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If you are a self-employed independent contractor, you are probably wondering if you can reduce self-employment taxes. The answer is yes you can!
Good bookkeeping practices make keeping track of your financial records throughout the year simpler. By keeping good bookkeeping records, you relieve added frustration and confusion during income tax season.
What does self-employed mean?
A self-employed person is considered an independent contractor. An employer can tell an independent contractor how the service needs to be performed but, they cannot tell an independent contractor when and how to complete a service.
As an independent contractor you are your own boss; therefore, it is important to keep clear records of revenue and expenses.
Below is a list of some common self-employment tax deductions for the independent contractor.
Let me remind you to sign up for my free Bookkeeping Simplified Guide. My Bookkeeping Simplified Guide includes free access to my method on how to put your bookkeeping on a schedule.
Common Self-Employment Tax Deductions
A common self-employment tax deduction is advertising. Being an independent contractor means attracting your own clients and getting the word out about your business. Which means you can deduct expenses as a result of advertising.
Some of these deductions can be social media marketing, mailings, business cards, flyers, TV advertisement, and radio advertisement.
Continuing education expenses need to be related to the type of service you provide.
An example of this would be taking an accounting class at a community college if you are offering services as an accountant.
Business Insurance Premiums
Insurance premiums are common for freelancers and businesses alike. General liability insurances, commercial property insurance, and error and omission insurance are a few insurances freelancers and businesses grab to cover their interests.
Keep track of insurance premiums you use for your business for possible tax deductions.
You cannot claim your home office if a company employs you. However, if you are self-employed and use a portion of your home for business, you may be able to use it as a deduction.
The IRS requires your home office to meet two requirements:
1. The home office has to be used regularly and solely for your business.
2. The home office has to be your primary place of business.
If you meet the two IRS requirements then talk to your CPA or tax advisor regarding the tax deduction.
There are two different tax deductions when claiming a portion of your home. Your CPA or tax advisor will help to determine which of the two deduction options will work for you.
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The meal allowance for tax deductions is generally 50%. However, the IRS has allowed a 100% tax deduction for the 2021- and 2022-income tax year.
In order for a meal to be a tax deduction:
- a business owner or employee has to be present
- the meal cannot be extravagant or lavish
- the meal is necessary for business
- the cost of a meal is spent with a customer, client, employee, or consultant
Business only trips allow you to expense travel meals.
To learn more about deductible meal expenses visit the IRS website.
Another very common self-employment tax deduction is office supplies. Think about your everyday supplies and uses like pens, paper, ink, and postage.
In most cases you can consider office supplies a tax deduction. If you make purchases over $2500 for equipment or other assets then talk to your CPA or tax advisor.
Phone and Internet Costs
Phone and internet costs are common necessities for most freelancers.
If you are using a personal cell phone for your business, figure out what percentage of use you are using primarily for your business.
Let’s say you are paying $1000 a year for your cell phone, and you use your cell phone for business 20% of the time; you would be permitted to claim $200 as a tax deduction.
You cannot use your home phone as a tax deduction. However, you can deduct long distance phone charges for business calls. You can also deduct a second phone line if it is setup specifically for business use.
Independent contractors often work from home, but there are an increased number of freelancers who rent space in coworking environments.
Shared spaces allow for collaboration with other like-minded freelancers. Therefore, rent fees are now easily becoming a common self-employment tax deduction.
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Startup costs are amounts paid for by the business owner while creating or investigating in their business. Organization costs are considered costs for a corporation or partnership.
Surveys for potential markets, products, advertising, wages for employees being trained, and professional fees are startup costs.
If your business requires you to travel, keep track of travel expenses. Travel expenses cannot be used for personal reasons and travel expenses can only be deductible if the work assignment is less than a year.
Cost of airplane, train, or bus tickets are travel expenses. You can also deduct fares for taxi, tolls, parking fees, dry cleaning, and tips for services.
Use a separate business bank account for business expenses. By using a separate account there is no question which expenses are for professional purposes.
Keep receipts for all of your self-employment tax deductions! It is imperative to have an audit trail when using money for business expenses. The IRS has a period of limitations when it comes to keeping records for income tax purposes. Go to their site for more information.
The information in this post is for self-employment deductions incurred in the United States. Other countries may have varied laws and requirements. For more information on IRS business deductions review the IRS Publication 535.
Always check with your CPA or tax advisor regarding your individual situation to get the most out of your self-employment tax deductions.
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