Maximizing your deductions when filing self-employment taxes is a big deal. Filing your self-employment taxes has two conflicting goals. 1. Minimizing the taxes you pay. 2. Avoiding a tax audit. Said another way, it means taking all of the expenses/deductions that you are entitled to and not making mistakes that can cost you penalties and fines that add to your tax bill.
The IRS advises that you usually owe self-employment tax if you had net earnings from self-employment of $400 or more (IRS Topic No. 554 Self-Employment Tax). Unlike W-2 employees, self-employed individuals do not have taxes automatically deducted from their paychecks. It’s up to you to keep track of what you owe and pay it on time. In 2021, the federal tax deadline for 2020 taxes owed by individual taxpayers, including self-employment tax has been extended from April 15, 2021, to May 17, 2021. However, the deadline for estimated tax payments remains April 15, 2021.
Of course, the source of your biggest tax savings can be a Solo 401k that allows for the highest tax deferral among all self-employed retirement accounts. After that, there are still many ways that being self-employed allows you to reduce your tax obligations further.
Self-Employed Expenses and Deductions
Because self-employment taxes can be high, maximizing deductions is an important way to pay less in taxes. Being able to deduct business expenses enables you to better succeed at your business. You work hard for your money and deserve to claim every allowable deduction. Below are important deductions you want to maximize.
Advertising and Marketing Costs
This is how you make people aware that you are in business, run promotions, advertise, and many other ways that you get the word out about your business. Some of these costs are obvious such as the simple business card or running online Google Ads. But there can be a lot more that goes on behind the scenes such as a consultant working on your business logo.
Deductible expenses are typically broken into sales, general, and administrative costs (SG&A). You might be overlooking expenses in areas such as media production, fixed costs, some sales commissions, costs to attend networking events, and other creative marketing strategies. Find these costs and deduct them from your self-employment tax return.
Books, Courses, and Training
These deductions include tuition, books, coaching, workshops, conferences, journals, magazines, newspapers, and possibly some overlooked costs. Required ongoing education for a real estate license qualifies as well as smaller incidental costs for materials and even copying services. Make sure to account for all of your training costs that might include hiring an assistant to type a research paper. Or maybe a larger expense such as a laptop required for a course.
Self-Employment Deduction: Health Insurance & Childcare
Deduct health insurance premiums, including dental and age-based premiums for long-term care coverage. Unlike an itemized deduction, this deduction lowers your adjusted gross income (AGI). Depending on the amount you pay and other eligibility factors, you may be able to deduct health insurance for your spouse and dependents.
If your child is in daycare to free you up to conduct business, your childcare expenses are deductible. Not as a business expense, but on your personal income taxes. This can be for a daycare center, babysitter, summer camp, or other care provider. (See IRS Publication 503 (2020), Child and Dependent Care Expenses).
Membership and Association Fees
This includes business licenses and professional licenses. Other common examples are real estate boards, trade associations, Rotary Club, and local chambers of commerce. Almost any dues you pay to professional, business, and civic organizations are deductible expenses. But not to organizations for personal reasons such as country clubs and gyms.
Professional and Legal Services
Don’t forget the lawyer that drafted any business operating agreement or provides annual services required for an S-Corp or C-Corp. CPAs definitely fit this category. You can also include incidental costs such as overnight document delivery. Business consultants belong to this group. If the fees include payments for personal work (for example, making a will), you can still deduct the part of the fee that’s related to the business.
Maintaining your business can be expensive. Maximize this deduction to reduce your self-employment income taxes.
Maximize Your Deduction: Internet Service & Website Expenses
For a separate office, this is a full deduction. This can be a partial deduction if you work from home or have your internet bundled with your TV cable. If your internet bill comes to $140 a month and you spend about 50% of your time online for your business, you can deduct half that amount. In this case, that’s $70 each month or $840 for the year.
All website-related expenses are tax-deductible. Examples are:
- Website hosting
- Domain name registration
- Themes and plugins
- Merchant accounts
- Stock photography
- Website help, such as hiring someone to design your site, a blog writer, or ongoing maintenance
- Other website services
Self-Employment Taxes Maximize Deductions Through Solo 401k Contributions
Your Solo 401k retirement plan is tax-deferred. There are little or no filing requirements for your Solo 401k. Remember that you are making two distinct tax calculations. Calculation 1 determines the net earnings for your business. Calculation 2 determines how much tax-exempt contributions you can make to your Solo 401k.
If your business is a pass-through structure (sole-proprietor, LLC, partnership), both contributions go on your personal tax return. Click here to learn more about claiming your Solo 401k contributions on your tax return.
Home Office & Office Supplies
You can deduct a portion of your home expenses against business income. There are two ways to deduct home office expenses.
- Simplified method. You can deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet.
- Standard method. Track all actual expenses for your home, such as mortgage interest or rent, utilities, real estate taxes, housekeeping, landscaping service, HOA fees, and repairs. Multiply these expenses by the percentage of your home devoted to business (the 300 square feet rule does not apply here).
Make sure you’re capturing all of your supply costs. For example, a dog walker could write off dog treats and toys. If you need a laptop computer to take your business to clients that can be a write-off. Of course, the standard stuff goes here such as notebooks, stamps, postage fees, ink cartridges, etc.
Rent and Co-working Spaces
Maybe you don’t run a home office or you occasionally rent space in another city. The rent, utilities, and other related costs all count including the cost of furnishing and decorating your offsite workspaces. Don’t forget separate supplies for these locations. A rental storage unit also qualifies.
Lesser-known Expenses to Consider to Maximize Deductions and Reduce Self-Employment Taxes
- Qualified business income deduction.
- Computer software that is integral to your business’s work can be completely deducted from a business’s taxes the year it is purchased.
- Computer peripheral equipment (new mouse, recharger, etc.).
- Phone bills in proportion to business use (not personal use).
- Business account bank fees (including ATM fees and credit card membership fees).
- Liability and professional insurance.
- Permits from local, state, and federal agencies.
- Generally, anything required to run your business.
Remember, maximizing deductions is a great way to lower your self-employment taxes. Always work closely with your tax professional to ensure you’ve taken the maximum deduction within IRS limits.