The tax deadline is almost here and that means there is very little time left to get things in order. Being that I am self-employed I get a lot of questions about what things can be deducted and what things can’t be deducted, as well as how much taxes you have to pay and when. Rather than explain to each individual person who was interested, I thought this would be a great opportunity to share with everyone what the differences are and the main things you should try to claim on your taxes if you are self-employed.
How much do you pay?
I think this is the hardest question to answer when it comes to self-employment taxes or contracted work. The reason for this is that even though there is a set percentage, the total amount you pay is based on your deductions as well as your income bracket. Normally if you worked for an employer you would pay 6.2 percent into Social Security and 1.5 percent into Medicare. This, however, is doubled when you are self-employed because you don’t have an employer paying for your other half. This means that if you make at least $20,000 a year you will have to pay 15.3 percent into Social Security and Medicare combined. If you make less than $20,000 however, there is a good chance that you will get half or close to it back in a tax rebate. To play it safe, always put back that percentage out of all you make so that you will have it when tax time comes. If you know how much you will make you can go to a website like this one and input your total and it will tell you how much you will have to pay. You can even use it to estimate what you might pay.
What can you deduct as an expense?
The IRS allows you to deduct an amount off of your total based on if you have a room strictly dedicated to a home office. I wouldn’t recommend doing this unless you have a lot of documentation and proof of expenses because the IRS is very strict on this particular deduction. The room has to be a certain size and pictures have to indicate that it is nothing more than an office. Also, in order to claim it as an office you have to have a second independent phone line installed and make it only for use as an office line.
If your business is primarily done online you can deduct the amount you pay for internet each month from your overall earned income. In order to do this effectively you will have to keep detailed logs of the time you spend on the internet each day and then after that you will have to total your hours. Be sure to include any time you spend not working as your total time spent. You will then need to find what percentage of your internet time is used strictly for your business and apply that percentage to your internet bill. If you pay $100 and your percentage used for business is 75, then you could subtract the $75 each month from your earned income. This will lower your overall taxes because it is based on your income alone. This is why it’s important to keep records and subtract all expenses from your income being self-employed. You never want to pay taxes on money you didn’t actually earn.
If your business deals primarily with travel or the use of a car then you can subtract expenses like gas and car repairs from your total income. Again, you are not legally allowed to subtract the full amount unless you use that particular vehicle strictly for business and nothing else. If you use it for business and otherwise, take a percentage just like you did with the internet bill and subtract that.
If you have to pay for your own health insurance, as most self-employed and contract workers do, you can deduct it from your income tax and you may even get a refund of a portion off it.
If your business consists mostly of work that you do on the computer, as mine does, you will want to be sure to deduct any and all computer expenses. This includes repairs that you may have to pay for as well as parts that you may have to order. I will tell you, however, that not everything is covered or counted and that you have to do it as a percentage of usage unless it is strictly for business. This means you can’t buy a $300 graphics card and then claim it was for business, unless your business strictly required such hardware and you could prove it. I like this deduction because it is easy to keep records of everything you spent and it comes in handy when something breaks and money you thought you had is now gone.
For more information on deductions