Although I have been working for myself, I still feel like a dunce when it comes to taxes. Everyone knows the American tax code is one of the most complex systems in the world. So, you can understand why it ratchets up my anxiety every year as I prepare to file. Now that I’m managing my business’ accounts as well, it’s even more panic-inducing. I have spent countless hours reading up on what the self-employed should know. However, I still continually ask myself “Did I qualify for other self-employment tax deductions?” or “Did I miss something important?”
Whenever I have basic finance questions, I find it hard to ask my peers. So, I hold my tongue for fear of looking stupid. As much as I’d like to avoid the subject altogether, I know I can’t. Therefore, I turn to online resources and libraries to learn what I need to know. Then, I ask my financial advisor more questions after I have a basic grasp of things. Here’s what I’ve learned about self-employment taxes so far.
What is the Self-Employment Tax?
When I started my own business, I went straight to Investopedia to read up on all the tax codes and deductions that applied to me. Now that I was working for myself, my federal taxes would no longer be deducted from my paycheck. Although I expected to pay a decent amount of money in taxes, I wasn’t sure how much it would undercut my earnings.
As a freelancer, the IRS views me as both the company and the employee. Unfortunately, that means I am responsible for paying both portions of Medicaid and Social Security taxes. When combined, the self-employment tax is 15.3%. While this seems like a shocking number, I discovered that there were self-employment tax deductions that I qualified for.
However, there were also a few restrictions and rules about Covid relief measures that you should also know if you are self-employed:
- Anyone who earns more than $400 in earnings from self-employment must pay the tax.
- For the Social Security tax, this rate only applies to the first $142,800 of your net income. However, there is no income limit for the Medicare tax.
- Half the self-employment tax is deductible. Although the full 15.3% is charged on the business’ profits, the “employee” portion qualifies as a deductible expense.
- If you deferred paying the “employer” portion under the CAREs Act, 50% of those taxes were due December 31, 2021. The additional 50% must be paid by December 31, 2022.
- Even though you don’t have a withholding tax, you must schedule quarterly estimated payments. Otherwise, you’ll be facing a hefty bill when you file your tax return.
Do I Qualify for Self-Employment Tax Deductions?
The short answer is yes. However, it was up to me to find out exactly which deductions I could claim. What’s included in the list of “business expenses” is wide open to interpretation. While some things are clear, other expenses fall into gray areas. So, I took some time to review the most common deductions and speak with people I know who are also self-employed.
Based on all my usual sources, I came up with a lengthy list of the most common deductions. They included:
- the self-employment tax deduction
- home office
- office supplies
- utilities, internet, and phone bills
- health and business insurance premiums
- vehicle use
- interest from your loans
- subscriptions and publications
- start-up costs
- retirement contributions
As you can see, some of these categories can lead to more questions. Differentiating your personal and business expenses could become quite complicated. However, I usually revert to the KISS method and keep it simple. Based on my initial assessment, these are the self-employment tax deductions I will qualify for this year.
My Self-Employment Tax Deductions for 2021
Social Security and Medicare Tax
The most common deduction is the “employer” portion of the self-employment tax that you must pay. Although I paid the full 15.3% of the business’ profits, I can claim half of it as a business expense. So, even though you pay a higher percentage in taxes if you work for yourself, this deduction means it will cost less than I initially thought. And, I won’t have to itemize to claim it either.
The next largest deduction would qualify under offices supplies or equipment. My beloved laptop finally gave up the ghost this year. After taking it to a computer repair shop and paying for the diagnostic, I broke down and finally bought myself a new one.
Since my laptop is the lifeline of my business, I knew I couldn’t skimp on this business expense. Fortunately, it happened just before Black Friday. I found some great deals and saved about $250. However, it still set me back about $750 with all the programs and licenses I needed to purchase as well. But you can be certain I saved all my receipts!
Although I never claimed this deduction in the past, my living situation has changed. Rather than working as a digital nomad, I now have a home office. Not only do I regularly use this space for business purposes, but it is also my primary workspace. Since it qualifies under the IRS definition, I plan to include it on this year’s return.
However, I have to calculate the percentage of our house’s total square footage to determine how much I can deduct. Since it accounts for approximately 5% of the home’s total square footage, we can deduct 5% of housing expenses for the year.
Phone and Internet Bills
In the same line of thought, if you use your cell phone or internet connection for business, you can also claim it as a self-employment tax deduction. If the line is dedicated for business only, you can claim the full amount. Otherwise, you would need to calculate the percentage of usage that you use for business. In my case, it is split between my personal use as well. Only about 25% of my bill will qualify for the deduction.
Qualified Business Income (QBI)
This last deduction is new to me. So, I still plan to discuss it with my CPA to determine if I can claim the qualified business income deduction. It’s relatively new and set to expire in 2025, so I’d like to take advantage while I can. Under this deduction, single filers with total taxable income less than $164,900 and joint filers under $329,800 qualify for a 20% deduction on your taxable business income. Since most of my earnings are “pass-through income,” I should be eligible for this huge deduction.
As a new business owner, I’ve realized why it’s important to review what qualifies for self-employment tax deductions to maximize your profits. You may find unexpected deductions that can help you keep more of your hard-earned money.
- What to Do When the IRS Rejects Your Payment
- Buying Part of a Business: Is it Worth It?
- Hiring a Financial Advisor vs Managing Your Own Money
Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.