Tax Deductions for Self-Employed Individuals
Self-employed individuals also have additional retirement account options which can add up to big tax savings. A SEP-IRA for example (assuming the individual meets certain criteria) can allow a self-employed individual to save over $50,000 annually to a retirement account and 100% of this contribution is tax deductible.
Besides this self-employed tax deduction, individuals working from home who have a space set aside somewhere within the home, may have additional tax deductions as well like these three examples:
Utilities and Services
If your line of work requires an Internet and phone connection, then you may be able to recover a portion of your annual expenses for these services. The best way to do this is to keep all receipts from your Internet and phone provider throughout the year; at the end of the year, total up your annual expenses and determine what percentage of those expenses were business related. This may be anywhere from a few percent to all depending on your specific situation.Rent/Mortgage
This can save you a lot of money but you must also be very careful with it. If you have a specific room in your home that is dedicated to work, then you may be able to write off the cost of that portion of your rent or mortgage in addition to the utilities required to service it. If you plan on taking this, it is important that you measure the square footage of this space and prorate the amount based off of the footage. If it is a shared space, you must determine what percentage of time is used for work and prorate based off that percentage.Moving Expenses
You can't always deduct moving costs when it comes to taxes, but if your move was related to a job relocation, you may be able to claim a tax deduction. If a new job drove you to relocate to a new city, you can claim a tax deduction as long as the new job is more than 50 miles farther from your old house than the distance of your previous commute. If the distance between your old home and old job was 10 miles, the distance between your old home and the new job must be at least 60 miles to meet the 50-mile distance test. Additionally, the relocation must be completed within one year from the date you first reported to the new job unless there are reasonable reasons for the delay, such as waiting for a child to complete high school. Only expenses that are not reimbursed by your employer can be reported as deductions. After the move, you must remain with the job on a full-time basis for at least 39 weeks to qualify for this tax deduction.
When a move is job related, other moving expenses may be considered tax deductions. Keep track of the money spent on packing and shipping expenses, including boxes, tape and bubble wrap. Moving and packing company fees can also be deducted. The costs associated with moving pets or vehicles qualify for deduction, as do travel and accommodation costs. If you're driving, keep receipts when you fill up with gas, or simply claim the standard mileage rate. Recent graduates may also be able to use student loan interest and moving expenses to take a job.
One of the biggest hassles when moving is disconnecting and reconnecting utilities. Fees for these services can be included on a tax return. However, fees related to buying and selling of the home do not qualify.
Figuring out taxes can sometime be difficult for self-employed contractors, but exploring potential tax breaks can pay big dividends.
The Most Overlooked Tax Write-Offs for Contractors
There are a number of valuable tax write-offs available to 1099 contractors. The key to capitalizing on them, is understand what they are and to always keep detailed receipts and invoices. Here are a few of the most overlooked and often under-valued deductions:
- Home Office: The home must be the primary place of business. If it is not, it doesn't qualify. There are two ways to calculate deductions — "simplified" and "regular." In the simplified method, multiply office's square footage by IRS rate of $5 per square foot, up to 300 square feet. In the regular method, if the office occupies 20 percent of the home's square footage, it qualifies for a 20-percent deduction of utility costs. The same formula applies to deduct mortgage interest, homeowner's insurance, repairs, landscaping. If a rented home, deduct 20 percent from rent. For more information, see IRS Form 8829.
- Car-Related Expenses: If also a personal vehicle, separate the percentage of miles used for business. The IRS provides a 53.5 cents per mile deduction for 1099 contractors, starting in January or 2017. For those who keep extensive records, the "actual expense method" could generate higher deductions. This requires documenting costs incurred operating the vehicle — gas, oil, license fees, repairs, maintenance, insurance, car washes — in addition to researching the IRS's depreciation schedule. Tolls and parking are also deductible.
- Medical Plans: Up to 100 percent of health insurance costs can be deducted by 1099 contractors. Add a spouse as an employee and it can qualify as a family health insurance plan.
- Child Care: Here's something often overlooked — if a spouse is employed by a 1099 contractor, $5,000 can be deducted to pay the spouse for child care of their own children.
- Operational Expenses: Advertising, web hosting fees, and business cards are deductible.
- Supplies/Materials: Office equipment such as computer, camera, printer, paper, pens and ink are deductible, as are books, magazines and newspapers necessary to the business.
- Snacks, Coffee, Meals: Most know business meals are deductible, but few realize snacks and coffee consumed while working can be deducted.
- Business-Related Entertainment: Up to half the cost of entertaining clients at restaurants, sporting events, and festivals, can be written-off.
- Travel: Half the costs for hotels, flying, and meals can be written off for business trips.
- Cleaning Services: Hiring a cleaning company, maid service, or janitor to clean the home that houses the office is deductible.
- Continuing Education: Take a class to "maintain or improve skills" and it's deductible. This can't be claimed to learn a new profession.
These are just a few of the deductions that filers and self-employed individuals may sometimes miss. These can save you serious money this tax season, so remember to save those receipts and use E-file.com to help identify deductions.