Self-employment offers an enticing docket of write-offs to those willing to embrace tax planning. Become familiar with the tax forms that pertain to sole proprietorship. You will fill out a Schedule C, Profit or Loss from Business, and a Schedule SE, Self-Employment Tax, to file along with your Form 1040 each year. Some will fill out supplemental forms such as 8829 for the home office deduction. Keep meticulous records of your income and expenses to back up your deductions.
Self-Employment Tax Deduction
The self-employed pay a "self-employment tax" at a rate of 13.3 percent as of the 2011 tax year. The tax constitutes Social Security and Medicare contributions for those who work for themselves, who also pay federal income tax. The good news is that the IRS allows the self-employed to deduct a bit more than half the amount of their self-employment tax from their adjusted gross income on their Form 1040. This reduces taxable income and the amount of total federal taxes paid.
Legal and Professional Services
You may deduct fees paid to attorneys and accountants for services rendered on behalf of your normal business activities. This includes fees paid both for tax preparation advice and the actual filling out of tax forms for your business.
Keep records on all your office supply and postage expenses. They may seem small at the time, but they can add up over the course of a year, in particular if you use the mail as a vehicle for promotional activities such as a direct mail advertising campaign.
If you are self-employed, you can deduct your health and dental insurance, provided you are not eligible for coverage via a plan from your spouse's employer. You may also write off premiums paid to cover your spouse and dependent children.
Meals and Entertainment
Business meals and entertaining may be deducted from your taxes provided you conduct business during the meal or event, or immediately before or after it. The IRS allows for a deduction of 50 percent for meals and entertaining. Keep a copy of each receipt in this category, making a note of which client was present and the business conducted with them.
You may deduct mortgage interest on business properties, and non-mortgage interest on general business loans and business credit cards. Should you decide to deduct credit card interest on business expenses, it is best to maintain a business credit card account separate from personal credit cards to avoid record-keeping confusion.
Home Office Deduction
Sole proprietors can take a home office deduction for a part of their home exclusively dedicated to business activities. Expenses are calculated on the percentage of square footage used for business. You can deduct mortgage interest, property taxes, insurance, rent, repairs and utilities. Use IRS Form 8829 to calculate this deduction. Be prepared to prove the veracity of your home office deduction in case of an audit.
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