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Stay updated on all areas of tax filings and business processes affected by COVID-19.  Learn More.

Sorting Out Self Employment

You know, as the COVID 19 crisis was really beginning to hit us in March, corporate taxes were due.  Immediately after that, of course, the IRS pushed Tax Day back to July 15th

Now, plenty of business owners filed for an extension, but I wanted to take a few minutes today to go over some of the self employment deductions we’re always getting questions about, to help you for 2020. 

We’ve all got a little extra free time these days, so maybe this can help you to create the best plan for moving forward. 

First things first – what many don’t realize, when you work for yourself, you’ll play and PAY the part of employer and employee – at least when it comes to Social Security and Medicare taxes—a whopping 15.3% of net self-employment income.   Yes, you’ll have the opportunity to write off half of what you pay as an adjustment to income AND you can also deduct contributions to a self-directed retirement plan.  There are other benefits, too, the costs of health insurance in some instances.   

Even with that said, there are many other smaller deductions that business owners often fail to realize until we remind them of the options they have.  Let’s look at the ones that are most commonly forgotten or not used fully…

First of all, I’m very bullish on the Lifetime Learning Credit, which I’ve mentioned many times in my emails and newsletters.  Depending on the class and your income, up to $2,000 from the first $10,000 spent can be deducted for tuition from accredited institutions.  Obviously, this gives business owners a great resource to use to continue to sharpen their skills.  Don’t miss out on it!

Another often overlooked set of deductions are business travel expenses … within reason.  You’ll have the mileage expense ($0.56/mile) and get to claim the deductions of up to 50% for food and entertainment (you were going to eat and watch Netflix whether you were traveling or not).  Many business owners fail to simply keep track of all their expenses and lose a tremendous amount of money in this – and they neglect to realize that “travel’ can also mean remote or long distance assignments that will take place over many months. 

One of the most misunderstood deductions or credits available to business owners and employees is the Health Coverage Tax Credit & Self-employed Health Insurance Deduction.  For employees, they can deduct up to 72% of their health care costs, while that number goes to a full 100% for owners.  The nicest part of these?  Both of them are refundable, meaning that even if your tax bill is 0, you can still generate a refund based on them. 

What about true charitable donations of used items?  We’ve all taken a carload of stuff to Goodwill, or the Salvation Army, but did we actually keep up with the receipt they gave us?  Too many times, the answer is no.  Make sure you do, because you are allowed to claim the “fair market value” of those items as a deduction.  Of course, even the IRS has a definition of “fair market value” so be sure to discuss it with us, but it’s a useful tool that helps you and helps others.  Don’t forget it!

So many things are going on these days, it can be tough to keep track of it all and to select the right path to follow.  These are some simple ways to continue to grow and reduce your tax liability at the same time. 

I hope this helps and, as always, my team and I are here to help you figure out the best plan for you and your business. 

All the best-