Recently there has been an increase in self-employed workers, freelancers, and side gigs. You can look at different forums (Reddit, Facebook, Instagram, Esty, Ebay, and others) and see an increase of activity.
Before starting this short discussion there are a few references that you should review: Form 1040, Schedules 1, 2, 3, C, and SE. Along with Publication 334, Publication 535, Publication 463, and Publication 583 at IRS.GOV.
Because of COVID, remote, self-employed workers have become a prominent demographic. In the U.S., where nearly anyone can set up an LLC as a single member (disregarded) entity or be a sole proprietorship chances are many workers are looking into working for themselves. In any case taxes are still paid. There are many tax breaks available to small businesses.
Below are several of those deductions. Consult with a tax professional to see what fits for you. The tax professional is not always a Tax Attorney. Here are a few links to explain what an Enrolled Agent is and does, and locating a professional in your area:
Health Insurance
If a self employed individual is not qualified to join a spouse’s medical plan from their work, deduction of medical and dental premiums can be taken as an adjustment to income. This would apply to spouses, dependents, and children below 27 years old.
Transportation
One of the more asked question on the forums is can I deduct my car on taxes. Mileage costs for business travel may be deducted. A detailed mileage log will be needed to account for date, purpose, and miles driven. This is the easiest to take the deduction. Breaking out the gas, oil, depreciation, licenses, etc. can be done, but in my opinion is more of a hassle for the self-employed. If there are five or more cars registered to the business, they will have to choose actual cost method.
Education
Self-employed individuals that paying to earn skills that are used at work is deductible. This deduction covers tuition, lab fees, supplies, books and transportation to campus. As an example, I am an Enrolled Agent and the IRS requires me to obtain continuing education to maintain my credentials and those “education” expenses are deductible.
Home Offices
Most self-employed individuals have a dedicated workspace at home. This space has to be 100% dedicated to the business. No playing of Fortnite, Facebook for personal use, homework for the kids, surfing the internet for good recipes, etc. Calculate the percentage of floorplan the home office takes up. Use that percentage to apply to the mortgage and utilities paid on the entire house. There is a simplified deduction, which allows a deduction of five dollars per square foot, up to $300. That amount would cover a 17×17 workspace, which is larger than many home offices.
Self-employment Taxes
Up to half of the self-employment taxes can be deducted from income taxes on the Form 1040.
Retirement Savings
Self-employed can sign up for a solo 401K taking deductions up to $58,000 (in 2021) on the contributions. If your over 50 it is even better as they get an additional $6,500.
Office Supplies
This is often overlooked. Office supplies are normally not that costly. They do add up. These are supplies, from pens and paper clips to paper and ink for printers. Receipts prove their purchase. Normally the supplies need to be used up in a year. Items having a shelf-life of longer than a year can still be deducted.
Business Insurance
Premiums for business insurance, accident insurance and employee health insurance are all covered under this single deduction on the Schedule C.
Phone and Internet Costs
Most small businesses rely on the internet, these utilities can also be deducted from tax payments. If registered to the company, deduct the entire amount of the bill. Otherwise a percentage of use and a log should be used.
Loan and Credit Card Interest Payments
Does the business have loans registered to itself? The payments can be deducted from the company’s taxes. This is not limited to a business credit card. If the company uses a personal credit card to purchase something for business use, the payments can be deducted also.
Start-Up Costs
Yes you can still deduct start up cost. The deduction is up to $5,000 in start-up costs and $5,000 in organization costs. These costs include registration fees and other funds that the business must pay to get started as a company.
Membership Fees
Some professionals, such as engineers and lawyers, are required to join professional organizations that charge fees. If your client must pay membership fees as part of their self-employed business, they can claim deductions for those fees.
Advertising
Promoting your business through advertising is deductible. Those Facebook, Instagram, and the more traditional forms of advertising are included. Lobbying, conventions, and political parties are not acceptable for advertising deductions.
Qualified Business Income Deduction
This is a new deduction allowing business owners who made less than $163,300 in the previous calendar year to claim up to a 20-percent deduction on their taxable business income. This amount isn’t just for business income, but from all sources. Even if the income is above the limit, you may be able to claim some amount of deductions.
Don’t Overlook Deductions
Evey dollar counts. Look at these tax deductions regardless of whether you qualify for them or not. If your tax professional is not talking about these deductions and more, start asking or find someone new.
