If you are in business for yourself, here are some tax tips for self-employed people you must understand. This is an important guest post that I want everyone to read – even if you’re not self-employed. The reason is that many CPAs forget or overlook these simple ideas.
You have to remember that your tax preparer works with up to 500 clients. He or she loves you…but don’t expect them to remember every little detail. You’re responsible for your tax return…that’s why you sign it.
Here is a list of some tax tips and advice you can really benefit from – self-employed or not.
Matt Robinson is a tax accountant who has been helping taxpayers with major IRS tax debt problems for over 11 years. His firm specializes in tax debt settlement and resolution.
Approximately 10-12 million Americans, or 2/3 of all working Americans, are self-employed. Having financial independence is a great benefit if you can earn enough to provide for yourself and/or your family. Moreover, the tax code is designed to actually benefit the self-employed and small business owners in contrast to the average W-2 employee. For 2009, whether you were part-time or full-time, be sure to capitalize on many of the self-employment tax benefits provided by the Federal government or the IRS. Many expenses that you normally would incur as a W-2 employee can become legal, tax deductible business costs.
Tax Deduction for Self-Employment
The self-employment tax (15.3%) must be paid by self-employed individuals. The Social Security tax is comprised of Medicare (2.9%) and Social Security taxes (1%). If you are a W-2 employee, your employer pays half of the Social Security taxes (7.65%) due, which acts as a disincentive to self-employment as a whole. To combat this, the IRS allows you to adjust your gross income by half of your self-employment tax. Make sure you claim this deduction. If you are using TurboTax, ItsDeductible or another software program, it should deduct it for you, but double-check it because these software programs are not flawless.
Health Insurance Deductions
This is an above-line tax deduction in the sense that you can reduce your income tax with this but not your self-employment tax. If you paid for your health insurance yourself, you will be able to deduct those premiums as long as you were not able to participate in a W-2 employee or group health plan (like your spouse’s). Again, to figure out your allowable deduction, you need to take your self-employment income and deduct 50% of your self-employment tax (discussed above), as well as any IRA contributions, and what is left is your allowable deduction. In other words, if after the calculations you made only $2,500 but your total yearly premium cost was $3,000, you can only deduct $2,500. You would claim this deduction on your 1040 (line 29).
Retirement Plan Deduction
Self-employed retirement plans offer above-line tax deductions. If you made contributions to a qualified self-employment retirement plan (e.g. SEP IRA, Simple or Keogh Plan), you can deduct these contributions. For example, with a SEP IRA (common self-employment IRA) you can put away as much as 25% of your net income from self-employment (capped at $49,000) for 2009. To figure out your net earnings here, take your total revenue and subtract expenses, the 50% deduction for the self-employment tax and the deduction you made to your SEP (the last subtraction from net income is confusing, so see page 16 of IRS publication 560). If you file for a tax extension, you have until October 15, 2010, to not only file, but to fund your SEP IRA. For 2009, the line item you use to report your SEP contribution is 29.
Home Office Tax Deduction
If you work from home and you have an office that you solely and regularly use for business, you can take this deduction. This deduction is applicable whether you rent or have a mortgage. This deduction would be applicable to rent, your mortgage, property taxes (if applicable), home insurance and utilities. Take the percentage of total square feet your office or workspace represents and apply it to the expenses formerly mentioned. Use caution here because this deduction has a tendency to trigger audits, so be prepared to provide proof as to why you took this deduction. Moreover, make sure that your total home office deduction is not more than your total income. Your deduction is limited by what your income was from your business.
Phone Number and Internet Access
If you utilize your internet and phone for business, you can typically factor these in as business expenses. However, if you utilize your internet for personal use 10% of the time, then you would deduct 90% of your monthly internet costs. The same goes for your cell phone or business phone.
Capital Expenditure Deductions
Office equipment you use to run your business (e.g. computer, fax, printer, etc.) normally is depreciated over time, but there is a small business tax deduction you can take advantage of which will allow you to deduct up to $250,000 a year in equipment.
Meals and Entertainment Deductions
You can deduct up to 50% of meals and entertainment as long as these expenses were incurred for business purposes. It is a good idea here to keep a record of what you spent, when and why in case you are ever audited.
Travel Expense Deductions
You can deduct the full cost of traveling (so long as you traveled out of town). For any trip that included staying overnight, you can deduct the hotel cost as well. Remember, any meals or entertainment involved with that out of town trip can only be deducted by 50%.
Educational Online Memberships or Publications
If you subscribe to a trade journal or membership site in order to improve your business, you can deduct these expenses.
Editor’s Note: Please don’t assume that your CPA is going to remember all these deductions. Call her up and ask her if she’s using all these deductions or not. If not…why not? Have you uncovered other deductions your CPA forgot about?