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Before you put pen to paper on those self-employment tax forms, one of the most important things you can do is make sure that you have maxed out your deductibles.
Many people aren’t sure where they can make the most impact and often miss out on some deductibles that can change how their taxes look.
When you are self-employed, there are a lot of forms and a lot that you need to understand.
While it is typically best to have an accountant or use accountancy software to help you if you are going alone, here are some tips to help you maximize what you can save.
Home office
While having a home office can be a luxury for many, it is very beneficial for your needs. You can add the home office deduction if you have a dedicated room used exclusively for your home business.
A simplified method means you can claim $5 per square foot, although you might like to take the more complex route.
The more complex home office tax deductions cover maintenance, equipment, and a portion of your utilities. You will need to work these out individually. Regardless of your choice, it is always best to consider reducing your overall energy costs with green energy options like solar panels, LED light bulbs, and energy-saving sockets.
Supplies
Those of you who adore stationery will be happy about this one. If you buy stamps for your business, envelopes, planners, notepaper, printer ink, and more, you can add these to your deductions.
So long as everything in the category is deemed ordinary and necessary, you are good to go.
To claim these deductions, you must keep track of all of your expenses and store the receipts away.
Software and Hardware
Most of us need a desktop computer or a laptop at the very least, and you’ll be happy to know that these can go into your deductibles. You might need to factor in depreciation, though, but there are calculations to help you work it out.
Suppose you use software to help you run your business like social media automation, accounting software, CRM, and more. As soon as you sign up for any software, make sure that you add it to your expenses and download and print out the invoices. Keep track of everything!
As well as software, you can also deduct your web hosting. Your web hosting is an essential part of your business and can be expenses and deducted from your taxes.
Self-employment tax deduction
Freelancers are required to pay a 15.3% employment tax, which sounds pretty steep. But, as a freelancer, you are the employer and employee – which is why you see the 15.3% tax rate. If you had been in a traditional job, half of that would be covered by the employer.
So when you file as self-employed, keep in mind that the self-employment tax deduction means you can deduct between 50-57% of the tax on your income tax.
Travel deduction
Are you required to travel for your work? Perhaps you need to travel to your client’s office for a few days, or you are a content creator and need to go to a location to film.
Either way, you can deduct travel for business reasons. Just like the other items on the list, though, you must keep track of the receipts.
As well as travel deductions, you can get a mileage deduction too. The mileage deduction in 2022 was $0.62 per mile, and that can add up pretty quickly.
If you are trying to do this manually, it can get a bit confusing. So the best option is to get some accounting software on your phone and get into the habit of inputting your travel at the start of every trip.
Planning out your route will be one of the most important things you can do here.
If you don’t want to deduct mileage, then you might consider deducting the vehicle expenses.
Here is where a great accountant will pay dividends, as they will be able to tell you which one is the most beneficial for your circumstances.
Health insurance premiums
While most people look for stable work in a 9-5 specifically for health insurance, it is your responsibility as a freelancer. Luckily if you are self-employed, you can most often deduct your health insurance premiums from your taxes.
It is essential to keep in mind that the deductions for your health insurance can’t be more than your annual earned income.
Training and Education
One of the biggest perks you have, when you work for yourself, is deciding what you need in terms of training and education that can improve your career.
There are specific certifications and education that can be deducted from your self-employed taxes. You need to prove that they are related to your current work and not training for a new career.
So if you are a social media manager, anything related to that will most often be classed as necessary training and can be added to your deductibles.
Every time you take a course, make sure that you have the receipts or the proof that you have undertaken the training.
Marketing and Advertising
The freelance and self-employed markets are fierce with competition, and no matter what you sell or do, you will have to market yourself.
Your marketing will likely be targeted at bringing in new clients and customers, which can be deducted from your taxes too.
Even if you have just dabbled a little in some Facebook ‘boost post’ that counts as advertising, so make sure you have it documented.
Phone and Internet
It is highly unlikely that the internet is wholly dedicated to your work, but you can still deduct a portion of it from your taxes. You can choose to have a mobile phone dedicated to your business, which will be deductible.
Anything with personal usage doesn’t qualify, which is why you can only deduct a portion rather than all of it.
PayPal fees
No one likes to get hit by PayPal fees or other transactional fees. However, it is worth remembering that these are tax-deductible.
You can find out how much you have paid in PayPal fees from your PayPal dashboard.
A Start-Up
One of the best things about a startup is having a massive deduction of up to $5000 of the business start-up costs. According to the IRS, “any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business.”
There are some more start-up credits and deductions, but the best way to access them and understand any implications is to have a chat with an accountant.
Credit Card and Business Loans
If you have business loans or business credit cards, then the chances are you pay some interest. The interest you pay comes under what you can be deducted.
So long as the interest and the financial product in question pertain only to the business, and no personal use, they qualify for tax deductions.
While these are some of the most common, it is essential to remember that there are many other ways to maximize your deductions when it comes to your taxes. Having a chat with an accountant or carefully reading all of the available guides on the IRS (or your countries tax websites) will help you make the most of your small business cash.
Going out on your own as a freelancer can be one of the most exciting things you do. But it is vital you stay ahead when it comes to your taxes. If you are currently searching for freelancing ideas, read this: Great Business Ideas That Can Make Money Anywhere.
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