Self-Employed Tax Relief
Setting your own hours, working from home, and being your own boss are some of the perks of self-employment. Paying self-employment tax, on the other hand, is definitely no perk. Many first-time independent contractors forget to set aside enough money to pay taxes, or have no idea how to handle the unique situation of self-employment tax. However, independent contractors can take a load off their tax burden by deducting their business expenses on their Schedule C. But remember the mantra of the self-employed: keep every receipt, no matter what.
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What You Owe
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As of 2010, independent contractors who make less than $400 a year do not have to pay self-employment tax. The first $106,800 of your net earnings is subject to 12.4-percent Social Security tax. For example, if you made $108,900 as an independent contractor, you would not owe Social Security taxes on $2,100 of that income. The other self-employment tax is a 2.9-percent Medicare tax, which is owed on all income with no cap. For most people, the self-employment tax would end up being 15.3 percent.
Home Office
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Home office expenses are the most obvious write-off. If you have a room or even just a dedicated space set aside for your home office, measure the square footage of this space and divide by the total square footage of the house. You can deduct this percentage of your mortgage or rent payments, utilities and phone--if it is used for business expenses. Be careful with the phone deduction; the IRS sometimes red-flags deductions for home offices sharing a line with the rest of the house. Second lines are less suspicious.
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Business Supplies
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If it's bought for a home office, it's deductible. Computers, printers, software, ink, paper, staplers, paper clips, hole punches, mobile phones, shipping and postage, office chairs and other furniture, even magazine subscriptions can be deducted as business supplies. Most mobile phone providers will send you a yearly statement if you ask, saving you the task of finding your last 12 bills and adding them up. If you have to hire a legal or other professional service for any reason, those costs can be taken off as well.
Automotive
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Do you use your car to get to work, go to meetings or travel to conferences? Congratulations, it's now a business expense. Keep a notebook in your car to keep track of mileage, tolls and parking costs. Deduct the amount of miles you drive multiplied by the cents per mile allotted, which changes from year to year. Also, gas, repairs and car insurance are deductible as well.
Travel and Meals
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Airfare, train tickets, automobile travel and hotel costs are fully deductible. When you check out of the hotel, make sure to ask for an itemized receipt. If you forgot to, call and ask the hotel to mail, fax or email a copy to you. Hotels thrive on business travel and will generally accommodate this request. Business meals are also deductible, but only 50 percent of the total bill.
Insurance Premiums
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If you purchased a health insurance policy independently, you can write off 100 percent of the cost. There are two main limitations to this. You can't write off more than you earned, and you can't claim the deduction at all if you were eligible for health care coverage from a different source, including your spouse's. Business liability insurance is also deductible.
Miscellaneous
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Advertising and promotional expenses, like billboards, pamphlets, promotional bumper stickers, monogrammed water bottles and business cards, can be deducted as long as they're used to promote your business. As a self-employed individual, you pay both the employer's and employee's share of self-employment taxes. The good news is that you can write off half of this amount.
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