Did I Qualify for Self-Employment Tax Deductions?

Did I Qualify for Self-Employment Tax Deductions?


Though I’ve been working for myself, I nonetheless really feel like a dunce in relation to taxes. Everybody is aware of the American tax code is without doubt one of the most complicated programs on the earth. So, you possibly can perceive why it ratchets up my anxiousness yearly as I put together to file. Now that I’m managing my enterprise’ accounts as nicely, it’s much more panic-inducing. I’ve spent numerous hours studying up on what the self-employed ought to know. Nevertheless, I nonetheless frequently ask myself “Did I qualify for different self-employment tax deductions?” or “Did I miss one thing vital?”

Every time I’ve fundamental finance questions, I discover it onerous to ask my friends. So, I maintain my tongue for concern of trying silly. As a lot as I’d wish to keep away from the topic altogether, I do know I can’t. Subsequently, I flip to on-line sources and libraries to study what I must know. Then, I ask my monetary advisor extra questions after I’ve a fundamental grasp of issues. Right here’s what I’ve discovered about self-employment taxes thus far.

What’s the Self-Employment Tax?

After I began my very own enterprise, I went straight to Investopedia to learn up on all of the tax codes and deductions that utilized to me. Now that I used to be working for myself, my federal taxes would not be deducted from my paycheck. Though I anticipated to pay a good sum of money in taxes, I wasn’t certain how a lot it might undercut my earnings.

As a freelancer, the IRS views me as each the corporate and the worker. Sadly, which means I’m liable for paying each parts of Medicaid and Social Safety taxes. When mixed, the self-employment tax is 15.3%. Whereas this looks like a surprising quantity, I found that there have been self-employment tax deductions that I certified for.

Nevertheless, there have been additionally just a few restrictions and guidelines about Covid reduction measures that you just must also know in case you are self-employed:

  1. Anybody who earns greater than $400 in earnings from self-employment should pay the tax.
  2. For the Social Safety tax, this fee solely applies to the primary $142,800 of your web revenue. Nevertheless, there isn’t any revenue restrict for the Medicare tax.
  3. Half the self-employment tax is deductible. Though the complete 15.3% is charged on the enterprise’ earnings, the “worker” portion qualifies as a deductible expense.
  4. For those who deferred paying the “employer” portion beneath the CAREs Act, 50% of these taxes had been due December 31, 2021. The extra 50% should be paid by December 31, 2022.
  5. Regardless that you don’t have a withholding tax, you have to schedule quarterly estimated funds. In any other case, you’ll be dealing with a hefty invoice once you file your tax return.

Do I Qualify for Self-Employment Tax Deductions?

The quick reply is sure. Nevertheless, it was as much as me to seek out out precisely which deductions I may declare. What’s included within the record of “enterprise bills” is vast open to interpretation. Whereas some issues are clear, different bills fall into grey areas.  So, I took a while to evaluate the commonest deductions and converse with individuals I do know who’re additionally self-employed.

Based mostly on all my typical sources, I got here up with a prolonged record of the commonest deductions. They included:

  • the self-employment tax deduction
  • house workplace
  • workplace provides
  • utilities, web, and cellphone payments
  • well being  and enterprise insurance coverage premiums
  • journey
  • automobile use
  • meals
  • curiosity out of your loans
  • subscriptions and publications
  • schooling
  • lease
  • start-up prices
  • promoting
  • retirement contributions

As you possibly can see, a few of these classes can result in extra questions. Differentiating your private and enterprise bills may turn into fairly sophisticated. Nevertheless, I often revert to the KISS methodology and hold it easy. Based mostly on my preliminary evaluation, these are the self-employment tax deductions I’ll qualify for this yr.

My Self-Employment Tax Deductions for 2021

Social Safety and Medicare Tax

The commonest deduction is the “employer” portion of the self-employment tax that you have to pay. Though I paid the complete 15.3% of the enterprise’ earnings, I can declare half of it as a enterprise expense. So, though you pay the next proportion in taxes if you happen to work for your self, this deduction means it’s going to price lower than I initially thought. And, I gained’t should itemize to say it both.

Workplace Provides/Tools

The subsequent largest deduction would qualify beneath workplaces provides or tools. My beloved laptop computer lastly gave up the ghost this yr. After taking it to a pc restore store and paying for the diagnostic, I broke down and eventually purchased myself a brand new one.

Since my laptop computer is the lifeline of my enterprise, I knew I couldn’t skimp on this enterprise expense. Luckily, it occurred simply earlier than Black Friday. I discovered some nice offers and saved about $250. Nevertheless, it nonetheless set me again about $750 with all of the applications and licenses I wanted to buy as nicely. However you will be sure I saved all my receipts!

Residence Workplace

Though I by no means claimed this deduction previously, my residing state of affairs has modified. Relatively than working as a digital nomad, I now have a house workplace. Not solely do I usually use this house for enterprise functions, however it is usually my main workspace. Because it qualifies beneath the IRS definition, I plan to incorporate it on this yr’s return.

Nevertheless, I’ve to calculate the share of our home’s whole sq. footage to find out how a lot I can deduct. Because it accounts for about 5% of the house’s whole sq. footage, we are able to deduct 5% of housing bills for the yr.

Telephone and Web Payments

In the identical line of thought, if you happen to use your mobile phone or web connection for enterprise, you can too declare it as a self-employment tax deduction. If the road is devoted for enterprise solely, you possibly can declare the complete quantity. In any other case, you would want to calculate the share of utilization that you just use for enterprise. In my case, it’s cut up between my private use as nicely. Solely about 25% of my invoice will qualify for the deduction.

Certified Enterprise Revenue (QBI)

This final deduction is new to me. So, I nonetheless plan to debate it with my CPA to find out if I can declare the certified enterprise revenue deduction. It’s comparatively new and set to run out in 2025, so I’d wish to take benefit whereas I can. Underneath this deduction, single filers with whole taxable revenue lower than $164,900 and joint filers beneath $329,800 qualify for a 20% deduction in your taxable enterprise revenue. Since most of my earnings are “pass-through revenue,” I needs to be eligible for this big deduction.

As a brand new enterprise proprietor, I’ve realized why it’s vital to evaluate what qualifies for self-employment tax deductions to maximise your earnings. Chances are you’ll discover surprising deductions that may enable you hold extra of your hard-earned cash.

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