From being your own boss to having greater scheduling flexibility, being self-employed offers many unique benefits. Taxes are another such area in which self-employment proves beneficial. Whether you are just venturing into the realm of self-employment or are more experienced, a basic understanding of deductible expenses and other tax advantages is necessary to realize the maximum income potential of a business. While most self-employed individuals recognize that basics such as supplies, equipment, and mileage can be deducted, many do not take advantage of all the allowable deductions available to them from Uncle Sam. From business costs to retirement accounts, self-employment proves useful come tax time.
Those with a home office are sitting on a treasure trove of tax deductions. Not only can the cost of office supplies and equipment be deducted, but also a portion of the rent or mortgage and utility bills. Furthermore, if clients visit the home, a portion of bills related to landscaping, coffee for clients, and other miscellaneous items may be deductible. Phone and Internet service are allowable deductions as well, but keep in mind that only the business portion of these bills can be deducted. Therefore, though you may deduct 100% of the cost of a dedicated phone line, just a portion of the bill will be deductible if it is the only phone you have. The same goes for all other deductions mentioned as well, with the percentage deductible dependent on the portion used for business.
There are several other areas offering tax advantages to the self-employed. Deductions on mileage and other vehicle expenses is one such area. The IRS has determined that mileage from home to the first business stop of the day is not deductible, as even those who are employed by others must travel to and from work. However, deductions on mileage can be maximized by carefully planning your itinerary, making your first and last business stops as close to home as possible. With slightly more stringent record keeping, a percentage of vehicle maintenance, repair, and insurance bills may also be deducted. Finally, meals, entertainment, and travel related directly to business are at least partially deductible. These can be a red flag that could trigger the increased likelihood of an audit though, so be prepared to prove their legitimacy if needed.
Another fantastic tax advantage for the self-employed exists in the ability to defer income or increase expenses to affect the bottom line. By deferring a portion of income to the next year, the self-employed can avoid a higher tax bracket. The same concept applies to increasing expenses. While unnecessary purchases are not recommended, those planning a large business purchase may want to buy that item before the end of the year, effectively reducing net income.
Finally, the self-employed can use various financial savings accounts to accumulate income for later use. Contributing to Keogh plans, solo 401(k)s and similar retirement plans specifically focused on the self-employed can allow substantial tax-deferred savings. The use of such options becomes increasingly important in self-employment as income increases.
The tax advantages of being self-employed are both substantial and quite varied. The use of deductions and other advantages unique to self-employment will vary from one individual to the next, depending on the type of work done and numerous other details. Thus, it is often recommended that a CPA or other qualified professional be consulted to properly identify and claim such benefits for the self-employed person. However, it is clear that self-employment offers several advantageous tax options for those savvy enough to utilize them.
This article was supplied by Kristin Urbauer from Constant Content.