Several important lines have been written into the tax code throughout the years. They were written by legislators to cut down the additional expenses that self-employed individuals must spend on their businesses.
But in the year 2017, both Tax Cuts & Jobs Act (TCJA) removed a number of self-employed tax deductions. Most of these amendments are temporary and may expire in the year 2025; however, others are permanent.
The law impacts a small business in various ways, especially via a complicated 20 percent business income deduction for pass-through businesses- for people who pay taxes through the individuals instead of through the corporation.
Here are a few deductions that are now eliminated:
- Entertainment deduction
- Domestic production activities deduction
- Local lobbying expenses deduction
- Employees’ parking, mass transit or commuting expenses deduction
Also Read: 7 Smart & Effective Ways To Spend Tax Refund
One should thoroughly know all the common self-employed & deductions to figure out the factors that may affect his or her business in the long run.
Take a look!!
Self-Employed Tax
This tax refers to an employer’s part of Medicare & Social Security taxes that should be paid by self-employed people.
Every person who works is liable to pay these taxes. As for 2019, it was 7.65 percent for employees whereas it is 15.30 percent for the self-employed.
The income thresholds for extra Medicare tax are not just applied to self-employment income but to also his or her combined wages, compensation, and even self-employment income.
Hence, if a person has $100,000 in self-employment income and his or her spouse has $160,000 as wage income, then he/she will be liable to pay the extra Medicare tax, i.e. 0.9% on the $10,000 by which his/her joint income exceeds the $250,000 threshold.
Obviously, paying additional taxes is not that great. But the good thing is that the self-employment tax will cost a person less than he/she may expect because he/she gets to cut down half of his/her self-employment tax from his/her total income.
Home Office
This is actually one of the most complex deductions. Home office tax is basically the expense of a workspace that a person uses daily and most importantly, for his/her business.
No matter the office space is on rent or you own it, both ways you are liable to pay this tax.
An employer is typically on the honor system. However, he or she must be well-prepared to defend his/her deduction in the event of an IRS audit.
Following are the two choices to calculate home office deduction:
- The standard method
- The simplified option
You can use any method! Talking about the standard method, you should calculate your actual home office expenses. On the other hand, the simplified option allows a person to multiply an IRS-determined rate by his or her home office sq footage. If you use the simplified option, then your home office should not be more than 300 sq feet. Also, you cannot deduct depreciation or home-related itemized deductions.
Also Read: Everything You Should Know About Stop-Loss Insurance
Internet & Phone Bills
In this tax, you can deduct expenses such as business phone, fax, and Internet expenses. Here the aim is to cut down only the costs that are directly related to the business.
In case, a person has just one phone, then he or she must not deduct his/her complete monthly bill, which includes both personal & business use. He or she may only have to deduct expenses that particularly relate to the business.
On the other hand, if a person has a second phone line that he or she uses particularly for business, then 100 percent of that cost will be deducted. Likewise, he/she should only deduct the monthly internet expenses in proportion to how much of the time was spent on the business.
Health Insurance Premiums
If a person is self-employed, then he/she is liable to pay for his/her own health insurance premiums. Besides, one is also not eligible to participate in a plan via his/her spouse’s employer.
You can cut down all of your health, dental and qualified long-term care insurance premiums. Also, you can deduct premiums that are paid to offer coverage for your spouse, your dependents, and your children who are younger than 27 at year-end, no matter if they are not dependents.
Also Read: 4 Types Of Insurance Every Individual Must Consider
Meals
This is a tax-deductible business cost when a person travels for a business purpose. One can only deduct 50 percent of a meal’s total expense if he/she keeps his/her receipts or 50 percent of the standard meal allowance. The meal ate alone at the desk is not tax-deductible.