There are countless pros and cons to being self-employed and being able to “be your own boss.” While cons can include uncertainty in cash flow and often times longer hours, there are plenty of pros – especially at tax time. Many self-employed individuals may end up "owing" taxes at the end of the year, which could be seen as a con, there are pros in terms of tax write-offs on the other side.
Most people who “commute” to work aren't able to write off that expense, but for the self-employed, it is a bit different. You can deduct the dollar value of business miles traveled on your tax return and the Internal Revenue Service (IRS) set the rate at 57.5 cents for 2020 as the standard mileage deduction. Additionally, self-employed taxpayers can choose to deduct the actual operating expenses instead and go with the higher option.
The home office deduction is a bit more complex, and it doesn't matter if you own or rent your home. Instead, it involves the workspace you use regularly and "exclusively" for your business. That means a kitchen counter, desk in the family room or bedroom won't qualify. Instead, it needs to be a dedicated home office space, and you can deduct a portion of your home expenses and that includes utilities, insurance premiums, mortgage interest, and real estate taxes. There is also a simplified deduction that lets you claim $5 per square foot up to 300 square feet.
Any educational expense can be potentially tax-deductible for the self-employed. This could include doctors, accountants, and attorneys, but generally, anyone who takes classes or other programs to maintain an industry credential or license. Likewise, it could include those individuals who take classes to expand their skill set.
Subscriptions, Memberships, and Even the Internet
This can include software and magazines that are used in the course of business, but also membership to professional organizations. The same is true of your internet and phone bills. However, the key is that you can only deduct the expenses that are directly related to your business.
This can include the software licensing for programs used for work, as well as the costs of running a business website. Likewise, you can deduct 100 percent of the cost of a second phone line when it is solely dedicated to the business.
One of the best deductions is putting money away in a retirement plan. An individual with no employees can still open up an individual 401(k) and can contribute up to $19,500 in 2020 as a 401(k) deferral, plus twenty-five percent of net income. An even easier option is to set up a Simplified Employee Pension IRA (SEP-IRA), and all workers younger than age fifty can deduct up to $6,000 in contributions, and those fifty and older can deduct up to $7,000. Additionally, self-employed can use a SEP-IRA and contribute and deduct as much as twenty-five percent of their net earnings, up to $57,000 for the tax year 2020.
Consider that literal money in the bank for your retirement.
Peter Suciu is a Michigan-based writer who has contributed to more than four dozen magazines, newspapers, and websites. He regularly writes about military small arms and is the author of several books on military headgear including A Gallery of Military Headdress, which is available on Amazon.com.