Managing your self-employment tax deductions year-round is crucial for your financial success. Not only can you maximize your tax benefits, but you can maintain financial stability. In addition, you can avoid your last-minute tax season stress.
Managing and tracking business deductions is more complex than it is for salaried employees, as it requires you to track and keep good records of your deductions and expenses related to operating your business.
Here are some tips to better manage your self-employment expenses year-round and at tax time:
Know Your Self-Employment Deductions
The business deductions you can take largely depend on what kind of business you have, but you will be surprised at how many deductions you can take! For example, if you have a product-based business, you can take deductions for certain expenses related to the production and selling of your products, such as the cost of inventory, storage space, shipping, and marketing expenses.
If you have a service-based business, your deductions are more likely to be related to marketing, travel and entertainment, car expenses, rent or home office expenses, and technology.
Some of the self-employment deductions that many people overlook include business use of your personal phone and computer, home office, and business use of your personal car or truck. You can also deduct interest paid on loans that were used in connection with your business, as well as any types of education or classes you participated in, as long as the purpose was directly related to your business.
Also, don’t forget about the self-employed health insurance deduction. You can deduct the full cost of premiums paid for medical insurance, dental insurance, and long-term care insurance. What’s more, you can take these deductions as an “above the line” tax deduction, which means they can be used to reduce your taxable income, even if you don’t itemize your tax deductions. In addition, since you don’t have to deduct those premiums as an itemized deduction, they aren’t subject to the required 7.5% adjusted gross income (AGI) reduction that medical expenses are typically subject to if you have an employer.
Record Your Deductions
The easiest method is to use a dedicated bank account and credit card for all business-related expenses so all transactions are in one place, and to regularly record them in an accounting software package like QuickBooks Self-Employed.
But if you don’t use business software, or if you regularly transact business transactions using personal accounts, the task may be harder. Some credit cards will provide you with a year-end summary that tallies up all of your expense categories. But with personal checking accounts, you may have to go through your monthly statements for the entire year to determine exactly what business income and expenses you had for the year.
If you can, it’s best to use a dedicated bank account so you don’t have to worry about co-mingling business and personal income and expenses.
Take Advantage of Self-Employed Retirement Plans
One of the very best ways to increase your self-employment deductions is by participating in a retirement plan. Generally speaking, the deductions available for these plans are more generous than they are for salaried people with the same income level.
Here are examples of the main self-employed retirement plans that are available:
- Solo 401(k). This plan enables you to contribute as much as $69,000 per year in 2024 (or $76,500 if you are 50 or older). When you establish a solo 401(k) plan, you are both employee and employer for plan purposes. As an employee, you can contribute up to $23,000 to the plan (or $30,500 if you’re 50 or older). But as employer, you can also contribute up to 25% of your business net income to the plan. That means that if you have a business net income of $100,000, you can contribute $23,000 to the plan as an employee, plus $25,000 ($100,000 X 25%) as employer, for a total tax-deductible contribution of $48,000.
- SEP IRA. A SEP IRA is another option for self-employed taxpayers. For 2024, you can contribute up to $69,000 to the plan or 25% of your net business income to the plan, whichever amount is less.
Taxes don’t have to be a big expense if you’re self-employed. If you learn how to manage your self-employment expenses year-round, you can easily do your taxes yourself and save money for your business in a major way.
No matter what moves you made last year, TurboTax will make them count on your taxes. Whether you want to do your taxes yourself or have a TurboTax expert file for you, we’ll make sure you get every dollar you deserve and your biggest possible refund – guaranteed.
