For self-employed individuals, no time of year is more intimidating than tax time. Not only do you need to make sure your taxes are done correctly, but you also have to remember all the possible deductions and credits available to independent contractors.
However, by keeping track of your expenses throughout the year, you can save yourself a lot of work come tax time and ensure you’re taking full advantage of the deductions available. Below, we’ve compiled a cheat sheet of some of the most common expenses you can and can’t write off during tax season when you’re self-employed.
Keep in mind that the information in this article is specifically intended for sole proprietors or those who have structured their business as an LLC; however, much of this information may apply to other business structures as well. These are general guidelines and the deductions you might qualify for can depend on a number of factors so it’s always best to consult a tax professional before taking action.
What You Can Write Off
When it comes to self-employment deductions, there are a few key categories that you can take advantage of. In each of these cases, it’s vital to keep detailed records of all your expenses, including receipts and invoices.
Below are some of the standard deductions you should be tracking and writing off:
- Self-Employment Tax Deductions: Deductible Social Security/Medicare taxes, health insurance costs, retirement contributions.
- Home Office Deductions: Rent/mortgage payments, property taxes, utility bills, repairs, and insurance premiums related to a home office.
- Business Insurance: General liability insurance, errors and omissions coverage, worker’s compensation, commercial auto coverage, and key person life insurance policies.
- Vehicle Expenses: Fuel costs, maintenance costs, lease payments for cars/trucks used for business.
- Depreciation: Many business-related items have a value that can be depreciated over time, such as office furniture and equipment.
- Business-Related Meals: Meals related to sales calls/meetings or staff meetings with proper documentation.
- Office and Supply Expenses: Office supplies, printing costs, postage fees, etc.
- Business Travel: Travel expenses related to attending sales calls/conferences with records of dates and purposes of the trip plus lodging info.
- Professional Fees: Accountant/lawyer fees, marketing and advertising costs, and other consulting fees.
- Business Software: Accounting, tax software, office automation, customer relationship management (CRM), and other computer-related costs.
- Education Costs: Continuing education courses, conferences, seminars, and other related events.
- Taxes and Licensing: Any taxes or licensing fees associated with running a business.
- Commissions: Any commissions paid out to agents or 3rd party vendors that are required for your business.
- Contractor Labor: Costs associated with hiring contractors or freelancers for projects.
- Qualified Business Income: Income from your business activities that meet the qualified business income deduction requirements. This includes rental, trade, or business income.
- Phone and Internet Bills: Any phone and internet bills related to the operation of your business.
- Bad Debts: Any debts your business incurs that cannot be collected.
- Charitable Contributions: Any charitable donations you make with records of the donation and a receipt from the charity.
What You Can’t Write Off
When doing taxes as a self-employed individual, you might think you can deduct any expense you come across. Unfortunately, this isn’t the case. There are specific rules regarding deductions, and some expenses simply cannot be written off. Here are six deductions that are often not allowed:
- Groceries: While food can be deducted in some cases, it is generally considered a personal cost and cannot be deducted from your self-employment tax bill.
- Cost of Clothing: Clothing purchased for strictly personal use cannot be claimed as a deduction on your taxes.
- Federal Income Taxes: These taxes are not considered deductible, and any payments made will not be applied to your self-employment taxes.
- Monetary Value of Volunteer Work: Unfortunately, giving back to society through volunteer work will not impact your tax liability, as volunteer work does not have a monetary value and thus doesn’t count as an expense or deduction.
- Personal Phones: Cell phones used solely for personal purposes can not be deducted from your taxable income, no matter how much they cost.
- Pet Expenses: Expenses related to owning a pet, such as food, vet bills, or grooming products, usually don’t qualify as an allowable business expense since they are primarily used for personal needs rather than business needs.
How to Track Expenses
As a self-employed individual, it is essential to track your documents to ensure you are filing correctly and paying all of the appropriate taxes. Here are some tips for monitoring your self-employment taxes:
- Receipts and Invoices: Keep a copy of any receipts or invoices you have issued, as these can be used when completing your tax return. It is essential to track who paid what and when they paid it.
- Bank Statements: Bank statements provide an overall picture of incoming and outgoing cash flow, which helps assess the total income earned during the year. Be sure to keep copies of bank statements throughout the year so that it is easier to track what was earned and spent.
- Canceled Checks: Canceled checks provide proof of payment for any business expenses paid with checks. Keeping copies of canceled checks will help substantiate the self-employment income reported on your tax return.
- Credit Card Receipts and Statements: Credit card statements provide proof of payments made with a credit card, which can be used when preparing your tax return. Keep copies of credit card statements for each month so that it is easier to track how much was spent using a credit card throughout the year.
- Mortgage Documents and Loan Documents: If you are paying mortgage or loan payments on any property or item, keep all documents related to those payments throughout the year, as they can be used when filing your tax return.
- Interest Statements: Interest statements show money earned from interest-bearing accounts such as savings accounts or certificates of deposit (CDs). These documents should also be kept while preparing your tax return, showing additional income earned during the year.
Tracking your self-employment taxes requires organization and attention, but following these steps will help ensure accuracy on filing day.
Reduce Your Tax Liability and Maximize Your Cash Flow Every Year
As a self-employed individual, expenses can be an efficient way to lower your taxable income. But many self-employed folks make the mistake of being so scared of taxes that they over-expense themselves and end up with cash flow issues.
While it’s vital to ensure that you are taking full advantage of all available deductions and expense opportunities, other tax strategies, such as using tax credits and deferring income, can help reduce your taxable income even further. By taking the time to research these options and explore their potential benefits correctly, you will be able to make informed decisions that allow you to keep more of what you earn while still ensuring that you satisfy all of your local, state, and federal requirements.
Shahar Plinner is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy.
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