One of the biggest stumbling blocks for small business owners and entrepreneurs is self-employment tax. Most people understand that they have to pay taxes, but they don’t realize that paying taxes as a self-employed person is completely different than paying taxes as an employee.
While I won’t get into the details of why that is, what you need to know is that as a business owner you must pay the employee AND the employer’s side of taxes. If you aren’t prepared, it can catch you off guard. Suddenly you owe nearly double what you expected, and it can be a struggle!
That’s why it’s important to plan ahead to minimize self-employment tax as much as possible – legally, of course!
So how do you do that? While there are some more complicated methods like forming an S-Corporation, there are simple ways you can minimize self-employment tax without the help of a lawyer.
1. Track mileage, don’t forget small trips
The IRS is very specific about what does and does not constitute a business drive, but you might be surprised by what counts. Things that do qualify are drives to meet clients or prospects, to pick up supplies, to go between offices, to run business errands, or even to the airport if you’re traveling for business. But remember that your basic commute does NOT qualify.
It’s also important to actually track mileage, not just guess. Because you’re using a personal vehicle for business purposes, the IRS wants to know exactly how many miles were used for business. You can do this on paper or using an app, but however you do it, make sure you are thorough. Even the small trips can add up over the course of a year.
2. Track home office expenses
First, you must determine if you qualify for the home office deduction. The IRS says that your home office must be your regular workspace. It cannot be used for other uses (like as a guest bedroom or eating area). You also must use it regularly and exclusively. If you meet those qualifications, congratulations! You are eligible to deduct certain expenses like mortgage/rent, homeowner/renter’s insurance, repairs and maintenance, property tax, and some utilities.
However, in recent years the IRS has simplified things by allowing taxpayers to use a simplified method of calculating your deduction. Instead of tracking all the deductions, you simply calculate how many square feet your home office is and multiply that by $5. So if your home office is 150 square feet, you get a deduction of $750. The simplified deduction caps at $1,500, so if your home office is larger than 300 square feet, it would be in your best interest to do the traditional method.
3. Deduct portion of cell phone use
If your cell phone is used exclusively for business purposes, you can deduct 100% of both the cost of the phone and your monthly plan. But many small business owners use their cell phone for personal and business purposes these days. Can you deduct your cell phone bill too?
Yes and no.
Yes, you can deduct some of the costs, but not all. Like with your personal vehicle, you are able to deduct the amount you used for business purposes. While you don’t have to track mileage, you should be tracking overall use as much as possible. Unlike with your vehicle, you can estimate this percentage a bit, but always underestimate.
4. Deduct self-employed health insurance
With the cost of health insurance skyrocketing, you’ll be happy to know that if you have health insurance through your business (or that you obtained for yourself or your family independently) you are able to deduct the cost of your health insurance for yourself, your spouse, and your dependents. That does include the cost of dental insurance, so don’t forget those costs!
There some exceptions and additional items to take into consideration, so you may want to consult your accountant about this particular deduction. But it’s important to keep it in mind as you choose insurance policies and begin tax planning.
Of course, it’s wise to consult an accountant about all of these deductions. While these deductions are fairly straightforward, an accountant can help you sort through details and, likely, find ways to save you even more money!
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.