There are many perks associated with being self-employed; however, dealing with your taxes is not often considered to be one of them.
Unlike employees who have their federal taxes deducted from their pay and paid by their employer, individuals who work for themselves are responsible for paying their own taxes.
There are many expenses that regular employees cannot claim as deductions on their tax return that self-employed individuals can use to reduce their taxable income. This, in turn, will reduce the amount of money that you owe the IRS and in some cases can even result in a tax refund.
Here are a few deductions that you should be aware of to ensure that you aren’t paying more than you should at tax time:
- Tax software or tax preparation– Whether you do your taxes on your own using tax software or pay a tax professional to prepare your tax return- these expenses can be used as a tax deduction.
- Designated home office– If you have a designated work space in your home that is used solely and regularly for work purposeds, you can claim the home office tax deduction. Using the percentage of total square feet your office represents, this deduction can be applied to rent, mortgage, home insurance, utilities and property taxes as well.
- Internet and telephone– You can deduct either all or a portion of your telephone and Internet service if you use these items for work related activities. When you use either item for both work and personal activities, only a percentage of the expenses will be deductible.
- Travel expenses– Does your business require traveling? If so you may deduct 100% of costs associated with travel for business. This will include gas, mileage and hotel stays (if you are out of town).
- Entertainment and meal expenses– When incurred for business purposed, entertainment and meal expenses can be deducted up to 50%. This is the case for expenses in your local area or while traveling as long as they are business related. Keep receipts and note the nature of the business for future reference.
- Health insurance– A percentage of health insurance premiums may be deducted. This does not apply to individuals who choose to pay for their own insurance while they were eligible for coverage under another group health plan.
- Business related expenses– Any expenses that you incur in part or full as a result of operating your own business may be eligible as a deduction. Office supplies, cost of running a website, training or subscription fees and technology expenses are a few examples of expenses that could be tax deductible.
Knowing what may be considered a tax deduction is only the first step. It is your responsibility to keep good records that are organized in a manner that will provide proof of expenses in the event of an audit. Create a filing system that included files or folders for various expenses. This will not only ensure that all of your receipts are in one place when you are ready to file your tax return, but also serves as proof of all deductions that you are claiming.