Do you know that self-employed professionals enjoy various tax relief services and benefits as salaried employees? For example, you can deduce your business expenses while paying self-employment tax, which in turn, would reduce your Medicare and social security tax. Here are a few tips that you can keep in mind while filing self-employment tax in the next accounting year:
1. Self-employment tax deduction
Your social security and Medicare taxes come under the self-employment tax. Small-business owners, independent contractors, and freelancers need to pay 15.3% tax out of which 2.9% goes for Medicare and 12.4% for social security. In fact, you may have to pay an additional 0.9% for Medicare if your income is more than the threshold amount. Here’s the threshold amounts that you need to remember:
● Single self-employed person – $200,000
● Married but filing separately – $125,000
● Married and filing jointly – $250,000
● Qualified person as the head of the household – $200,000
● Qualified widow who has a dependent child – $200,000
It may seem that the tax structure is a burden on self-employed professionals, but in reality, it is not. Self-employed professionals get a 50% deduction from self-employment tax from the net income while calculating income tax. According to the IRS, the employer’s portion of 7.65% in the total of 15.3% tax is treated as a business expense.
2. Home office deduction
Home office deduction refers to the cost of the space that you use for your business. It doesn’t matter whether it’s a rented place or you own it; the IRS considers it as a home office expense. Make sure you prepare your workplace’s diagram, in case there’s an IRS audit. The measurements need to be accurate to prove that your calculations are correct.
The office space isn’t the only thing for which you may get additional tax relief. A few other expenses that you can also include are repairs for the office throughout the year, homeowners insurance if you work from home, home depreciation, mortgage interest, and utility expenses. For example, if your home-office setup occupies 25% of your home’s premises, then 25% of the annual electricity bill will also come under tax-deductible.
3. Phone bills and internet deduction
In addition to claiming home office deduction from your self-employment tax, you can also deduct internet, fax, and phone expenses. But make sure those expenses are directly related to your business. For example, you can deduct the internet bill that helps run your company’s website. But if you have a single phone line in your house that you also use to make and receive business-related phone calls, you can’t deduct its bill from your self-employment tax.
The IRS only allows a 100% tax deduction if you have a second phone line from which you only make and receive business calls or the cost of long-distance calls for your business from the first line.
4. Travel deduction
Your business trip must last for more than one working day to come under the tax deduction slab. Additionally, your business trip should have some purpose, such as meeting new clients, finding new customers, or learning something that would help in improving your business. Don’t forget to keep all the receipts and records from the trip. You need to file them at the time of requesting for travel deduction.
A few travel expenses that the IRS accepts are lodging, meals, transportation expenses to and from the destination, and if you need to go anywhere else for business purposes.
Self-employed professionals may also enjoy more deductions, such as rent, startup costs, business insurance, vehicle use, advertising, retirement plan contributions, and health insurance premiums. Talk to an expert about the possible deductions your business is eligible for before you file your self-employment tax in the next accounting year.