Tax deductions and other benefits you can enjoy when you’re self-employed
Love to reduce your business tax bill? (Who wouldn’t?!) Here are tax deductions and other benefits you can enjoy when you’re self-employed.
As a self-employed person, you’re responsible for generating income by promoting your business and verifying the value of your goods and services. While running an independent business, you have to manage your internet and phone bills, travel expenditures and utility bills.
The good news is that, when you’re self-employed you can claim deductions related to your business. However, too many people miss deductions that can significantly decrease their tax bill.
To make it easier for you to prepare your accounts for tax season (and claim any deductions you’re entitled to), Careful Cents have produced this quick guide to tax deductions and other benefits you can enjoy when you’re self-employed.
What does self-employment tax mean?
‘Self-employment tax’ are the Social Security and Medicare taxes that are necessary for everyone to pay at the right time. For 2018, the tax percentage for employees was 7.65%, while self-employed paid 15.30%. Here are the breakdown of rates:
- Social security tax is 6.2% for every employer and employee on the initial $128,700 in salaries.
- Medicare tax is 1.45% for employer and employee without any wage limit.
You may own an extra Medicare tax of almost 0.9% in these situations:
- Single with $200,000 income.
- Married (filing jointly) with $250,000 income.
- Married (filing separately) with $125,5000 income.
The thresholds of income for extra Medicare tax apply to the income of a self-employed person along with compensation income and combined wages. With $100,000 self-employment income and $160,000 wage income from spouse, you have to pay extra 0.9% Medicare tax on $10,000.
What tax deductions might you be eligible for?
Here are five tax deductions for self-employed people. To take advantage of these deductions, you need to make sure you track your expenses with receipts.
1) Internet fees
If you use the internet or a website for your business, some of your internet costs can be deductible. Use of internet for non-business objectives can’t be deductible, so you’ll need to deduct a specific percentage of internet cost used for your business.
2) Home office allowance
IRS has some special deductions for home offices. For deduction of a home office, measure the square space that you are using for your office and multiply it by $5. For instance, for 15-foot x 15-foot home office space, multiply 225 x $5 to get $1125.
3) Phone and travel expenses
You can deduct any costs for your business calls. To make it easier to separate person calls (which aren’t deductible) and business calls it may be easier to get a separate phone for your business. Similarly, you are allowed to deduct travel expenses related to your business.
4) Promotional expenses
If you spend money on promoting your products and services, you can deduct it from your tax bill. This includes advertising or marketing agency fees, the cost of promotional videos, advertising, business cards, and web hosting.
5) Office supplies
You can also deduct office supplies exclusively used for your home business, including staples, folders, ink, pens, paper, etc.
Photo by Anthony DELANOIX