How to Take Self Employed Tax Deductions

Knowing how to take self employed tax deductions can slash your tax liability with the IRS. There are many things, from computers to health insurance premiums, you can legally deduct to lower your expenses. You can even deduct half of your self-employed income tax, which is the Medicare and Social Security portion of your quarterlies. However, be careful not to take questionable tax deductions, as they may be a red flag for audit. Here's how to take self employed tax deductions.

Instructions

Difficulty: Moderate

1. Keep tax records. Keep impeccable records of business expenses throughout the year. Organize your files and books and update them daily or weekly as needed. The time it takes to set up a good system is minimal compared to how much time you'll save at the end of the year putting together your tax return. If you messed up this year, use your frustration as motivation for better organizing.
2. Save receipts for taxes. Save your receipts throughout the year, especially those proving the purchase of supplies or self employed expenses. Keep all credit card statements, health insurance bills and retirement plan contribution statements.
3. Deduct health insurance costs. Add up the cost of your health insurance premiums. These are 100 percent tax deductible if you're self-employed. Other medical expenses, such as co-pays, deductibles and doctor bills, are only deductible if you itemize your deductions and the medical expenses (other than insurance premiums) add up to more than 7.5% of your adjusted gross income.
4. Deduct the cost of business equipment purchased during the year. For small businesses, this may mean home office furniture, computers and tools. Large equipment or expensive purchases may be better depreciated over several years; consult a competent small-business accountant to learn more about depreciating assets.
5. Deduct clothing purchased solely for work purposes and not worn elsewhere. For example, uniforms with company logos are deductible. Boots worn for both the job and recreation are not deductible.

Tips & Warnings

• Consult a small business accountant for specific tips and guidelines on what you should deduct to save the most money on taxes.