Self-employed folks like freelancers and independent contractors have one big question at tax time: How can I reduce my self-employment taxes?
The majority of self-employed individuals want to claim as many deductions as possible to reduce their taxes but may not know which deductions they’re eligible for.
It doesn’t matter if your business is in the black or in the red, there are six types of tax deductions you can take advantage of.
1. Home Office Deduction
If you’re working for a company, you can’t take the deduction. If you’re self-employed and use a portion of your house for business, you may qualify even if you rent. When tax time comes around, there are two options: the simplified option and the regular method.
Whichever method you choose for your home office, you will need to fulfill two requirements.
In the first place, the IRS insists that you use it regularly and exclusively, which means only business purposes are conducted there.
Second, it should be the place where you conduct business and have meetings. Your home office may not be deductible if meetings are regularly held outside of your house.
The simplified option: This option can help you figure your deduction quickly. You need to multiply the square footage of your office by $5 (up to a maximum of 300 square feet). On your tax return, you may claim a deduction of $1,500 for a home office of 300 square feet.
The regular method: You get a deduction for your home office based on the percentage of your residence that it occupies. In the first step, divide the area of your home office by the area of your entire residence. Then multiply that percentage by the total allowable expenses for your home to determine the allowed deduction. If you had a 300-square-foot home office and a 1,500-square-foot home, you could deduct 20% of your allowable expenses (300 / 1,500 = 0.2).
The deductions you may claim under this type of deduction are specific to your home office. They include rent, mortgage interest, insurance, taxes, and utilities.
2. Credit Card Interest
If you made business purchases on your credit card, you may be able to deduct the interest.
The IRS approves purchases that are deemed “ordinary and necessary” for the operation of the business. The list can include things such as cell phone service, internet, meals, salary and wages, rent, utilities, and interest.
3. Deductible Taxes
Certain types of taxes can be deducted by small business owners and self-employed individuals.
Depending on your state or local government, you may have to pay real estate taxes, sales taxes, or employment taxes. You cannot deduct federal income taxes.
Whenever you deduct your taxes, you need to do so during the year you actually paid them. You will need to make sure you have paid your state and local taxes by Dec. 31, 2021, if you plan to claim them on your 2022 tax return. It means you should be very careful, as well as consult your tax professional when making your payments and tax calculations.
4. Self-Employed Health Insurance Premiums
Self-employed persons may have difficulty affording health insurance but they may be able to claim it as a deduction from their taxes. Tax-deductible health care premiums include premiums paid by you, your spouse, and any dependents younger than 27 on your health plan regardless of whether you claim them on your return.
This deduction requires that you report a net profit this year. On your federal tax return, Schedule A, you can instead claim your premiums as an itemized deduction if you didn’t.
5. Business Mileage
Your mileage can be deducted from your taxes if you use your car for work purposes, such as making deliveries or going to meetings. Taxes can only be deducted for business mileage if you use your car for both business and personal trips.
If you claim miles on your taxes, you have two options, just like with the home office deduction.
You can multiply the standard mileage rate by the number of miles you drove for business during the year. Mileage rates in 2022 will be .58 cents per mile. In 2022, you could deduct $5,850 if you drove a total of 10,000 business miles.
You must meet these criteria to be eligible for the standard mileage rate:
- The car must be yours or leased
- You cannot operate more than five vehicles simultaneously
- Your cars cannot have been depreciated
Note: If you select the standard method when leasing a car, then you will have to use it throughout the lease.
You can deduct the actual business expenses incurred in operating the car using the actual expense method. You will need to determine which portion of a vehicle you use for business and which for personal purposes.
However you track your business miles, it is recommended that you keep a log that records trip dates, the type of trip, the odometer reading, any repairs or tires, insurances, lease payments, or depreciation.
It is also important to determine which method generates the biggest deduction and choose it. When you use an online tax software program, it will ask you for both vehicle mileage and actual vehicle expenses. The software will then calculate the biggest deduction available for you.
6. Training and Education Expenses
Your tax return may let you take a deduction for work-related education. The education you pay for must maintain or improve your current skills. You may not be able to deduct education if it is for a new job or line of business.
A home repair education course can be claimed as a tax deduction if you provide the service and take it. The course is tax-deductible since it improves your current skills and maintains them.
Tax deductions are available for tuition, books, supplies, fees, and transportation costs.