By Kayla Matthews
Self-employment means a lot of freedom and flexibility in your work — but being your own boss isn’t cheap. Unlike a worker on business payroll, you’re responsible for paying your own Medicare and social security tax in the form of a 15.3 percent self-employment tax.
It’s a big expense, and one that leads many freelancers to think about alternative career options. Fortunately, it’s possible to seriously cut down on those extra taxes that you have to pay.
The tax code is full of lines that provide deductions for business and the self-employed. While the 2017 Tax Cuts and Job Act nullified a number of these tax write-offs, there are still many write-offs you can use to lower your taxes. Below, we’ll cover the best ways to save on taxes when you are self employed, plus other strategies you can use to save on taxes.
1. Take Advantage of Above-the-Line Deductions
Since 2017, standard deductions have been higher than usual, even for single filers. The size of these deductions, combined with the labor needed to track expenses, means some taxpayers skip keeping track of potential deductions. It may seem like there’s no way you can spend enough to have itemized deductions that beat the standard deduction.
Even if you don’t itemize your deductions, you can still write off certain expenses on your tax return.
Above-the-line deductions, sometimes called business deductions, reduce your adjusted gross income (AGI). Your AGI is the sum total of your annual income, including wages, business income, capital gains, unemployment and so on. You can take these deductions even if you don’t itemize.
There is a variety of above-the-line deductions that you can use to cut down your AGI. For example, you can use retirement plan and HSA contributions. You can also deduct many self-employed business expenses, like office rent, utilities and legal fees.
2. Deduct Travel-Related Expenses
Business travel is a deductible expense, so long as it lasts longer than a work day, requires you to sleep or get rest and takes place out of your tax home. You can also write off many travel-related expenses.
The cost of transportation to and from your destination is deductible. So is the cost of transportation at your destination. You can also write off meals and lodging — so long as they’re not considered “lavish” or “extravagant,” per IRS guidelines.
Typically you can only write off 50 percent of the cost of meals, but there are exceptions that let you go over this limit.
3. Save Purchases for the End of the Year
IRC Code Section 192 allows taxpayers to deduct the cost of personal property in the year you put it into service — so long as you use it more than 51 percent of the time for your business. So long as you buy a business asset and start using it by December 31, you can probably write off the expense on your tax return for the year.
Normally, you’d have to depreciate the expense over several years, splitting up your savings.
4. Write off Interest
If you’ve taken out a business loan, interest paid on those loans can be fully deductible, so long as you’re spending loan funds on business expenses.
There are some exceptions to this rule. For example, the loan needs to come from a real lender. Some banks and financial groups offer loan options for self-employed professionals. If you take out one of these loans, you can write off the interest on your tax return. If you borrow money from a family member or friend, however, you can’t write off the interest.
5. Write off Publications and Subscriptions
Any business-relevant publications you buy or subscribe to can be written off on your taxes.
Not all subscriptions can be written off. You may have a hard time justifying a subscription to your local paper, for example. Relevant industry publications, however, can be written off. Reference materials are also a deductible expense.
6. Deduct Your Home Office
Have a space in your home dedicated to work? You can write off the value of that space on your taxes.
The space has to be dedicated to work, however. If it’s serving another purpose — like a bedroom — it won’t be deductible. The IRS may request documentation of your home office space.
Even if you can’t write off the costs of your work space, you can generally write off the cost of utilities. Your internet connection and phone line are may count as fully- or partially-deductible expenses.
Tracking and Applying These Deductions
You can connect personal finance software to your bank account and automatically log expenses. This can help you keep track of your annual expenses.
You may also want to start looking at long-term tax saving strategies. If you don’t have a HSA, retirement fund or self-employed defined benefit plan, opening one can provide additional opportunities for savings.
About the Author: Kayla Matthews writes about communication and workplace productivity on her blog, Productivity Theory. Her work has also appeared on Talent Culture, MakeUseOf, The Muse and Fast Company.