Are you dipping a toe into entrepreneurship before leaving a steady-paycheck employer? Among the many things you’ll want to consider is Uncle Sam: If your self-employment gig generated more than $400 in 2018 income, you’ll need to pay self-employment tax on your earnings. Just make sure you also take full advantage of the associated tax deductions.
“The biggest misconception I hear is that new entrepreneurs think everything is 100 percent deductible,” says Debby Foley, CPA, MST, with Coughlin, Sheff and Associates, P.C. “It’s not and can vary depending on what type of work you are doing.” Foley recommends keeping detailed records and receipts of everything for tax time, and in case of an audit.
Self-employment tax is complicated. The good news is that you’ll pay 15.3 percent self-employment tax on 92.35 percent of your net, not gross, business income.
Workspace in your home that’s used exclusively for business qualifies. Deduct the business percentage of your rent or mortgage interest, property depreciation, taxes, utilities, insurance, and home maintenance costs or use the simplified tax deduction based on the square footage of your home office.
Only the percentage of internet and phone use related to your business may be deducted; if you have a phone line exclusively for business, deduct the entire cost.
If you were not eligible to participate in a health insurance plan through your spouse’s employer, you can deduct all of your health, dental and long-term care premiums (subject to limitations). You can also deduct family plan coverage for your spouse and your dependents (children who were younger than 27 at year’s end).
50 percent of a meal is deductible only when you are traveling for business or entertaining a client, but the entertainment cost — such as cost of a Red Sox ticket — is no longer deductible.
To qualify, business travel must last longer than an ordinary workday, be away from the general area of your tax home. Standard transportation to and from your destination, at your destination, and lodging are 100 percent deductible. If you combine business with pleasure, keep dated records and receipts of expenses directly related to your business travel.
When you use your car for business, record the date, mileage and purpose for each trip. Calculating a deduction using the IRS’ cents-per-mile (this changes regularly) is easiest. Multiply your total annual business miles by the mileage rate.
You can deduct interest on a business loan and credit card interest on business purchases (the new tax law has some specific limits on this deduction).
You can deduct magazines, journals, books and specialized tools directly related to your business.
Education expenses must be related to maintaining or improving your skills for your existing business.
When it comes to business insurance, premiums for fire, credit, business vehicle or business liability insurance are deductible.
If you rent anything related to your business, deduct the rent.
The IRS usually requires you to deduct major expenses over time as capital expenses rather than all at once. However, you can deduct up to $5,000 in business start-up costs. Examples of tax-deductible start-up costs include market research and travel related to starting your business, scoping out potential business locations, advertising, attorney fees and accountant fees. If you set up a corporation or LLC for your business, you can deduct up to $5,000 more in organizational costs such as state filing fees and legal fees. Professional fees to consultants, attorneys, accountants, and advertising costs are also deductible any time. Business expenses such as buying equipment or vehicles can be depreciated or amortized as capital expenditures.
SEP or SIMPLE IRAs and solo 401(k)s reduce your tax bill now and yield tax-deferred gains (consult an investment advisor or tax professional).