Essential Tax Deduction Tips For the Self-Employed
Learn to Play the Game With the IRS
As an entrepreneur, the tax system can be like playing multi-level chess. If you’ve never played, you have to play on two boards — one above the other. Everything you do affects another facet of the game. As you take turns with your opponent you have to think not two steps ahead, but four!
When we think about the IRS and business ownership, it’s easy to get lost in the headache rather than focusing on the process. If you’re a gig worker or small-business owner, we can help you keep track of your taxes this season.
As a self-employed individual, you typically file an annual tax return and pay an estimated amount quarterly. This includes self-employment (SE) tax as well as income tax. SE tax is a Social Security and Medicare tax for independent contractors.
You Can Deduct a Net Loss
Before you can determine if you need to pay self-employment tax and income tax, you must calculate your yearly net profit. To do this simply subtract your business expenses from your business income.
If your expenses are less than your income, you have a net profit which becomes part of your income on Page 1 of Form 1040. However, if your expenses are more than your income, the difference is a net loss, which you can deduct from your gross income on Page 1 of Form 1040.
If your net earnings are more than $400, you have to file an income tax return. If your net earnings from self-employment are less than $400, well, you still have to file an income tax return.
Breath of Fresh Air
If you work from home take a breath of fresh air: your home office is tax-deductible! Home office expenses are deductible along with any rent or vehicle lease payments, equipment or machinery needed to run your business. This includes business property. If you’re using your home as your primary office, there is a portion of your monthly rent or home utilities you can deduct as well.
Don’t let the IRS play games with your tax filing process. Take one step at a time and you can cut right through it.
~ Michael Raanan MBA, EA, Former IRS Agent