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Self-Employed? Here’s How to Reduce Your Tax Bill

It’s easy to forget all of the benefits of being self-employed when tax time comes ‘round.

For one, “tax time” isn’t a once-a-year event for the self-employed. Thanks to quarterly estimated taxes, there’s an IRS-related reason to grind your teeth each and every season.

Taxes for the self-employed are also much more complicated. Traditional employees have their taxes taken out automatically, receive a W-2 in January and move on with their lives. But if you’re your own business, you have more hurdles to navigate, from much more complex reporting to estimating tax payments.

If there’s any good news on the self-employed tax front, it’s that there are numerous ways to reduce your levies throughout the year. Here, we’ll go over a few ways you can trim your tax bill.

The Home Office Deductions

The home office deduction is one of the most common and well-known tax breaks for the self-employed. It makes sense. These small business owners typically run their companies from home.

The short version: If part of your home, whether you rent it or own it, is used for business purposes, then you can deduct some expenses, typically based on whatever percentage of your home your home office actually accounts for. Same goes for any free-standing structure such as a studio or barn. Better still, the expenses you can claim for your home office “may include mortgage interest, insurance, utilities, repairs, and depreciation,” according to the IRS.

But be brutally honest. Any space you use must be both the principal place of your business and be regularly and exclusively used for work. If you occasionally check your emails in the kitchen, claiming your kitchen isn’t going to fly, and you’ll be torched if the IRS actually decides to conduct an audit.

There are two ways of calculating your home office deduction. The regular method involves actually calculating the various expenses of your home office. The simplified option is simply multiplying the allowed square footage of home use for business by a multiple predetermined by the IRS (currently $5 per square foot).

Social Security Tax Deductions

This is a simple but useful deduction. In short, while traditional employees will pay 7.65% for Social Security and Medicare taxes (and your employer will pay the same amount), the self-employed must pay a full 15.3% in Social Security in Medicare taxes. However, you can write off half of this amount. The deduction is taken from gross income, not itemized.

Health Premium Deductions

Another adjustment to income you can make if you’re self-employed is the health insurance deduction. If you weren’t eligible to participate in a spouse’s health plan, you can deduct premiums paid on a health insurance policy not just for yourself, but also your spouse and dependents. This applies not just to traditional health care plans, but also dental and even long-term care plans.

Education Deductions

If you want to get better at whatever it is you do for a living, you can also deduct educational costs on your Schedule C. This deduction covers any classes that are required for maintaining a professional or trade license, or that will maintain or build skills you can use in your current business. That said, you can’t deduct any educational costs if you’re, say, learning skills that apply to a different career track.

Communications-Related Deductions

You’re typically going to need the internet and phone service to conduct your business, no matter how large or small. Fortunately, that’s one of a number of business expenses that are tax-deductible for the self-employed.

But like the home office deduction, you must be sure not to lump in personal use. For instance, if you have a dedicated phone line for just your business, you can deduct the full expense of that. But if you have a single internet bill covering both your personal and business costs, you can’t deduct 100% of that expense.

Learn About Many More Self-Employed Tax Deductions

Small business owners can use every financial break they can get, regardless of the economic environment. But admittedly, the current climate is emphasizing the need to save every dollar you possibly can.

McManamon & Co. can help you out with these deductions and so many more. We’re a full-service accounting, tax, fraud, forensic and consulting firm specializing in small and midsized businesses, and our comprehensive tax services include not just helping you file, but also providing creative and proactive tax advice to help you reduce your tax bill in any way you’re eligible.

Find out how we can shrink your tax obligations. Get in touch with us today by calling 440.892.8900 or contacting us online.

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