Being self-employed may not always be simple, but it definitely has its rewards. Doing what you love and having the flexibility that comes with being your own boss can certainly make the challenges worthwhile. In some cases, being self-employed can also have some less obvious tax advantages. Making sure you plan according to the tax code can help ensure that you benefit from the applicable tax breaks. Here are four self-employed tax advantages to consider.
4 Self-Employed Tax Advantages
For instance, did you know that combining work trips with vacations can help you write-off some of the cost of your trip? For example, if you visit a client in another state or country, you can deduct the cost of the flight as well as the cost of meals and hotels associated with the business portion of the trip. If you tack on a few extra days to do some site seeing, you can still deduct the entire flight. However, you should not deduct the meals, entertainment and accommodations associated with the leisure part of the trip.
2. Contributing to Your Retirement
While it may not feel as nice as site-seeing while on business, contributing towards your retirement will help you sleep a bit better at night, and knowing that you’re saving on your taxes should make that sleep a little sweeter. Having a traditional IRA and a Roth IRA are far and away the simplest way to bolster your retirement plans and put your savings in a tax-advantaged position.
Contributing to your standard IRA will help you reduce your tax bill this year, while contributing to your Roth IRA will allow your investments to grow tax-free. In other words, contributions made to your traditional IRA are tax deductible this year (meaning that they’ll reduce your tax bill this year). However, any disbursements will be taxed.
Contributions to your Roth IRA will not reduce your tax bill this year, but instead, allow whatever contributions you do make to grow tax-free; that way, when it comes time to take disbursements from your Roth IRA, you will not pay any taxes on those disbursements.
Note: Contribution limits change from year-to-year and depending on your age, so make sure to check in with your CPA to ensure that you’re taking full advantage of these plans. You should also be aware of the fact that early withdrawals from your retirement plans may trigger penalties. And as with any rules, there are certain exceptions that allow you to make penalty-free withdrawals (i.e. financial hardship, first-time home purchase, etc.).
Tracking your mileage is incredibly important when you’re self-employed. The IRS currently allows you to deduct approximately $0.58 per mile. This deduction can add up throughout the year, but the IRS requires that you maintain accurate mileage logs, so make sure to use a mileage tracking app to ensure that you have suitable records in case you’re ever audited.
4. Home Office
If you’re self-employed, then you’ve probably worked from home in the past. Having some dedicated office space at your home will allow you to deduct a pro-rata portion of your housing expenses; including rent or interest on your mortgage, internet, phone, electricity and other utilities. In order to calculate this, simply take the square footage of your office (i.e. 200 square feet) and divide by the total square footage of your home (i.e. 2,000 square feet) this will allow you to deduct 10% of your expenses. If the aforementioned expenses added up to $2,500/month, you’d be able to deduct $3,000 from your taxable income. Obviously, this would have to be combined with other expenses so as to allow you to itemize your deduction and get over the standard deduction ($12,000 single / $24,000 married), but it’s a sizable deduction none-the-less.
If you’re new to being self-employed, these are just some of the benefits that you can take advantage of. If you’ve been self-employed for a while, it doesn’t hurt to refresh your knowledge and ensure that you’re up-to-date on any changes that might’ve taken place since the TCJA (Tax Cuts Jobs Act) went into effect in 2018.
The information provided in the MBO Blog does not constitute legal, tax or financial advice. It does not take into account your particular circumstances, objectives, legal and financial situation or needs. Before acting on any information in the MBO Blog you should consider the appropriateness of the information for your situation in consultation with a professional advisor of your choosing.