NEW YORK, NEW YORK – NOVEMBER 25: Lin-Manuel Miranda lights the Empire State Building blue in … [+]
Running a business can be time-consuming and stressful. Keeping up with all the ins and outs of tax planning is often ignored. Here are 10 tax breaks for the self-employed small business owner. Take a look and see if you are missing out on some valuable tax deductions.
1. Self-employment tax
You are likely aware that you are paying into Social Security and Medicare each year. Together, these payroll taxes are referred to as FICA (Federal Insurance Contributions Act). What you may not be aware of is that there is an additional tax on self-employment income called SECA (Self-Employment Contributions Act).
When you are an employee, your employer would be paying the SECA portion of payroll taxes. When you own your own business, you get to pay both sides of the payroll taxes. Super fun, right!? We all love paying more taxes. (SARCASM, in case it wasn’t clear). The only good news here is that you get a tax break for the portion that an employer would typically be paying. That’s not as great as not having to pay it, but it’s better than nothing.
2. Large Retirement Plan Contributions
Business owners have more options when it comes to being proactive with retirement planning. Depending on your income and which type of retirement plan you set up, you can greatly reduce your currently tax liability. Common retirement plans for small business owners include the SEP IRA, Solo 401(k) Plan, Profit Sharing Plan and Defined Benefit Pension Plans.
There are rules about how much you can contribute to each plan. Those amounts will partially depend on your age, income, and business structure. Just to give you some insight, with a combined Profit Sharing-Defined Benefit Pension Plan, I am currently helping a business owner client shelter nearly $300,000, per year, in income.
The costs of health insurance may be tax-deductible if you are self-employed.
3. Health Insurance
Health insurance is expensive. If you have self-employment income, you may be able to deduct the money you spend on health insurance for yourself, your spouse, and even your dependents.
4. Costs of Promoting Your Business
You can get a tax deduction for money you spend making people aware of your business. That may be in the form of networking, search engine optimization (SEO), or even traditional advertising. Don’t forget expenses like your website, graphic design, and other costs you incur to advertise your business.
5. Auto Expenses
When you use your vehicle exclusively for business, you can deduct the cost related to using that car or truck. That could be lease payments, interest on your car note, gas, parking, maintenance, even repairs (in some cases).
For those who split the use of the vehicle between personal and business, you can deduct just the portion attributable to the business. If that is your case, you will want to keep records to justify the portion of business use. That could include a mileage log, which will highlight when you use the automobile for work.
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6. Business-Related Insurance Premiums
Depending on what type of business you run, you will likely need to have insurance. In some cases, you may have several types of insurance. That can include things like errors and omissions (E &O), malpractice insurance, liability insurance, and workers compensation insurance. Those are in addition to insurance to protect your premises. Those insurance premiums are deducted separately from your health insurance premiums.
Related: 401(k) Contribution Limits for 2020
7. Legal and Professional Services
Are you paying a bookkeeper, CPA, business consultant, attorney, or human resources associate? All of those time-saving services can really add up. Luckily, the net cost can be a tiny bit lower when your accountant is able to deduct these expenses from your business income. When handled properly even the cost of a fabulous financial planner can turn into more tax breaks for your business.
Multi-computer basement home office.
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8. Home Office Deductions
To qualify for the home office deduction, a portion of your home must be used exclusively and regularly for your trade or business and that part of your home must be your principal place of business; a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business; or a separate structure used in connection with your trade or business.
This deduction can be quite valuable, but make sure you keep records of expenses, and which portion of your home you use exclusively for business.
Make sure to track your spending on office supplies, the tax savings can add up.
9. Office Supplies
This one may sound obvious, but many people miss out on this area. When you order paper or ink cartridges from places like Staples or Office Depot, you are pretty aware of the fact that you are buying office supplies. When you stroll through a Target and throw some office supplies on top of your otherwise full cart, will you remember to deduct those expenses? Take the extra few minutes to separate the business purchases from the personal expenses. Put them on a separate receipt and pay with a business-specific credit card. Believe me, when tax time rolls around, you won’t remember what was or wasn’t a business expense.
10. Licensing and Taxes For Your Business
If you have to pay taxes or licensing fees to run your business, they are likely tax-deductible. This can even include real estate taxes, or property taxes, you pay on business real estate. It can also include fees for professional licensing.
I know thinking about taxes is about as fun as a root canal, but take a little extra time to track your tax deductions. Doing so will help you keep more of your hard-earned money. Perhaps with a little fewer taxes (aka more take-home pay), you could work just a little bit less.