Being your own boss can be a richly rewarding experience, but many people put it off because they fear facing a complex tax system. In reality, the tax process for self-employed individuals can be fairly simple, and offers its own set of rewards.
Self-employment tax deductions are a blessing for those who run their own business, or are planning to set up a new enterprise. These individuals can claim tax benefits that were not available when they were working as employees. Self-employed professionals can use their Social Security numbers as business tax identification numbers, and file taxes under Schedule C or Schedule C-EZ. It is important to understand the two schedules, because each provides a different set of benefits.
Schedule C-EZ is intended for use by those with relatively small business expenses, who finish the year with a profit, have no employees, do not report depreciation and have no need to claim a home-office deduction.
Schedule C is for more elaborate business enterprises. In addition to gross income, you will be asked to provide detailed information about your business expenses. Unlike Schedule C-EZ, with Schedule C it is possible to report a loss and realize a tax saving.
If you are self-employed, the following tax deductions are available to you:
Home Office
If you use part of your home merely for bookkeeping and file storage, you may still claim a home office deduction. This is possible even if you spend a good deal of time conducting business outside of your home office.
Equipment Expenditure
Section 179 is a benefit that allows you to deduct the entire cost of equipment purchased for your business in the same year. This deduction includes costs incurred on purchasing a computer, office equipment, filing cabinet or any other item relevant to your business requirements. There is a limit to this claim, and the allowable amount changes frequently. Check with IRS Publication 946 for the amount you are able to claim.
Travel and Entertainment
Business-related travel, mileage and a percentage of meal and entertainment expenses are also deductible. Be sure to keep all receipts and be prepared to explain the purpose of the expenditures in order to make these deductions.
Health Insurance and Social Security Taxes
Deductions are available for health insurance premiums paid for yourself and your family members. A part of the payment you make as social security tax can also be retrieved from your total income. This deduction is available on Form 1040.
Self-managed Retirement Benefits
Consider opening a Keogh or a Simplified Employee Pension plan to realize greater tax savings. When you file your Form 1040, the contributions that you make to either of these plans from your earnings can be subtracted from your adjusted gross income.
If worries about the tax system keep you from realizing your self-employment dream, stop worrying. The process can be a simple one, and the tax breaks available to you can help your dream become reality.
Donald Brown contributes to several web sites, on education and business topics. |
|
