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Self Employed business owner

Be Sure to Take Advantage of Deductions for the Self Employed

Tax breaks can be a boon to the self-employed. If you own your own a Bay Area business — or are thinking about it — here are some tax deductions you may be eligible to claim.

Self-employment (SE) tax. When you’re self-employed, you have to pay SE taxes on your earnings instead of the Social Security and Medicare taxes that employees and employers pay. You’ll be able to deduct a portion of your SE taxes.

Health insurance. If you’re not eligible for coverage under a plan offered by your spouse’s employer, you can deduct the costs of health, dental, and long-term care insurance premiums paid for yourself, your spouse, and your dependent children. (Requirements apply.)

Office at home. You can deduct a percentage (usually based on square footage) of your mortgage or rent, utilities, property taxes, homeowners insurance, and home maintenance costs. Alternatively, you may use the “safe harbor” method, which allows a deduction of $5 per square foot (up to 300 square feet). But be careful — you must use the space regularly and exclusively for business to claim the deduction.

Thinking about retirement. Deductions for contributions to a tax-deferred retirement plan, such as a SEP-IRA, SIMPLE IRA, Keogh plan, or solo 401(k) plan, will reduce your current tax bill.

Talk and surf. You can deduct phone, fax, and Internet expenses directly related to your business.

Vehicle use. The cost of driving a car for business is deductible. You can use either the IRS standard mileage rate or your actual expenses to compute your deduction.

Interest. Interest on business loans and business purchases charged to a credit card is deductible.

Food, fun, and travel. You can generally deduct 50% of the cost of business meals and entertainment if you meet certain tax law requirements. Other business travel expenses, such as lodging, are 100% deductible.

Make sure you keep good records, and give us a call today if you have any questions at 510-222-5800. Or, request a free consultation with our Bay Area accounting firm.

Lower Your Taxes for the Self Employed Business Owner

Self EmployedWhen you are self-employed, your business profits are taxed to you at federal rates as high as 39.6%. Add self-employment taxes, which in 2016 will amount to 15.3% of the first $118,500 of your net self-employment earnings plus 2.9% of any earnings over that amount. Then there’s an additional 0.9% Medicare surtax on earnings in excess of $200,000 ($250,000 if married filing jointly). At tax rates like these, it pays to take steps to reduce your tax burden.

Step One: Deduct Business Expenses

Be sure you have an organized system for recording your expenses. To be deductible, a business expense must be “ordinary” (common and accepted in your trade or business) and “necessary” (helpful and appropriate for your trade or business). Since personal expenses are generally not deductible, it’s smart to have a separate business bank account and use a separate credit card for business purchases.

Step Two: Deduct Health Insurance Premiums

You may qualify to deduct premiums paid for medical, dental, and qualified long-term care insurance coverage for you, your spouse, and your dependents.* The coverage may include children who haven’t reached age 27 by the end of the year, even if you don’t claim them as dependents on your tax return.

Unlike health insurance premiums paid for employees, the self-employed health insurance deduction won’t save you self-employment taxes. However, it will lower your taxable income. You must meet certain requirements to qualify for the deduction.

Step Three: Deduct Retirement Plan Contributions

Funding a retirement plan can also save you significant tax dollars. Within limits, plan contributions will be tax deductible.** Several types of plans may be suitable for you as a self-employed taxpayer, including a simplified employee pension (SEP) plan, a savings incentive match plan (SIMPLE), or a solo (individual) 401(k) plan. Each plan has specific features and requirements that you will want to weigh carefully before making a choice.

If you are tired of overpaying taxes, simply call 510-222-5800 and ask for Navjeet.  Our initial consultation is free.  Lowering your taxes legally is our expertise.

 

Chahal & Associates services small business owners throughout the Bay area.  We have convenient offices in Emeryville, San Rafael and Pinole.  Chahal & Associates provides additional expertise in QuickBooks Accounting, International Taxation, Restaurant Accounting and Retail Accounting.

 

* Dollar limits apply to the deduction for long-term care insurance premiums.

 

** Although deductible for income-tax purposes, contributions to your own retirement plan account do not reduce earnings subject to self-employment taxes.