Tax season is quickly approaching, and we have yet to meet an entrepreneur who looks forward to this day. No one likes parting with their hard-earned money, but there are many (legal!) ways you can lower your tax bill this year.
As a self-employed individual, there are numerous tax deductions you can take advantage of. These deductions can reduce your tax liability and improve your bottom line.
So if you’re getting ready to file your taxes, here are 13 commonly overlooked tax deductions you’ll want to take advantage of.
1. Health insurance premiums
If you buy health insurance for yourself or your family, you may be able to deduct the premiums on your taxes. Any medical or dental insurance premiums you paid for yourself, your spouse, or children under the age of 27 qualify for a deduction.
This deduction is available as an adjustment to your income, so you don’t have to itemize your deductions to claim it. However, there is one big caveat — you can only claim this deduction if you’re not eligible for a spouse’s employer-sponsored plan.
2. Home office deduction
If you’re self-employed and work from home, you can claim a home office deduction. However, the IRS sets two requirements you must meet to claim this deduction:
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You must use the office solely for business purposes
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It should be the primary location where you work and have meetings
Assuming you qualify, there are two different ways you can claim this deduction: the simplified method or the regular method.
With the simplified method, you multiply your office’s square footage by $5 for a maximum of 300 feet. This means you can deduct a total of $1,500 on your tax returns.
If you use the regular method, you’ll figure out the actual costs of your home office. These costs could include your mortgage, insurance, and utilities. From there, you’ll figure out what percentage of your home the office occupies.
For instance, let’s say your office is 300 square feet and your home is 2,300 square feet. This means you can deduct 13% of your allowable expenses for your home office.
3. Mileage deduction
If you regularly use your vehicle to drive to meetings or make deliveries for your business, you can deduct the mileage used. However, this deduction is only available for business trips, not personal use.
There are two different ways you can claim the mileage tax deduction. You’ll multiply the total number of miles you drove that year by the standard rate with the standard mileage rate.
For 2021, the standard mileage rate is 56 cents per mile. So if you drove 5,000 miles for business, you can deduct $2,800 on your taxes. However, you can’t claim this deduction if you also claim depreciation on the vehicle.
The other method you can choose is the actual expense method. This deduction allows you to claim the actual expenses of owning and operating the car, like gas, oil, registration fees, and insurance.
4. Retirement savings
One of the advantages of self-employment is that you have more options when it comes to tax-sheltered retirement savings. You can contribute pretax money to a solo 401(k) or a SEP IRA, and both of these come with higher annual limits than regular retirement accounts.
For instance, if you open a solo 401(k), the maximum amount you could have contributed in 2021 is $58,000. Plus, you can add in catch-up contributions if you’re over the age of 50.
5. Office supplies
If you regularly purchase office supplies for daily operations in your business, these expenses are tax-deductible. Office supplies can include printer ink, pens, or postage stamps. If you have larger items to deduct, like a computer or any other office equipment, these items are tax-deductible in the year you purchased them.
6. Social Security taxes
If you’re self-employed, you have to pay a special 15.3% tax — 12.4% for Social Security and 2.9% for Medicare taxes. However, you’re able to write off half of the amount you pay in Social Security taxes.
And best of all, you don’t have to itemize to take advantage of this deduction. However, you must have a net earning of at least $400 to qualify. And in 2021, the maximum amount of self-employment income you can claim is $142,800.
7. Phone and internet
If you regularly use your smartphone or internet for business use, you can deduct these expenses from your taxes. However, you can only claim the costs directly related to running your business.
For instance, if you have just one mobile phone, you can’t deduct your entire phone bill from your taxes. You need to figure out the percentage that actually went toward your business. But if you have a dedicated business phone, you can deduct this from your taxes.
8. Start-up costs
If 2021 was your first year in business, you can claim up to $5,000 in startup costs. Startup costs are expenses you paid to start the business or investigate a business idea.
Here are some examples of qualifying startup costs:
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Market research
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Advertising for the business
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Employee wages
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Necessary business travel
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Fees for business or legal consulting
However, you cannot deduct interest, taxes, or the cost to purchase vehicles or equipment.
9. Business travel and meals
If you regularly have to travel for your business, you can deduct the money you spend on business travel and meals. To qualify as a deduction, the business travel must last longer than a regular workday, and it must take place outside of the city where your business is located.
In addition, you must have a specific business purpose planned before you leave. And you must engage in actual business activity during the trip. For instance, meeting with clients or engaging in client prospecting would qualify as business activities.
It’s essential to keep any receipts and records you receive during your travels since the IRS looks more closely at business travel. And you should avoid combining business and personal trips — you’re only allowed to deduct the expenses that are actually related to your business.
10. Advertising
If you pay to advertise your business, these are all tax-deductible expenses. Advertising costs could include Facebook ads, billboards, or a direct mail campaign.
However, certain types of advertising aren’t allowed. For instance, you can’t deduct lobbying expenses.
11. Credit card interest
If you have a credit card you use exclusively for business purchases, you may be able to deduct any interest accrued throughout the year. And you don’t have to take out a business credit card — it can also be a personal credit card you use solely for business purchases.
12. Professional memberships
If you join any professional memberships, like a local chamber of commerce or board of trade, you can deduct the membership fee from your taxes. You may also be able to deduct the cost for books, journals, or magazines that are specific to your business.
13. Continuing education
And finally, if you pay for ongoing education, you may be able to deduct these costs as well. You can deduct the cost of the course, books, fees, and transportation to and from class.
However, this education must help you maintain or improve your skills related to your existing business. For instance, if you’re taking training to help you switch careers, this is not a tax-deductible cost.
The bottom line
When you’re self-employed, it’s easy to get discouraged by the amount of taxes you have to pay. But with some strategic planning, there are ways you can reduce your taxable income. Consulting with a CPA or business attorney can help you identify areas where you can save money in your business.
As someone who’s self-employed, you also need to think about what would happen if you were unable to work due to an illness or injury. Income insurance is a great way to protect your livelihood from the unexpected — contact Asteya to learn more about how to get started.
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