4 Ways to Keep Your Taxes Down If You Are Self-Employed
Whether you drive for a ride-hailing service on the side or work full-time as your own boss, these tips can help you save money when time comes to pay taxes.
Self-employment has its perks, but being your own boss can lead to headaches come tax season. In addition to the income tax, you’ll need to pay self-employment taxes that support the Social Security and Medicare programs.
But there are ways to reduce the amount you owe.
At the start of the new year, you may receive a 1099-NEC tax form or 1099-K tax form. You also may have received other income in the form of cash or checks for work performed in the previous year from being self-employed.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
One of the best ways to lower your taxes paid on self-employed income is to increase your business expenses. As a self-employed taxpayer, you can write off expenses and take certain deductions against that income to help reduce your tax liability.
However, it is very important to hold on to all receipts for any business expenses related to purchases or professional services received and to keep accurate, up-to-date records of your business’s activity.
Here are four easy ways to keep your taxes down if you are self-employed.
1. Driving expenses
If your self-employed income is from operating a ride-hailing or delivery business through platforms such as Uber or Lyft, you will be able to take a vehicle expense deduction. This allows you to recover some costs associated with wear and tear on your vehicle to operate your business.
Be sure to keep track of your business miles, personal miles and commuting miles as you will need to provide this information to take the deduction.
2. Home office expenses
Home office expenses is another deduction that you can take advantage of if you utilize part of your home as your office space to conduct business. A home office tax deduction can be calculated using the simplified deduction method, which is a prescribed rate of $5 per square foot of your home that is used for business up to 300 square feet.
Or you can use the actual expense deduction method, which allows you to write off a percentage of expenses related to rent, utilities, mortgage interest, property taxes and repairs and maintenance.
Other common deductible expenses related to your home office include website services, computer software, merchant fees, electronics and other supplies needed to run your business.
You also can deduct communication expenses, such as a portion of your internet and cellphone bill, as long as those costs are directly related to your business. For example, if 20% of your time on the phone is spent on business, you could deduct 20% of your phone bill.
3. Depreciation deductions
If you purchase equipment, such as a laptop or a leaf blower for your business, you can categorize it as an asset and take a depreciation deduction — which allows you to spread the expense over the useful life of your asset.
For example, let’s say you purchased a new ergonomic office chair at the beginning of the year for $400. You will be able to classify this as an asset and take a $57.14 depreciation expense deduction each year over a useful life of seven years, which is standard for office furniture.
You can also take a Section 179 election to fully expense and deduct the asset in the current year — instead of depreciating it — to further reduce your tax liability. This is an annual income tax deduction taken by filling Form 4562 with your tax return.
4. S Corp election
Another way to keep your taxes down is by changing your business structure into an S Corp election with the IRS. You can make the S Corp election for your corporation or limited liability company.
For example, when operating your business as an S Corp, if your business income is $100,000 per year and you pay yourself a reasonable salary of $60,000, all income that exceeds your salary — $40,000 in this case — is not subject to self-employment taxes. Only the salary of $60,000 is subject to self-employment taxes. However, if operating your business as a sole proprietor, self-employment tax is due on the entire amount of $100,000 business income.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Ebony J. Howard is a certified public accountant and financial reviewer for RetireGuide.com. Her background is in accounting, personal finance and income tax planning and preparation. Ebony holds a dual degree bachelor’s and master’s in accounting from Clark Atlanta University. She is passionate about making an impact in the community, sharing her knowledge in financial literacy and empowering people to achieve greater financial freedom.
-
Where to Retire: Living in Portugal as a US Retiree
Living in Portugal as a retirement landing spot has abundant advantages, but do your homework and due diligence first.
By Brian O'Connell Published
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
By Brian Gray Published
-
A Social Security Storm Is Gathering: Here's Your Safety Plan
If Social Security reserves are depleted by 2033, as predicted, future benefits could be cut by as much as 21%. Here’s how to weather the impending storm.
By Brian Gray Published
-
What a Second Trump Term Means for Investing in Water Safety
A new administration focused on deregulation could change the scope of today's water protections. So, what does that mean for the investors who support them?
By Peter J. Klein, CFA®, CAP®, CSRIC®, CRPS® Published
-
How to Avoid These 10 Retirement Planning Mistakes
Many retirement planning mistakes are easily avoidable. Here are 10 to have on your radar so you don't end up running out of money in your golden years.
By Romi Savova Published
-
Before the Next Time Markets Sink, Do Your Lifeboat Drills
An eventual market crash is inevitable. We can't predict when, but preparing for the ups and downs of investing is imperative. Here's what to do.
By Andrew Rosen, CFP®, CEP Published
-
This Late-in-Life Roth Conversion Opportunity Spares Your Heirs
Expensive medical care in the later stages of life is an unpleasant reality for many, but it can open a window for a Roth conversion that benefits your heirs.
By Evan T. Beach, CFP®, AWMA® Published
-
Women, What Is Your Net Worth?
Many women have no idea what their net worth is, or even how to calculate it. Many also turn to social media finfluencers for advice. Here's what to do instead.
By Neale Godfrey, Financial Literacy Expert Published
-
Converting Retirement Savings to a Roth IRA? Don't Do This
You might want to convert all of your savings to a Roth in one go, but you could end up paying hundreds of thousands more in taxes than you have to.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
What Is Your 'Enough Is Enough' Number for Retirement?
Chasing a 'magic number' for retirement can be anxiety-inducing. Instead, build your plans around a personal number that reflects your individual circumstances.
By Scott M. Dougan, RFC, Investment Adviser Published