This article was updated on May 22, 2020.
When you’re self-employed, you likely want to find as many tax deductions as possible. While everyone else is waiting for a refund, you’re probably thinking about all of the money you’re going to have to pay the IRS, even if you estimated your taxes and paid quarterly.
There’s plenty to keep up with throughout the year including your mileage log if relevant, your receipts and any other information that you might be able to use for your deductions come tax time.
When you’re self-employed you’re shouldering the burden of certain costs you wouldn’t have if you worked for an employer. You’re also constantly grinding to make sure you’re generating income,and it can be tough all around. Yes, you have autonomy and a sense of independence, but you don’t have that sense of security that employees have.
You can help yourself out a bit by knowing about the best tax deductions for the self-employed, however. The following are examples of some that might be ideal for you.
If you drive for your work, whether that’s meeting clients, picking up supplies or anything else, you may wonder about auto-related deductions available to you. If you have a car that you use entirely for business, you may be able to deduct car expenses. If you use your car for a combination of business and personal uses, which is more common, you have to divide your expenses based on mileage.
Mileage is the primary auto-related deduction, and while it may not seem like it’s going to be a lot, it’s generally worth it to keep a mileage log because it can add up.
In 2018, the per-mile rate was 54.5 cents for business miles. If you’re self-employed, you can either choose to deduct exact expenses, or you can use the standard mileage rate and calculate deductions that way. Don’t forget about insurance either, as your employment status and what you use your car for may also affect your car insurance rates.
Home Office Deduction
If you’re self-employed, the home office deduction may be available to you. Some people are fearful of using the home office deduction because there’s the misconception that tends to float around that it will trigger an audit. Unfortunately, if it applies to you and you’re not using it, you’re missing out on a valuable way to trim your tax bill.
There were changes made in the 1990s, according to Turbo Tax, that made it easier for people working from home to take this deduction and it’s much more common to work in a home office than it used to be,so it’s not a red flag in most cases.
According to the IRS, the use a home office deduction there must be a dedicated part of your home regularly used for business. It can be in a separate room or a group of rooms, and if it’s just one part of a room, there should be a division. That division can be as simple as a partition.
Eligibility also requires that your home office is the primary location for your business, or it’s somewhere you regularly have meetings.
Self-Employed Health Insurance Deduction
If you’re self-employed and pay your own health insurance for yourself as well as your family, you may be able to take a tax deduction. It can be one of the biggest deductions available. If you qualify as someone who’s self-employed, you may be able to deduct 100% of your insurance premiums, including dental coverage for yourself, your spouse and your dependents.
What is important to understand about this is the fact that it’s not a business deduction. Instead, it’s a personal deduction that applies to your federal, state and local income taxes, but not to your self-employment taxes.
To qualify, you can’t have any other health insurance coverage, and you must have a business income.
Finally, if you save for retirement,you may be able to deduct your contributions. If you don’t have employees, you can create an individual 401(k). Then, you can contribute up to $18,500 as an individual and 25 percent of your net income.
If you have employees, you might want to opt for the SIMPLE IRA. SIMPLE stands for Savings Incentive Match Plan for Employees. This IRA plan lets employers make contributions to employees’ retirement.
Another option for the self-employed is the Simplified Employee Pension IRA or SEP IRA. You can contribute the lesser of 25 percent of your income or $5,000 currently. If you have eligible employees, an equal percentage of their income has tobe contributed as well.
Of course, tax laws and guidelines change quickly so there may be differences next year, but it’s worth looking into these deductions if you’re self-employed.