7 tax deductions for the self-employed
By Liz Smith
Paying taxes is never fun. Fortunately, you may be able to reduce your taxable income by claiming certain tax deductions. There are exclusive tax breaks for self-employed Americans. But the key to taking advantage of these benefits is knowing what’s tax-deductible. Check out seven self-employed tax deductions you might qualify for this season.
1. Self-employment tax deduction
Since self-employed workers pay the entire tax for Medicare and Social Security (15.3%) on their own, the IRS considers the employer portion of the self-employment tax to be a deductible expense. You can deduct half of the self-employment tax from your net income.
The self-employment tax break is an above-the-line deduction. That means you can claim it on your income tax return (Form 1040) regardless of whether you’re itemizing your deductions. Don’t forget to attach Schedule SE when filing your taxes.
2. Self-employed health insurance deduction
If you’re self-employed, the dental, health and long-term insurance premiums that you paid for yourself, your spouse and your dependents may be tax-deductible. You may be able to claim the health insurance deduction for a child under 27 as well, even if he or she isn’t considered a dependent.
You’re ineligible for the health insurance deduction if you could’ve enrolled in an employer’s health care plan (like your spouse’s plan). To qualify for the tax break, you’ll also need to meet certain criteria. For example, you must have a net profit that you included on Schedule C, used Schedule SE to calculate your net earnings, reported your net earnings on Schedule K-1 (because you were part of a partnership) or paid insurance premiums (or had them reimbursed) as a more-than-2 percent shareholder in an S corporation.
Since it’s an above-the-line deduction, you can claim the self-employed health insurance deduction on your tax return if you’re filing Form 1040.
3. Home office deduction
This tax break allows you to deduct a portion of the expenses you use exclusively for business purposes at home, like property taxes and utilities. Claiming this deduction won’t be easy, however. You’ll need to crunch some numbers and provide proof that you have a space that you use regularly for professional reasons only.
4. Tax deduction for business use of a car
You may qualify for a deduction if you drive your car for a business or work-related purpose. There are two ways to figure out how much you can deduct. You can use the standard mileage rate or add up your actual expenses. Trying out both methods could be a good idea if you’re not sure which one will offer the biggest deduction.
The standard mileage rate for 2017 is 53.5 cents per mile. You can apply that to all of the business miles you drove in tax year 2016. Just be sure to keep a mile log in case the IRS wants to audit your tax return. The actual expense method takes depreciation into account in addition to other expenses (like the cost of insurance, vehicle maintenance and gas).
5. Self-employed retirement plan deductions
The government encourages all workers to save for retirement. And there’s another good reason to build your nest egg: It could lower your tax bill. Self-employed workers can qualify for tax deductions by making contributions to SIMPLE IRAs and SEP-IRAs. They can also take advantage of other tax-deferred plans like individual 401(k) accounts.
6. Deduction for education expenses
Other business expenses may be tax-deductible, including the money you spend to gain new skills or improve your craft. Just know that you can only get a tax deduction for the expenses that relate to your current professional path. You can’t get a tax write-off for trying to pursue a new career.
If you decide to go back to school, you may qualify for the Lifetime Learning Credit. It’s worth up to $2,000.
7. Deduction for business loan interest
If you took out a loan, the interest you paid or that accrued over time may be tax-deductible as a business expense. But certain rules apply. For example, you must be liable for the debt you took on. And the loan interest you’re trying to write off cannot come from a personal loan.
In general, business expenses must be “necessary and ordinary” to be tax-deductible. An ordinary expense is defined by how common it is for someone in your industry. A necessary expense is one that’s appropriate for your business or trade.
Final word
If you’re unsure of whether an expense is tax-deductible, it’s best to visit the IRS website or seek professional help. After all, you don’t want to pay the government more than you need to.
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