Worried you aren’t taking advantage of all the tax benefits for self-employed individuals? Here are some tax pro tips for you!
Home Office & Business-Related Deductions
Home office deductions are some of the most talked-about and least understood pro tips for the self-employed. The quick description of the home office deduction is this: the cost of any workspace you use exclusively for your business – even if it’s a closet in your home or a bedroom-turned-craft-or-recording-studio – can be deducted as a home office expense.
And this applies to more than just the desk or computer you use. Let’s say, for example, the space you are using occupies 12% of your home. That means you can deduct 12% of the following expenses:
- Business percentage of deductible mortgage interest
- Home depreciation
- Utilities
- Homeowners insurance
- Annual Repairs
You can also deduct the following business expenses: phone, fax, and internet. Essentially, if you can show that an expense was incurred while you were doing business (charge for a long-distance phone call, the monthly or yearly costs of owning and operating your website), it is, more often than not, deductible.
Bonus: did you know you can also deduct the cost of specialized magazines, journals, and books that are directly related to your business? Here’s some more information on that.
Retirement Planning
Several retirement plan contributions are also tax-deductible. Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s are included in this. For the 2020 and 2021 tax years, you can contribute up to $19,500 (or $26,000, with the catch-up contribution, if you’re 50 or older) in deferred salary.
Mileage & Business Trip Expenses
When you use your car for business, your mileage for those trips is tax-deductible. For 2021, the standard mileage rate is 56 cents per mile. Using the standard mileage rate is easiest. However, after the first year of you using that vehicle for business, you can use the more in-depth expense method. This method requires you to calculate the percentage of driving you did for business during the year, and the miles you drove (including the dates you drove them), then multiply your total annual business miles by the standard mileage rate to determine your deductible amount.
Updates for Tax Year 2021
One self-employment-related change for this year comes from the Consolidated Appropriations act, 2021, and it relates to meals as a tax-deductible business expense. For food or beverage expenses provided by a restaurant when you are traveling for business, from January 1, 2021 to the end of 2022, you may deduct 100% of the bill (the previous rule allowed for a 50% deduction and will likely revert to that after this provision expires, barring any other amendments between then and now).
Workest has an article with lots more little-known deductions you may be able to take advantage of, just check out their piece on self-employment tax and the rates for 2021, or watch Switty Kiwi’s “Top 15 Tax Deductions for Self-Employed 2020-2021” video.
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