There is something about taking self employed tax deductions that makes small business owners and solopreneurs start shaking in their boots. Maybe it’s the fear of making a mistake. After all, when you work for yourself, there’s nobody else to blame if there is a snafu or two on your return come tax time. But the self employed have some incredible tax opportunities that regular employees don’t get to enjoy. Are you taking all the deductions you could be? Shoeboxed wants to help you find out.
1. Business Tax Write Offs
Self employed folk pay a significantly higher tax rate than regular employees. Last year, the average self employment tax was 5.65% higher than employee taxes. But where Uncle Sam taketh away, Uncle Sam giveth back again.
Unlike employees, solopreneurs can take self employed tax deductions from their own self employment taxes. This means that 50% of your taxes can be written off from your net income. In essence, the taxes you pay to be in business for yourself are considered business expenses, and can therefore be deducted.
2. Taxed Business Income Write Offs
Not all of your net income is taxable by the IRS. You are only responsible for paying self employment taxes on the portion of your net income left over after you’ve subtracted all of your various business expenses and write offs. Only what’s left over after all of your deductions is taxable (which, after reading this post, will hopefully be a significantly lowered amount!)
3. Income Bracket Discounts
We all have to pay at least a 7.65% tax rate on our income, whether we have a boss or we are the boss. Beyond that, however, the self employed only have to pay taxes on a certain percentage of their income. As of 2010, this number was 92%. Depending on which tax bracket you fall into, you could end up paying closer to 7.65% than 12, 13, or even 15%. In essence, if you make less, you’ll be taxed less.
4. Health Insurance Write Offs
Most regular employees aren’t able to write off their monthly health insurance premiums, making this one of the biggest and best self employed tax deductions small business owners can take. As long as you’re not eligible for other health coverage under your spouse, you can claim 100% of the premiums you pay for health insurance – even dental!
Here’s another benefit for the self employed: if your spouse isn’t eligible for their own health insurance and are covered under your plan, you can even write off the premiums you’re paying for them. Premiums paid for kids and other dependents count too. Here’s the tricky thing, though – writing off health premiums for your dependents is actually a personal write off, not a business write off, but it’s only available to small business owners who are self employed. Go figure.
5. Credit Card Interest
If you have and use a credit card specifically for business and business-related expenses, the interest you pay on those purchases counts towards your self employed tax deductions. Normal credit card interest is decidedly not tax deductible, however, so make sure the interest accrued is tied to business expenses that are “regular and necessary” for your industry.
Magazines? Yep, magazines. And journals, and any kind of publication or subscription that is considered specific to your industry or line of work can be written off as a deduction. So go ahead and renew for another 12 installments of Fly Fishing Monthly (but only write it off if your business has something to do with fishing).
In part two of this series, we’ll look at the ins and outs of writing off ongoing education courses, self employed retirement plans, and oh-so-much-more!
Which self employed tax deductions are you unsure about?
photo credit: fly-fishing-discounters.com