Whether you’ve been self-employed for years or you’re one of the many new entrepreneurs to strike out on your own in the age of COVID-19, lowering your self-employment taxes is always a smart business strategy. Here are 12 tax deductions self-employed people could consider this tax season:
- Health care: It’s no surprise that health care is a priority for most. If a self-employed taxpayer is not eligible to enroll in their spouse’s health insurance plan, they may deduct medical and dental plan premiums for themselves and their spouses, dependents, and children under age 27 at as an income adjustment. These premiums do not have to be itemized to claim the deduction.
- Startup costs: All costs of forming a legal business entity, such as registration fees, add up. Fortunately, up to $5,000 in start-up costs and $5,000 in organizational costs that your business had to pay to get started can be deducted.
- Eligible business income: The qualifying business income deduction may be available to the self-employed; however, special rules apply to certain service companies. Ask for advice on what might be a significant deduction to increase income.
- Advertising: Every business enterprise needs customers, right? Advertising costs promoting your products or services may qualify for a deduction.
- Transport, travel and meals: A self-employed taxpayer can deduct mileage expenses for all business trips in their personal vehicle, provided a mileage log was used. Alternatively, more detailed transportation costs, such as gasoline, oil, depreciation, licenses, etc. can be deducted, which is particularly important if five or more vehicles are registered in the name of the company. Documentation of business use is essential, and taxpayers can use either the standard mileage rate or the actual expense, whichever is greater. If travel to clients, clients, or other business-related destinations is required, travel expenses, including the cost of meals, may also be deducted.
- Education: Paying to learn new business skills? The costs of your education could be deductible, including tuition, lab fees, supplies, books, and transportation to campus.
- Home offices: Most freelancers have a dedicated workspace at home. If so, you can claim a deduction for the percentage of space occupied by the dedicated workspace in your personal home. The deduction could apply to a portion of the mortgage paid on the property, or the simplified deduction might be a better choice – a taxpayer can deduct $5 per square foot of dedicated work space, up to $300 .
- Office supplies, telephone and Internet: What’s a home office, or any office, without office supplies? Expenses for everything from pens to printers needed for business use can be deducted if there are receipts as proof of purchase. And if you use phone and internet services to conduct your business, those utilities can be deducted as a percentage of business usage if you use the services from your home. If telephone and Internet services are registered with your company, the entire bill can be deducted.
- Business insurance: Self-employed taxpayers can deduct premiums for professional insurance, accident insurance and employee health insurance under one deduction.
- Membership fees: If you have to join a professional organization that charges fees as part of your self-employment, you can claim deductions for those fees.
- Pension saving: Self-employed people can set up various types of retirement savings, such as 401(k), SIMPLE IRAs, and other plans that offer tax deductions or deferrals, in some cases up to 25% of income ( up to $58,000 in 2021)—and even more if age 50 or older.
- Taxes on self-employment: Self-employment tax is one of the most common deductions for self-employment. You can deduct up to 50% of your self-employment tax from your income tax.
With the many small business tax deductions available, self-employed taxpayers have many opportunities for increased business income to consider. The Illinois CPA Society reminds taxpayers that everyone’s tax situation is different and not all tax deductions will be available to everyone. Consulting a certified public accountant (CPA) is the best way to maximize your tax deductions and get the strategic advice you need to increase your profitability and move your business forward.
The Illinois CPA Society’s free “Find a CPA” directory can help taxpayers find the right trusted strategic business advisors based on location, types of services needed and languages spoken. Find your CPA at www.icpas.org/findacpa.