Self Employed Tax Deductions
Self Employed Tax Deductions
Self employed people are subject to the self employment tax, which is 15.3% of your net profits. This is on top of your regular tax, and can add up very quickly.
To minimize your taxes, it's important that you are aware of all of the self employed tax deductions available.
This lens will discuss the most common self employed tax deductions, tax credits, and tax strategies to help you make sure you don't overpay Uncle Sam.
List of Tax Deductions for Self Employed Business Owners
Q: Is there a list of tax deductions that are common for self employed business owners?
A: You are allowed to deduct expenses against your business income as long as they are ordinary and necessary for your business. This basically means that if it's a common expense for your type of business and it's necessary in order for you to run the business, it's probably deductible.
If in doubt, write it down, and let your accountant decide if it's deductible.
In the meantime, here is a list of common tax deductions for self employed people:
* Bank fees
* Shipping fees and supplies
* Office supplies
* Accounting and legal fees
* Computer and software
* Internet, website and faxing services
* Contract labor
* Furniture and office equipment
* Continuing education
* Home office expenses
This self employed tax deductions list is not all inclusive. There are a lot more expenses you could incur, but these are the most common tax deductions for self employed people.
How Do I Report 1099 Income?
If you're self employed or an independent contractor, chances are you will receive a Form 1099-MISC at some time during your career. Form 1099 is used to report various types of income, and is due on January 31st of each year.
Income shown on IRS Form 1099 should be reported on your individual income tax return (use Schedule C - Profit or Loss from Business).
The good news is that you can deduct expenses from your business income, which will reduce your taxable income and thus the taxes that you pay on your self employment income (see above for a 1099 tax deductions list).
Standard Mileage Rate For 2010 Down Slightly from 2009
Many self employed business owners use their own car for business use. You are allowed to deduct the business use of a personal vehicle on Schedule C, Profit or Loss from business. You can use either the standard mileage rate or actual business expenses, although most people use the standard mileage rate.
Higher gas prices caused the IRS to increase the standard mileage rate in 2008 and 2009. While the rate has gone down slightly in 2010, it's still pretty high at 50 cents per mile. The rate was as high as 58.5 cents per mile in 2008 and 55 cents per mile in 2009.
Taxpayers may use the standard mileage rates to calculate the deductible costs of using their personal automobile for business, charitable, medical or moving purposes.
Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
Whichever method you choose, it is important to keep track of your mileage to substantiate your deduction. Because the rates were increased in the middle of the year, it's also important to keep track of the dates you use your vehicle for business to make sure the proper rate is used.
Home Office Tax Tips
One of the biggest income tax deductions for self employed people is the home office. Here are some tax tips to help you get the most out of the home office deduction.
Qualifying for the home office tax deduction:
Your home office qualifies for the home office tax deduction if it is your principal place of business, and you use it regularly and exclusively for business.
To pass the 'place of business' test, your home office must be the principal place you conduct your business, or a place where you regularly meet with clients or customers, or it must be a separate structure not attached to your home.
Regular and exclusive use means that you spend at least 10-12 hours per week conducting business in your home office, and that you don't use this room for other purposes. For example, if you use part of the room as a laundry room or children's play room you may not qualify for the home office deduction.
A good example of a home office that would qualify for the home office tax deduction is a spare bedroom that is used only to operate your home
based or online business out of. A poor example of a home office - and one which probably would not qualify for the home office tax deduction - is using your dining room or kitchen as a home office.
Expenses that you can deduct as part of the home office tax deduction:
Expenses that can be deducted include mortgage interest, real estate taxes, utilities, insurance, repairs, security, and depreciation.
If you itemize deductions, chances are you are already deducting your mortgage interest and real estate taxes. However, deducting the business use of these expenses on the home office deduction schedule reduces your business income, which reduces your self employment tax. This results in much greater tax savings than just deducting these expenses on the itemized deduction schedule.
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Tax Tips for Home Office Use
Any tax advice contained in this message is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. It is strongly recommended that you get additional help from a (paid) tax professional who is familiar with your unique circumstances. In other words, don't take take advice from a Squidoo lens, or forum, or blog...