IRS Self-Employment Deductions

Some self-employed people are entitled to deduct office equipment.

The Internal Revenue Service views any person who makes more than $400 in a year from business activities to be self-employed, even if they mainly have another job. Self-employed individuals must pay estimated taxes four times a year in addition to paying self-employment tax on their yearly tax return. Fortunately, there are several deductions self-employed people may take in order to offset the high tax burden they must shoulder.

Significance

Self-employed individuals pay a 15.3 percent tax on gross income up to $106,800 and a 2.9 percent tax on all additional income. This tax is supposed to be equivalent to the Social Security and Medicare taxes that employers automatically deduct from an employee's paycheck. This tax rate is significantly higher than the taxes persons employed by others pay.

Benefit

If you are working for an outside employer, she shoulders half the burden of payroll taxes for each employee. Therefore, the IRS allows self-employed people to deduct half of their self-employment tax from their gross income for that year. For example, if your business made $15,000 this year, you owe $2,295 in self-employment tax and may deduct $1,147.50 from your gross income for a total gross income of $13,852.50.

Considerations

If you are self-employed and do not need additional employees, you might consider working from home. The IRS allows people who work from home to take a home office deduction if they follow strict guidelines. You must set aside a room of your home to be used only for business purposes. This room must be off-limits to others in the home even during non-business hours. For example, you may not allow children to play in the room when you are not working. If you qualify, you may deduct a percentage of your home mortgage or rent from your taxes equivalent to the percentage of your home used for business. For example, if your office is 360 square feet in a 3,000-square-foot apartment, you may deduct 12 percent of the rent for the year from your taxes.

Types

If you are a sole proprietor, you may want to itemize your deductions, since you have to declare business income on your personal taxes. This gives you the opportunity to deduct business expenses from your taxes. You can deduct cost of business equipment such as computers, cost of business services such as your phone or Internet service, and cost of business operations such as advertising costs. You can also deduct your health care costs if you pay for 100 percent of your health care premiums yourself.

Warnings

NoLo Legal Solutions says that the IRS audits self-employed people more frequently because many self-employed individuals underreport income or use deductions inappropriately. To reduce the risk of an audit, only take deductions you fully understand, and consult a tax professional if you are not sure how a particular deduction works. Home office deductions are especially scrutinized, so follow the guidelines for this deduction if you plan to take it. You should also save all receipts and other documentation such as business plans or contracts demonstrating the need for a particular expense you are claiming as a deduction.

References

• IRS: Self-Employment Tax
• NoLo Legal Solutions: Why the Self Employed are Audit Targets