SELF‐EMPLOYED
I bet you can guess the one question I get asked the most – “How can I save on my taxes?” Well, maybe
not the most asked but certainly one of the most frequently asked, especially at tax time. The truth is,
most folks can’t do much to save taxes because their situation is pretty simple and as long as you choose
the correct filing status, accurately report any dependents, report your income correctly, and take the
appropriate Standard Deduction, you’re probably paying the least tax legally possible. There’s not much
you can or should do to lower your tax bill.
If you’re self‐employed however, you want to make sure you capture all your legitimate deductions to
pay the least tax possible, and sometimes that’s not as easy as it sounds. I didn’t say spend money
unnecessarily to get a tax deduction, but don’t overlook deductions that you’re entitled to.
If your business is small and you work out of your home, you may be eligible to deduct part of the cost of
your home as a home office deduction. You have to dedicate part of your home to regular and exclusive
use in your business, but if you do, you may be eligible to deduct part of all your home costs, including
utilities, insurance, maintenance, and ownership costs like rent or mortgage interest and depreciation. If
you don’t want to go to the trouble of keeping up with all those expenses, there is even a simplified
method that allows you $5 per square foot of home office space up to a maximum of 300 square feet, or
a deduction of up to $1,500.
Business use of a vehicle is also an eligible deduction for self‐employed folks. If your business requires you
to use a vehicle, you can deduct the business use. Just like with the home office, there are two methods.
You can deduct the business portion of actual car expenses, including gas, repairs and insurance, or you
can use the standard mileage rate, which for 2019 was 58 cents per mile (57.5 cents per mile in 2020).
Remember, this is business use only, so the mileage rate is only applied to business miles, and if you use
actual expenses, you must apply the business use percentage to the total costs and only deduct that
amount. You should compare the two methods and consider which will give you the best result. In fact, if
you start out using the standard mileage rate but later decide actual costs will be best for you, you can
change methods. But once you use actual costs, you’re stuck with that method as long as you own that
vehicle.
Generally, employees that have health insurance provided by their employers receive that benefit tax
free. The employer pays the premium and it’s not income to the employee. In some cases, the employee
pays part of the premium, or the employee pays for additional coverage for their spouse or family. But
often that cost is paid “before tax”, which means the employee pays the premium before income tax is
calculated. That’s the same as getting to deduct the premium on their return, but because of the way
medical expenses are deducted, most regular taxpayers don’t get a deduction for medical expenses. So,
this is a big benefit. Self‐employed folks generally can deduct the cost of health insurance premiums they
pay without the limitations imposed on folks that pay their own premiums directly rather than through
an employer plan. There are some restrictions, but most self‐employed folks get essentially the same
benefit as employees covered by their employer’s plan, except they must pay the premium.
There are others, like the deduction for ½ of the self‐employment tax you pay, the deduction for
contributions to a retirement account, or the ability to write off many equipment and other capital asset
purchases instead of depreciating them. All of these are deductions that self‐employed folks should be
sure they don’t overlook. And in most cases, these are costs you’d incur whether you’re self‐employed or
not – you have a home, a car and health insurance – so be sure you get the business deduction when
appropriate. But as I said earlier, don’t spend money unnecessarily for the tax deduction. You’ll always
have more money in your pocket, after taxes, if you make as much as possible and spend the least amount
possible.
If you’re self‐employed and have questions about capturing the business expense deductions you’re
entitled to, please call our office. As always, I am looking for article ideas that you would like me to cover.
If you have an idea for a future article, or just have a topic you would like more information on, please
send me an email.
