Self-employment tax deduction is a blessing
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Self-employment tax deduction is a blessing for those who run their own business or are planning to set up their business. They can avail several tax benefits on their expenses -- benefits that were note available to them when they were working as employees. The self-employed professionals can use their Social Security number as their business tax identification number and file taxes under Schedule C or Schedule C-EZ.
It is important to understand the two schedules, because each provides a different benefit. Form Schedule C-EZ should be used by those whose business expenses are small, who end up the year with a profit, who run the business without any employees, who have no need to claim a home-office deduction and who do not report any depreciation.
Form Schedule C is for business enterprises that are more elaborate. In addition to asking your gross income, you are quizzed in detail about your business expenditure. The main difference between the two forms is that with Schedule C it is possible to report a loss, and make a tax saving.
The following are the tax deductions that you can claim if you are self-employed:
Equipment Expenditure: Section 179 is a deduction that helps you subtract the entire cost of equipment purchased for your business in the same year. This includes costs incurred on purchasing a computer or filing cabinet or any other item relevant to your business requirements. However, there is a limit to this claim. The best place to check the amount is IRS Publication 946 because this amount is changed frequently.
Besides this, your travel (including mileage) and a percentage of meal and entertainment expenses also are deductible. However, to claim these benefits you have to produce receipts and explain the purpose of the expenditure.
Health Insurance and Social Security Taxes: You can avail deductions on health insurance premiums paid for yourself and your family members. Similarly, a part of the payment you make as social security tax can be retrieved from your total income. However, this deduction is available on Form 1040 form and not on Schedule C.
Self-managed retirement benefits: You can open a Keogh or a Simplified Employee Pension plan. The contribution that you make to either of these plans from your earnings can be subtracted from your adjusted gross income when you file Form 1040.
Home Offices: Those of you who use a part of your houses merely for book keeping and file storage can now claim a home office deduction. Now this is possible even if you spend a lot of time doing business outside of your house office.
Written by: the Editor
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