Self-employment has its perks, but being your own boss can lead to headaches come tax season. In addition to the income tax, you’ll need to pay self-employment taxes that support the Social Security and Medicare programs.
But there are ways to reduce the amount you owe.
At the start of the new year, you may receive a 1099-NEC tax form or 1099-K tax form. You also may have received other income in the form of cash or checks for work performed in the previous year from being self-employed.
One of the best ways to lower your taxes paid on self-employed income is to increase your business expenses. As a self-employed taxpayer, you can write off expenses and take certain deductions against that income to help reduce your tax liability.
However, it is very important to hold on to all receipts for any business expenses related to purchases or professional services received and to keep accurate, up-to-date records of your business’s activity.
Here are four easy ways to keep your taxes down if you are self-employed.
1. Driving expenses
If your self-employed income is from operating a ride-hailing or delivery business through platforms such as Uber or Lyft, you will be able to take a vehicle expense deduction. This allows you to recover some costs associated with wear and tear on your vehicle to operate your business.
Be sure to keep track of your business miles, personal miles and commuting miles as you will need to provide this information to take the deduction.
2. Home office expenses
Home office expenses is another deduction that you can take advantage of if you utilize part of your home as your office space to conduct business. A home office deduction can be calculated using the simplified deduction method, which is a prescribed rate of $5 per square foot of your home that is used for business up to 300 square feet.
Or you can use the actual expense deduction method, which allows you to write off a percentage of expenses related to rent, utilities, mortgage interest, property taxes and repairs and maintenance.
Other common deductible expenses related to your home office include website services, computer software, merchant fees, electronics and other supplies needed to run your business.
You also can deduct communication expenses, such as a portion of your internet and cellphone bill, as long as those costs are directly related to your business. For example, if 20% of your time on the phone is spent on business, you could deduct 20% of your phone bill.
3. Depreciation deductions
If you purchase equipment, such as a laptop or a leaf blower for your business, you can categorize it as an asset and take a depreciation deduction — which allows you to spread the expense over the useful life of your asset.
For example, let’s say you purchased a new ergonomic office chair at the beginning of the year for $400. You will be able to classify this as an asset and take a $57.14 depreciation expense deduction each year over a useful life of seven years, which is standard for office furniture.
You can also take a Section 179 election to fully expense and deduct the asset in the current year — instead of depreciating it — to further reduce your tax liability. This is an annual income tax deduction taken by filling Form 4562 with your tax return.
4. S Corp election
Another way to keep your taxes down is by changing your business structure into an S Corp election with the IRS. You can make the S Corp election for your corporation or limited liability company.
For example, when operating your business as an S Corp, if your business income is $100,000 per year and you pay yourself a reasonable salary of $60,000, all income that exceeds your salary — $40,000 in this case — is not subject to self-employment taxes. Only the salary of $60,000 is subject to self-employment taxes. However, if operating your business as a sole proprietor, self-employment tax is due on the entire amount of $100,000 business income.
Financial Reviewer, RetireGuide.com
Ebony J. Howard is a certified public accountant and financial reviewer for RetireGuide.com. Her background is in accounting, personal finance and income tax planning and preparation. Ebony holds a dual degree bachelor’s and master’s in accounting from Clark Atlanta University. She is passionate about making an impact in the community, sharing her knowledge in financial literacy and empowering people to achieve greater financial freedom.