRAs are deductible, although the amount you deduct may change with each tax year. In 2018, you can contribute up to $55,000 to a SEP-IRA, up from $54,000 in 2017. It needs to be no more than 20 percent of your adjusted self-employment income or no more than 25 percent of your gross yearly salary. That $55,000 contribution to your retirement account is considerably more than if you had a traditional employer arrangement.  

Loan Interest

If you've had to shell out for loans in the course of opening and operating your business, you can deduct the interest you incur from these loans. You can also deduct credit card interest as long as it applies to business purchases. To simplify your tracking, keep separate personal and business credit cards.  

Health Insurance

 If you pay health insurance premiums on your own, you can deduct these payments on your taxes. The same idea applies when you pay to provide your children up to age 27 and your spouse with health insurance. However, you cannot be eligible for a plan under your spouse's employer.

Telecommunications

Today phone and internet service are necessary for almost all businesses. You can deduct these expenses along with fax expenses as long as they connect directly to your business. Partial deductions are allowable. If 75 percent of your time on the internet at home is for business use, deduct 75 percent of your internet bill, not 100 percent.  

Other Deductions

Other deductions you can take include those related to entertainment, meals and travel expenses. Make sure that they relate directly to your business. For example, traveling to Palm Springs for a friend's birthday weekend and exchanging business cards with fellow partygoers don't qualify. Also, meal and entertainment expenses tend to be only 50 percent deductible. With all of these tax benefits comes the need to keep detailed records. They'll save you if you get audited and will make your life much easier come tax time.