I didn’t get a blog post up last week, but it’s not my fault! I blame Uncle Sam. Thanks to our self-employed status, doing our taxes is somewhat more complicated and time-consuming. But on the bright side, they say the US tax code is set up to benefit two kinds of people: billionaires and small business owners.
That’s right! Uncle Sam loves entrepreneurs! Even if you’re not self-employed full time (like if you have a day job and you’re just starting a side gig), you can still take advantage of some of these goodies built into the tax code to benefit small business owners:
The government can subsidize equipment purchases for your business in two ways – by depreciation and expensing.
With depreciation, you deduct the cost of your investment over what the IRS determines is the “life” of the equipment, writing off a certain percentage of the cost each year according to a specific formula. Expensing lets you deduct the entire cost of the equipment in the year it’s purchased.
Home office deduction
This is one of those perks that you can take advantage of even if you also have a day job. If you regularly and exclusively use part of your home as an office for a money-making enterprise, you can deduct part of your utility bills and insurance costs against your business income. You can also write off part of your rent, or if you own your home, you can claim depreciation.
Some self-bossers don’t take this lucrative deduction because they’re afraid of raising a “red flag” and getting audited. Or they’re lazy like me and don’t think keeping meticulous documentation is worth it. Times have changed, however, and now the process is much simpler – just deduct $5 for every square foot of your home office. If you have a 300-square-foot home office, you can claim a sweet $1500 deduction.
Social Security Taxes
The biggest bummer about having your own business is paying ALL the Social Security Taxes yourself. As an employee, you split the cost of this tax 50/50 with your employer, and each of you pays 7.65%. But those of us who are self-employed have to cough up the whole 15.3% ourselves! Fortunately, the IRS has taken pity on us and allows us to deduct half of our Social Security and Medicare taxes.
Health Insurance Premiums
Thanks to the Affordable Care Act, health insurance is no longer an excuse to stay in a soul-sucking job. Not only are health insurance premiums now affordable for everyone, but you can deduct those payments on your tax return if you’re self-employed. Unfortunately, you can’t claim this deduction if you qualify for employer-sponsored health insurance through your day job or your spouse’s job.
Good news for Encore Entrepreneurs! If you continue to run your business after qualifying for Medicare, the premiums you pay plus the cost of supplemental Medicare (Medigap) policies or the cost of a Medicare Advantage plan can be deducted as health insurance premiums for the self-employed.
More options for Retirement Savings
If you’re an employee, your retirement investment options are limited to whatever your employer offers and/or an IRA. But those of us who work for ourselves can contribute pretax money to other investments that allow higher annual contributions than IRAs do (plus you can also have an IRA if you want to).
So what are you waiting for? Listen to your old Uncle Sam and start your business! Next April, you could be thanking him.