You’ve worked hard to be able to work for yourself, and we know that it comes with nearly endless details to attend to and remember. We want to make sure that these five tax deductions don’t get lost in the shuffle so you can maximize your profits for the year.
The home office deduction is a complicated one, we admit. If you use part of your home regularly and exclusively for your work, you can write it off. While this is mostly an honors system, you will need to be prepared to defend the deduction in the event of an IRS audit. We recommend preparing a diagram of your workspace, with accurate measurements, that includes the square footage of the space. The IRS has simplified the home office deduction by allowing taxpayers to deduct $5 for every square foot that qualifies. So if your home office is 300 square feet (the maximum size allowed for this method), you can deduct $1500.
You can deduct other expenses for your home office according to the percentage that your office square footage takes of your home. If your home office is 15% of your home, you may be able to deduct 15% of your electric bill, mortgage interest, homeowners insurance, etc. Some of these benefits only apply if you own your home as opposed to renting it.
Also, even if you don’t take the home office deduction, you can still deduct some elements of your internet, phone, and fax lines.
If you drive your car for work, even if driving itself isn’t your job, you can claim the business use of a vehicle deduction. The key here is to keep excellent records of the dates, mileage, and purpose of each work-related trip.
You can use either the standard IRS mileage deduction or your actual vehicle expenses. The standard mileage deduction means you take that year’s rates (57.5 cents per mile for 2020 and 56 cents per mile for 2021) and multiply that by the number of miles you drove for work. If you want to do the actual expenses method, you need to calculate all of the expenses of owning the vehicle (gas, oil changes, tires, repairs, etc). Then, multiply the total percentage by the number of miles driven for business reasons, so if your total car costs were $6000 for the year and 20% of your driving was for business, you would multiply 6,000 x .2 and your vehicle deduction would be $1200. It may be worth calculating both to determine which is the most advantageous for you.
Health Insurance Premiums
Health insurance premiums are one area in which it pays to be self-employed, from a tax deduction perspective. Unlike those who work for others, you can deduct what you pay for health insurance for yourself and your family–including your spouse, dependents, and children under the age of 27 who are not dependents–whether or not you itemize. This deduction includes dental, health, and long-term care premiums.
Retirement Plan Contributions
Retirement plan contributions are another area in which self-employed people benefit. If you work for a company, you’re limited to whatever your employer offers. If you work for yourself, you have more options. Contributions to SEP IRAs, SIMPLE IRAs, and solo 401(k)s lower your tax bill now and help you accumulate tax-deferred investment gains down the road.
Contributions vary by plan types and you will of course need to be earning enough to be able to contribute without sacrificing your immediate quality of life.
Advertising is key to success, but it costs money. If you pay for Facebook ads, billboards, a TV commercial, or other forms of advertising, you can write it off. This includes advertising that encourages people to contribute to a charity if your business’s name is on the ad.
If you have questions about how to manage all of these tax deductions for self-employed people, please give us a call. We would love to work with you on these and other ways you can save money on your taxes while making the IRS happy.