There are some great advantages to being self-employed. Being self-employed allows for plenty of opportunities to minimize your taxable income by turning expenses you would have even if you weren't self-employed into tax-deductible business expenses.
This article will give you some of the information you need to dramatically reduce your taxable income with a little work and planning.
Here are some of the great tax deductions that are available to the self-employed:
1. Home studio. This deduction is not the simplest one to pull-off. Fortunately, it is largely on the honor system; however, you should be prepared to defend it in the case of an audit. It is a deduction that is commonly attacked by the IRS because the requirements are difficult for many to maintain.
· Basically, any square footage that is used both regularly and exclusively for your business is tax deductible. This would include that portion of your home's rent / mortgage, property taxes, insurance, utilities and home maintenance. So if your office is 20% of your home's salon studio footage, you could deduct 20% of all of those expenses.
2. Health insurance premiums. While this is technically a personal deduction, it is only available to the self-employed. In a nutshell, if you’re self-employed and not eligible to enroll in your spouse's health plan, you can deduct your premiums from your income. This would include health, dental and long-term care insurance.
· This also applies to premiums paid for your spouse and dependants.
3. Automobile. This is a nice deduction that can really add up. You have 2 options available:
· Mileage method: In this case, you would simply keep track of the number of miles you drive for business related purposes. Then simply multiply the number of miles by the mileage rate provided by the IRS.
· Actual Expense method: You will have to determine the percentage of your mileage that was spent on business and then multiply that percentage by the total expenses related to your automobile. This would include, gas, repairs, oil changes, and more.
· Which method is best? The one that gives you the greatest deduction is best. In general, if you have an inexpensive car or a car that is paid off, then the mileage method is best. Otherwise, the actual expense method is usually the best.
4. Entertainment and meals. This expense is only deductible at 50%, but includes things like tickets to sporting events and the cost of a round of golf. You must be with a client or business partner and discuss some business, but this deduction can be used frequently with a little planning.
5. Self-Employed retirement plans. Contributions to self-employed retirement plans are tax deductible. This include retirement vehicles such as SEP-IRAs, solo 401(k)s, Keogh plans, and SIMPLE IRAs. In 2010, you could contribute up to 20% of your net income plus $16,500 to a solo 401(k). Based on the maximum allowable net income, that totals over $49,000 of contributions!
· It really pays to be self-employed when it comes to retirement deductions. Be sure you're taking full advantage of your opportunities!
Being self-employed isn't just about freedom from your boss and someone else's time clock. It's also about more freedom from the IRS. While this freedom isn't complete, there are tax laws in place that really offer significant advantages to the self-employed. Let the IRS help pay for your housing, car, food, entertainment, insurance, and retirement! It can take a little foresight and planning to really reap the benefits, but the benefits are certainly there.