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10 Tax Tips for the Self-Employed

10 Tax Tips for the Self-Employed

As a self-employed person, do you ever envy your employed friends at tax time?

Having your own business definitely increases the amount of recordkeeping you have to do for tax purposes. When you’re digging through boxes of business receipts, it’s easy to envy people who only have to enter income from a W-2 form.

However, as a self-employed person, you get some tax breaks that your employed friends don’t.

For example, employees can deduct certain expenses, but only after they exceed 2% of adjusted gross income.

You can deduct business expenses right off the top – and the expenses even reduce your social security and Medicare tax, which you pay in the form of self-employment tax.

These tips can make tax time less painful and help you take advantage of some of the tax benefits of working for yourself:

1. Make the most of medical insurance deductions

You can deduct health insurance premiums for yourself, your spouse, and your dependents as an adjustment to income.

This includes premiums for long-term care insurance. The policy does not need to be in the business name – it’s deductible even if it’s in your name.

2. Keep the form of your company simple

Unless you need to form a partnership or a corporation for some reason, stick with a Schedule C, Sole Proprietorship. It’s the simplest way to file, and there’s nothing you have to disband if you move on to something else.

If you’re looking for legal protection, get liability insurance (and consult your lawyer).

3. Automate your recordkeeping

Small business recordkeeping doesn’t have to be as hard as it used to be. In fact, shoeboxes (or grocery bags) full of crumpled receipts should be a thing of the past.

Use personal finance software that’s synchronized to your bank accounts.

Automatic recordkeeping not only saves you time, but it’s less prone to mistakes, too.

4. Itemized deductions vs. business deductions

By taking a business deduction instead of an itemized deduction, you reduce your adjusted gross income and your self-employment tax.

Whenever possible, deduct an expense or a portion of an expense as a business expense.

5. Pay your kids

You can deduct the amounts you pay your kids to work in your business, and the kids generally pay less tax than you would.

The first $5,950 the child earns is sheltered by the standard deduction, and any amount above that is taxed at the child’s rate, which is generally much lower than yours.

6. Take a home office deduction

If you have a qualified home office, you can deduct some of your otherwise nondeductible expenses, such as a portion of your home insurance, utilities, and rent.

7. Avoid the hobby trap

If the IRS deems your business to be a hobby, you’ll have to report any income, but you’ll only be able to deduct expenses up to the amount of your income.

That’s no deal if you’re seriously trying to earn a profit – especially if you may clear a handsome taxable profit in future years!

It helps to clear a profit in three out of five consecutive years, but you may still convince the IRS you are a for-profit business if you operate in a businesslike manner and keep good records.

On the other hand, if you make a little income every year from something that really is a hobby, such as breeding dogs or carving lawn ornaments, you may want to keep it that way.

Hobby income is not subject to self-employment tax, which otherwise would be 15.3% of your net income from the operation.

8. Turn charitable contributions into business expenses

Under normal circumstances, you can’t deduct charitable contributions on your Schedule C. However, if you give money to charities in exchange for advertising, it’s a business expense.

That will give you a greater tax benefit than an itemized deduction.

9. Increase your retirement contributions

Contributions to IRAs are still limited, but you can contribute significantly more by opening a SEP, SIMPLE, or profit-sharing plan, instead.

10. Track all business mileage

Whether you take the standard mileage deduction or your expenses for gas, oil, and other actual expenses, you must have good records to deduct vehicle expenses.

Your records must include mileage driven, the purpose, and the date. Count every trip to the post office and client meeting – those miles add up!

Do you track your business financials, every quarter, every month or more often? Share in the comments below.

TaxAct Business maximizes all the deductions you are entitled to with a broad list of business expenses. It walks you through your taxes with easy interview questions. Start for free now or sign into your TaxAct Account.

Photo credit: Philip Taylor PT via photopin cc

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at,,, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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