As a self-employed individual, it is crucial to take advantage of every tax deduction available to you. By maximizing your deductions, you can significantly reduce your taxable income and ultimately save money. Here are some of the most valuable tax deductions that self-employed individuals should consider:
1. Home Office Deduction: If you have a dedicated space in your home that is used exclusively for business purposes, you may be eligible for a home office deduction. This deduction allows you to deduct expenses such as rent, mortgage interest, utilities, and insurance related to your home office.
2. Business Expenses: Any expenses directly related to running your business can be deducted. This includes office supplies, equipment purchases or leases, software subscriptions, travel expenses for business purposes, and professional services fees.
3. Self-Employment Taxes: As a self-employed individual, you are responsible for paying both the employer and employee portions of Social Security and Medicare taxes. However, you can deduct the employer portion of these taxes on your tax return.
4. Health Insurance Premiums: If you pay for your own health insurance coverage out-of-pocket as a self-employed individual, these premiums may be deductible on your tax return.
5. Retirement Contributions: Self-employed individuals have several retirement plan options available to them that offer tax advantages. Contributions made to retirement plans such as SEP-IRAs or Solo 401(k)s are typically deductible up to certain limits.
6. Education Expenses: If you take courses or attend conferences that directly relate to improving or expanding your skills within your profession or industry, these educational expenses may be deductible.
It’s important to note that tax laws can be complex and subject to change. Therefore, it is advisable to consult with a qualified tax professional who can provide personalized advice based on your specific circumstances.
Starting Up
Even though starting up a business is easier than ever before, there are still costs associated with any new venture. Luckily, You can deduct up to $5,000 of all the costs related to starting a new business if your business was started this tax year. This can include things like market research and advertising for your business launch.
Insurance
A self-employed person can deduct the premium of various types of business insurance. This can include:
- Fire
- Theft
- Worker’s Compensation
- General Liability
Vehicle Expenses
So, if a self-employed person uses their vehicle for 100 percent business use and the vehicle is in the company’s name, then the car or truck is fully deductible.
If the vehicle is in your personal name and used partly for personal, partly for business use, then there are two ways to calculate the deductions
Track your actual car expenses, including gas, maintenance, insurance, and depreciation, and deduct a percentage supported by the number of business miles you drive.
Deduct a typical rate on each “business” mile driven for the year. For 2020, the quality mileage rate is 57.5 center per mile driven for business use, down from 58 cents per mile in 2019.
No matter which method you select, you’ll have to keep track of what percentage of business and private miles you drive. You can use a manual log or an online app.
Qualified assets for Section 179 include:
- Machines or equipment purchased for business use.
- Office furniture.
- SUVs, pickups, and vans weighing more than 6,000 pounds.
- Certain improvements to the interior of commercial property.
Read our handy article Tax Deductions that Every Small Business Owner Should Know to find out about more money-saving tax deductions.
Corporate Alternative Minimum Tax Credits
The corporate alternative minimum tax is defined as “A variety of exclusions, deductions, and credits are available to corporations, which often allow them to reduce the amount of tax that they are required to pay on the income they earn, sometimes to zero. To ensure that these corporations pay at least some tax on their income, Sec. 55 imposes an alternative minimum tax (AMT), which requires many corporations to add back some of these deductions and credits and pay tax on this reconfigured amount.”
This was repealed in 2017 and the AMT was made available as refundable credits ending in 2021. The federal government is allowing businesses that were going to receive AMT credits at the end of 2021 to claim a refund now due to the pandemic.
How Do I Know If My Business Needs To Collect Sales Tax?
Forty-five out of the fifty states require businesses to collect sales tax. This does not even include that many cities and localities that also have sales tax regulations. You must understand the rules of the places that you do business. Does your state or local area require some sort of license or sales permit? Be sure that you are charging the correct rate for both the point of sale and the types of products your business sells.
How Do I Know If I Need To Pay Sales Tax In A Given State?
To establish whether or not a state can impose a sales tax upon your business there first needs to be nexus. Nexus relating to state sales tax is established by a connection between the state and your business. How this connection is defined has been subject to fairly recent changes that reflect changes in the way business is conducted in modern times.
Traditionally, the nexus has been established by the business having a physical presence in the state. However, due to the explosion of e-commerce, physical presence within a state is no longer a requirement for sales tax nexus. In the case of South Dakota v. Wayfair, the courts eliminated physical presence as the major requirement for creating nexus. It still should be noted that physical presence is considered an important requirement to allow a state to collect sales tax and is still one of the first considerations for sales tax.
Getting A Tax Resale Certification Is One Of The Best Things You Can Do As An Entrepreneur
As a self-employed person, getting a tax resale certificate can save you money on taxes.
In short, a tax retail certificate allows you not to pay sales tax on items that you plan to resell. This can also apply to supplies that are going to be used in products that you will resell, such as wood for a cabinet.
However, the process can be difficult and the rules are different for each state. That is why TaxResaleCertificate should do all the hard work for you. We can make sure that you get all the advantages of a tax resale certificate without having to deal with the hassle of government red tape. Let us handle the hard stuff so you can proceed to run your business with confidence. Make sure you check out our second blog in this series so you can learn even more valuable information about tax resale certificates.