Taxes for Small Business Owners
Taxes are something that people don’t like to think about until they absolutely have to, but if you’re a small business owner you can greatly reduce your tax burden by knowing what tax deductions for self-employed are allowed and how to write off your business expenses. This is especially true if you’re self-employed, an independent contractor, or if you have a side hustle.
Today, I’m going to explain tax deductions and help you better understand tax deductions for the self-employed.
Taxes for Small Business
What are tax deductions? What does it mean when something is tax deductible?
Tax deductions allow you to subtract (or deduct) expenses, especially those incurred to help you increase your income. In essence, a tax deduction reduces the the amount of taxable income you report to the government as well as reducing the money you owe for taxes.
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How do I pay tax when self-employed?
Since maximizing your deductions can actually minimize your tax bill, I recommend trying to get as many deductions as possible. Many small business owners find themselves struggling and hustling to add everything up that they’ve spent throughout the year and then seeing what their tax deductions might be.
However, there is a better method for keeping track of your expenses and possible deductions: year-round bookkeeping. This means keeping accurate financial records month after month, quarter after quarter which doesn’t have to be as difficult as it sounds.
One tool that has helped me with this big task is the online bookkeeping service Bench Accounting. It makes record keeping easy and helps you keep track of everything related to your finances. It also has helpful resources for everything from taxes to filing for the Paycheck Protection Program. You can get a free month trial of Bench Accounting and 30% off your first three months of Bench Accounting by clicking here.
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What can a self-employed person deduct on taxes?
When it comes to tax deductions as a business owner, knowledge is power.
If you know ahead of time what things you can deduct as a business expense, then you can make strategic business decisions and keep track of your expenses that can be deducted throughout the year.
Here are some of the most profitable and popular business expenses that can be legally written off as a tax deduction.
Advertising and Promotions
Advertising and promotions are the number one business expense you should try to write off. Again, it is important to track your expenses accurately, so you can profit the most off of the deductions. This expense is so significant because it is 100% deductible, meaning that you do not have to pay taxes for any money you spent on advertising.
One example that is a little bit out of the box is logo designing. In the past year, I have hired some people to do logo designs for me on Fiverr. Also, I paid to have a website created, which is another great thing to deduct. Those examples demonstrate how far you can stretch these deductions to deduct as much of your expenses as possible and save money on your taxes.
Meals
The rules for deducting meals as a self-employed worker have recently changed. In 2020, business meals changed from being 50% deductible to 100% deductible, meaning you do not need to pay taxes on money you spend on business meals.
The easiest way to track business meals is to keep the receipt and a log of business related ideas that were discussed during the meeting, as well as who the meeting was with. Remember, as with most tax deductions, you can stretch them pretty far. For example, if you pick up any sort of food for an outdoor or virtual business meeting you can write it off.
Vehicle Use
Using your car is another easy way to deduct business expenses from your taxes. This expense is also 100% deductible if the vehicle is used entirely for business.
Remember that gas money is not the only vehicle-related expense that can be deducted – things like repairs, oil changes, and tires can be deducted as well.
If your vehicle is primarily used for personal use with only occasional business use, you can deduct a smaller portion using the Standard Mileage Rate. In 2021, the government will give you 57.5 cents back for every mile you drive for business use. This is convenient because, unlike other deductions, you don’t have to itemize all of your expenses.
With jobs that are very vehicle intensive, such as a Lyft or Uber driver, you may want to itemize all of your expenses. This will maximize your returns because you may be entitled to more than 57.5 cents back for every mile.
Home Office
With such a large increase of people working from home this past year, home office tax deductions have become somewhat of a hot topic. Unfortunately, the answer to whether or not your home office is tax deductible isn’t completely black or white.
Your home office must meet two requirements to be considered a home office for tax deductions:
1) Regular and Exclusive use: This means that the office is a dedicated space that is used only for business on a consistent basis. For example, a room with a computer couldn’t be considered a home office if you also use that room to play video games or do schoolwork.
2) Principal place of business: This means that more than half of your total business conducted must take place in your home office. It is a little bit complicated to explain, but if you are an employee elsewhere and you work from home, you will not be able to claim this deduction. Its target audience is self-employed business owners.
You must do business primarily out of your home to claim a home office tax deduction. In 2020, you can claim $5 per square foot of your home office. There is another complex way to track the use which involves mortgage interest, rent, and electricity use, but it gets very complicated. If you would like to check that out for yourself, it is called Standard Deduction. However, you have to keep track of a lot more items, and it’s probably not worth it for most people.
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Legal Expenses
Another common tax deduction for self employed people are legal expenses. This is especially valuable for budding entrepreneurs. People like sole proprietors or people thinking about getting an LLC (license to form and operate a business) will benefit from this type of deduction. If you pay for any type of professional service, such as bookkeeping, a lawyer, or someone to do your taxes, the cost of those legal services can be claimed as a business expense on your taxes.
Tax deduction examples for self-employed
I wanted to give you more examples of tax deductions available for the self-employed. Remember that the definition of business expenses are the costs of running a business. They can include anything from legal fees to vehicle costs. Here are common tax deductions for self-employed business owners.
- Vehicle Costs
- You can deduct 100% of vehicle expenses from your taxes if the vehicle is used solely for business related matters. If your vehicle is a mix of personal and business use, you can use the Standard Mileage Rate for trips related to business.
- Legal fees
- Legal fees are 100% business deductible. They can be anything from professional bookkeeping services to lawyers.
- Marketing
- 100% of marketing fees are tax deductible. Some examples of marketing fees are paying for a professionally designed logo or website, or designing merchandise.
- Meals
- In 2021, business meals are 100% deductible. A business meal is classified as a meal pertaining to business; it can be virtual or in-person. It is important to itemize business meals, which includes keeping receipts, and writing down who the meeting was with and what was discussed.
- Home Office
- You can deduct $5 for every square foot of your home office if you conduct over half your business there and if the space is used regularly and exclusively for business matters.
- Office Supplies
- You can write off office supplies used for business purposes within the year they are purchased. Deductible supplies include computers, printers, paper, pens, and software. Be sure to save receipts for when you file your taxes.
- Phone and Internet Expenses
- Your phone and internet are two of the tools you probably use most for your small business. However, if you use your phone or internet for a mix of home and personal use you can only write off the percentage of the cost that you use for business. If you use your phone about 50/50 for business and personal use, you will be able to deduct 50% of the cost.
- Education
- Any educational courses, workshops, trade publication subscriptions, or books that you purchase that bring value to your business are also tax deductible.
As you get close to the end of the calendar year, if your business expenses are unusually low it might be a good idea to make a larger business purchase or go ahead and buy a piece of business equipment to reduce the amount of taxes you owe.
What benefits can I claim if self-employed?
People who are self employed can also deduct health insurance costs including premiums and medical expenses like prescriptions, and doctor costs. You can’t deduct your health insurance costs if you have medical benefits from your spouse or another employer.
Key Takeaways:
Many entrepreneurs start a small business to work for themselves , to feel a sense of freedom, or to begin to create the life they want. The old saying, “You have to spend money to make money” is true. However, being aware of which business expenses are tax deductible and keeping track of those expenses can (sometimes significantly) lower the amount of taxes you owe.
I hope the information I’ve shared with you today has empowered you to take a closer and more strategic look at your business expenses for tax deduction purposes.
Additional information on this topic and topics like it can be found on my YouTube channel and my podcasts.
Please let me know down in the comments if you would appreciate me posting more about taxes about in the future.
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As always, I’m Rich and until next time.
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