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Six Common Tax Deductions for the Self-Employed

Six Common Tax Deductions for the Self-Employed

If you're self-employed, such as an independent contractor, or a freelancer, one question is probably the most important question regarding tax returns: How can I reduce my self-employment taxes?

Most self-employed people want to use all the deductions they are entitled to reduce their taxes, but they may not know what they are entitled to.

If you're operating at a profit or loss, here are six types of qualified tax deductions you can't miss.


Interest on credit cards

If you made business purchases with your credit card, you might be able to deduct the credit card interest from your federal Form 1040 tax return.

The IRS considers qualified business acquisitions to be "ordinary and necessary" to the operation of the business. These may include a mobile phone, internet, meals, wages and salaries, rent, utilities, and interest.


Home Office Deduction

If you are an employee of a company, you will no longer be able to benefit from the home office deduction. But if you are self-employed and use part of your home for business purposes, you may qualify, even if you are a tenant. You have two options for claiming at tax time: the simplified option and the usual method.

Whichever method you choose to go with, your home office must meet two major requirements.

First, the Internal Revenue Service requires you to use it regularly and exclusively, which means the space is for business use only.

So it should be your primary workplace, which means you use your office for meetings and work. Therefore, if you have regular meetings outside your home, your home office may not qualify for a deduction.


Simplified option: You can use this option to quickly determine your tax deduction. Simply multiply the total square footage of the office by $5 (up to a maximum of 300 square feet). If your home office is 300 square meters, you will be entitled to a tax deduction of $1,500.


Normal method: With this option, the tax deduction is based on the percentage of your home that your home office occupies. First, divide the square footage of your home office by the total square footage of your home. Then multiply that percentage by your family's total allowable expenses to get the allowable deduction. If your home office was 300 square meters and your house was 1,500 square meters, you would deduct 20% of eligible expenses (300/1,500 = 0.2).

With this home office deduction, you can only claim housing-related expenses, such as rent, mortgage interest, insurance, taxes, utilities, and other costs.


Training and education costs

If you paid work-related education expenses during the year, you could deduct them from your tax return. Your payment should be for education that maintains or improves your skills in your current field of work. However, if your education qualifies you for a new job or industry, it may not be considered deductible.

For example, you can claim it as a tax deduction if you offer home repair services and decide to take a home repair course. Because this course maintains and enhances your current skills, it is considered deductible.

If you qualify, you can deduct tuition, books, supplies, taxes, transportation costs, etc.


Health insurance premiums for the self-employed

If you are self-employed, health insurance can be expensive, but you can deduct it from taxes. The amounts you can deduct include health insurance premiums you paid for yourself, your spouse, your dependents, and any children under age 27 who are part of your health plan, whether or not you claim them on your return.

You must report net income this year to use this deduction. Alternatively, you can claim your premiums as an itemized deduction on the federal income tax return on Form 1040, Schedule A.


Business Mileage

Suppose you use your car for business purposes, whether for meetings or deliveries, you can deduct your mileage from taxes. However, if you use your car for both personal and business travel, you can only deduct business miles from taxes.

As with the home office deduction, you have two options for claiming tax mileage.

The standard mileage rate is a fixed rate that you can multiply by the company miles you drive during the year. For 2022, the standard rate per mile is 0.58.5 cents per mile. For example, if you drove a total of 10,000 company miles in 2022, you could deduct $5,850.

To benefit from the standard kilometer rate, the following conditions must be met:

  • Must drive five cars or fewer cars at a time

  • You should not have claimed depreciation on your cars

  • You must own or rent a car

Note: If you decide to go with the standard method for a rental car, you will need to use it throughout the rental of the vehicle.

The actual expense method lets you deduct the actual business cost of operating the car. If you use the vehicle for business and personal purposes, you will need to determine which part is for business.

Whichever method you choose, it's best to keep track of your business mileage, dates and types of trips, meter readings, and all business expenses, such as gas, oil, licenses, registration taxes, repairs, tires, insurance, rent, and depreciation.

In addition, you must calculate the amounts of the deduction in both methods and choose the one that would generate the greater deduction. If you use online tool software, you will be asked to enter your actual vehicle expenses and your annual mileage. It will then calculate the deduction for you.


Deductible Taxes

As a self-employed person or a small business owner, you can deduct certain types of taxes.

These may include state or local property taxes, labor taxes paid by employees, sales taxes, and some state and local income taxes. However, federal taxes paid are not deductible.

Remember that you will have to deduct taxes in the year you actually paid them. For example, if you intend to claim state and local taxes on your 2021 tax return, you will need to ensure that those taxes are paid by December 31, 2021. This means you need to be very careful when making your tax returns calculations, and you may want to consult your accountant.


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