Self Employment Deductions

If you are self-employed then it isin your interest to know a bit about self employment deductions. There are many tax benefits available to the self-employed and an understanding of these deductions is in your best interests as it helps your tax planning better.

Home Office deduction:You can claim a self employment deduction for business use of your home provided you use it exclusively and regularly foryour business and have no other fixed location where you conductsubstantial administrative and management activity pertaining to your business. Once the exclusive area is designated you can measure it and compare the area with the area of the home. This percentage (of office area to home area) can be applied to expenses incurred to the total operation and maintenance of yourhome including mortgage interest (or rent), utilities, insurance and taxes, depreciation (if you own your home), repairs, painting etc.

A home office also allows you to deduct automobile expenses from home to your business stops and back, which you cannot deduct otherwise. With a home office all business travel is deductible.

With a home office you can reduce your business income to zero, which not only reduces your income tax but also reduces your self-employment tax. Expenses not claimed in current year can be carried forward to next year.

Section 179 Expense Election:Business assets purchased are generally not expensed in the year of purchase but recovered over a period of useful life (e.g. 5 years for a computer, 7 years for office furniture). The Section 179 Expense Election is provided to treat the cost of qualifying property as an expense rather than as capital expenditure.

Medical insurance deduction:If you pay your own medical insurance premiums there is a sixty percent adjustment to income available on Line 28 of Form 1040. The remaining 40% must be deducted on Schedule A with other medical expenses.

Cost of tax preparation:It is a deductible expense as well. So choose well because someone with a good understanding saves you the amount of fee with reduced tax liabilities.

For social security tax purposes alsoyou need to report your earnings when you file your federal income tax return. If your net earnings are USD 400 or more in a year, you must report your earnings on Schedule SE in addition to the other tax forms you must file.

Social security and Medicare taxes: The Social Security tax rate is 15.3% on self-employment income up to USD 94,200. If earnings exceed USD 94,200 you pay only the Medicare portion of the Social Security tax which is 2.9% on the rest of your earnings.

These are general guidelines to planning your tax better. Remember that it is always best to be fully aware of the tax laws and self employment deductions even if you have a professional preparing it for you. Good luck!