You’ve undoubtedly heard the popular joke that those who are self-employed will work 100 hours a week for themselves just to keep from working 40 hours a week for someone else. And self-employment definitely has numerous benefits but because of the way tax laws are structured you need to ensure that you’re making the most of your self-employment deductions.
SEP Health Insurance Deduction
If you’re self-employed and covering your own health insurance, you can deduct 100% of your premiums, and that includes dental and long-term care. And if you’re covering your spouse and dependents those are deductible as well. Note if you’re eligible to participate in your spouse’s employer’s plan you can’t take this deduction.
Self-Employment Tax Deduction
One of the bigger costs of self-employment is that you don’t have an employer who automatically withholds 7.5% of your paycheck and pays FICA – it’s completely up to you to hold back 15.3% of your earnings to pay for Self-Employment Contributions Tax (SECA). However, you can deduct SECA on line 27 – the part that would normally be paid for by a traditional employer. (It’s one of the deductions that self-employed workers miss the most.)
Here are some options you have as a self-employed worker to establish a retirement savings plan and deduct it from your income taxes:
SIMPLE IRA: You can contribute up to $12,500 per year (more after age 50), and it’s relatively easy to process the paperwork each year. If you have employees (only up to 100 though), any matching contributions are deductible.
SEP IRA: Also easy to set up but doesn’t require yearly reporting to the IRS. Contribution limits are generous – up to $54,000 in 2017. You can start to take money out when you’re 59 1/2 years old. If you have employees however you have to include all of them in the plan.
Solo 401(k): You can contribute up to $18,000 per year (more after age 50) with pre-tax dollars. As the employer, you can also contribute up to 25% of your business earnings up to $53,000. You can’t have employees other than a spouse though.
If you’re self-employed and would like to know more about how to maximize your tax deductions, please don’t hesitate to contact us – we understand what a headache tax planning can be whether you’re a large corporation or the smallest of startups – we cover it all.