You are considered to be self-employed if you engage in a trade or business as a sole-proprietor or an independent contractor. Some examples would be a photographer operating out of their home, a building contractor, an electrician, or a plumber. The self-employed income tax status can also apply to persons who provide products or services on a part-time basis to supplement the income they receive elsewhere.
Income taxes for the self-employed are similar to that of any other employee. Whereas employers are responsible for deducting Social Security and Medicare taxes from their employee’s paychecks, the self-employed are required to pay these taxes themselves. This tax is referred to as the Self-Employment Tax (SE).
The self-employed take on the added responsibility of not only promoting and selling their product or service, but keeping track of the expenses associated with promoting and selling their product or service. To ensure that at the end of the year, you have taken full advantage of the tax credits and tax deductions available to you, you should be fully knowledgeable of those provisions (or employ a trusted tax accountant or tax preparation professional). If you hire a tax accountant, ask them what documentation needs to be collected throughout the year so you can utilize those income tax benefits available to you.
Some of the more obvious income tax deductions are the expenses associated with operating a business of your own. These might include the following items:
- Office Equipment ― copiers, fax machines, computer, printer, document shredder, telephone, answering machine, cameras, etc.
- Office Supplies ― paper, ink cartridges, toner cartridges, print heads, staples, stapler, envelopes, shipping boxes, packing materials, etc.
- Office Services ― accountant, computer technician, training, web hosting
- Mileage ― to and from client meetings, sales calls, job sites, tolls, etc.
- Postage, Cost of Industry Specific Periodicals, Newspaper Subscriptions
- Marketing Expenses, Advertising, Design, Promotional Items
- Cost of the Product(s) That Will Later Be Resold ― note the product that is purchased for resale is typically exempt from state taxes, provided the business owner secures a Resale Certificate each year.
Some of the less obvious expenses that may be deductible on your income tax return include the following:
- Home office expenses, a percentage of your mortgage interest, property taxes, insurance and utilities (calculated as office expenses based on how much your home office occupies of your dwelling). Keep in mind, too, that the area you use for warehousing business supplies/inventory (to be sold) may also qualify.
- If you use your vehicle for business purposes, mileage, maintenance, a portion of the monthly payment (or all if solely used for business purposes), insurance, tags, registration, all may qualify as a deduction on your income tax return.
For a more complete listing of qualifying tax deductions and the proper documentation of these expenses, look at IRS Publication 525.
[See related article “Tax Strategies for the Self-Employed”]