If you're self-employed, tax time can be a stressful one. Not only will you have to pay income tax on the money you made, but you'll also get hit with the hefty "self-employment tax."
However, there are some tax benefits for the self-employed, as well. There are plenty of expenses you can write off, and there are even some unique deductions that only apply to self-employed individuals. Here are five of the most lucrative tax breaks available to the self-employed, explained by our tax experts.
Matt Frankel: One great deduction for self-employed individuals is the home-office deduction. You're allowed to write off 100% of the expenses related to your home office, including the portion of your mortgage interest, taxes, and utilities that go toward the office space -- calculated as the square footage of your office as a percentage of the home. Or, you can choose to take the simple version of the deduction, which gives you a $5 deduction per square foot of office space, up to a maximum of $1,500.
However, the home-office deduction is one of the most frequently scrutinized by the IRS, so make sure you qualify before choosing to claim the deduction. You don't necessarily need to work entirely from home in order to claim it. You do, however, need to use that space in your home for the sole purpose of conducting your business on a regular basis.
For example, if you conduct business transactions outside of your home, but use one room of your house for the exclusive purpose of record keeping, ordering, and other business tasks -- i.e., as your "primary" place of running the business -- you might be able to take the deduction. If, on the other hand, you work entirely from home, but the room you use to do your work doubles as a guest bedroom, it can't be claimed as a home office.
The home-office deduction can be very lucrative, especially in parts of the country where housing costs are high. Just make sure you qualify under the IRS's definition of a home office before you attempt to take the deduction.
Dan Dzombak: One juicy tax deduction for the self-employed is professional journals, trade magazines, and subscriptions related to your work. As a self-employed person, I'm certain that most self-employed people get at least one publication that's work related.
For those in any field, serious trade publications can quickly add up to big bucks. This seems particularly true in the financial field, where publications range from $20 to $2,500 a year.
The key point to remember is that these publications must be work related. For example, if you work in investing, your subscription to your local newspaper doesn't likely count as related to your work, but a subscription to The Wall Street Journal or The Financial Times could count. As with most tax deductions, there is room for interpretation; but you should be able to clearly explain how each publication relates to your work in case the IRS decides to audit you.
Dan Caplinger: The biggest tax benefit from being self-employed is that you can set up your own personal retirement. By doing so, you can potentially save a whole lot more for your retirement than ordinary employees can.
For instance, a solo 401(k) plan allows self-employed individuals to make contributions both as an employer and as an employee. Like ordinary workers, self-employed people can save as much as $18,000 in a 401(k) through employee contributions, with $6,000 extra in catch-up contributions for those who are 50 or older. But you can also make employer contributions up to 25% of your compensation, which is equal to your net earnings after subtracting the deductible portion of your self-employment tax, as well as the amount of the contributions.
With an overall maximum of $53,000 applying to your total retirement savings, solo 401(k)s are great for making the most of tax breaks for retirement. Other plans, such as SEP-IRAs, SIMPLE IRAs, and defined benefit plans, offer different combinations of simplicity and savings features that can give you the exact flexibility you want to save for your retirement.
Creating a self-employed retirement plan is also relatively easy, with many financial institutions offering simplified plan documents that aren't much more complicated than opening a regular brokerage account. For successful self-employed individuals, the retirement savings opportunities are something that employees just can't match.
Jordan Wathen: It's no secret that healthcare costs for the self-employed can border on obscene. Without the benefit of group negotiating power, or a subsidy from your employer, health-insurance costs can really stack up.
Luckily, the self-employed can take advantage of a deduction for 100% of their health-insurance expenses. Generally speaking, you can deduct your health insurance expenses as long as your business showed a profit in the tax year. Many insurance expenses qualify, including dental and long-term care coverage. And you can even deduct the expenses for insuring your spouse and dependents.
There's only one drawback: You cannot take the deduction if you are eligible to participate in another health-insurance plan sponsored by your employer or your spouse's employer. But that's just a minor setback. Chances are that if you were eligible to buy insurance through a group plan, you wouldn't be shopping for your own insurance in the first place.
Jason Hall: If you're self-employed, there's a chance it's because you have a special skill or trade. If that's the case, your value to your clients is probably based on your level of knowledge or training. Further certifications or education could make you worth even more to them.
If you elect to further your training within your field, the costs of that education are very likely tax deductible. Here's the key: It must be further training in your current occupation.
In other words, if you're currently in the real estate business, you wouldn't be able to claim a deduction for culinary school. Since there's some gray area here -- for example, one professional might be able to deduct foreign language training, while others wouldn't -- it's always a good idea to check with your tax professional beforehand to get a professional opinion.
If you're self-employed, it's up to you to maximize the value you bring to your clients. If furthering your training makes you worth more, then it's probably worth it, even without the tax benefit; but because it's a deductible expense, don't leave it on the table.
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