Self Employed Tax Deductions

A person who is not working for any other person or organization and is working for himself, is liable to pay self-employment tax. This tax is like the medicare and social security tax, which employed and salary earning people pay. Self employed people can calculate their tax using Form 1040. The self employment tax rate is 12.4% for social security and 2.9% for medicare expenses, totaling to 15.3% on the net taxable income. The initial US $106,800 earned by a self employed person is liable for this tax. After arriving at the adjusted gross income, the person can subtract the various tax deductions according to the Internal Revenue Services (IRS), to arrive at the net income tax payable.

According to the IRS, a self employed person is the one on whom either of the following is applicable:

• A person who is either an independent contractor or a sole proprietor running a business.
• A person who is a partner in a partnership firm, which carries out any form of business.
• A person who is earning money for himself by conducting the business.

It should be noted that people pursuing a part-time business other than their normal occupation, also fall under this category and are subject to self employment tax. The independent contractor category includes lawyers, accountants, doctors, veterinarians, contractors, or any other person practicing any form of independent trade or profession which involves serving the general public. Self employment taxes need to be paid by any person earning a net income of US $400 or more, compiling to the above mentioned conditions and irrespective of the person's age and number of years since business is being carried on.

IRS Self Employed Tax Deductions

Tax deductions are preliminarily of two types - standard deductions and itemized deductions. Out of these, standard tax deductions are determined every year and for 2009 they were as follows:

• A married person filing returns jointly or a person qualifying as a widower: US $11,400
• Head of household: US $8,350
• Single person or a married person filing separately: US $5,700

On the other hand, itemized tax deductions were divided into six major categories and were as follows:

• Taxes Paid: Any local/state income taxes, personal property taxes and real estate taxes already paid by the individual.
• Medical Expenses: If an individual has paid medical or dental bills which are more than 7.5% of his adjusted gross income, he can subtract whatever amount is more than 7.5% from his income tax.
• Job Expenses: If an individual has paid any union dues, those are tax deductible.
• Donations to Charity: The individual needs to pay keen attention on documents required as proof of charity. Every person should keep a receipt of any donations made to charitable organizations in cash, or in kind.
• Interest Paid: Interest paid towards a mortgage or a qualifying loan qualifies as a tax deduction.
• Miscellaneous Expense: In its publication 529, IRS has dedicated 29 pages to information regarding tax deductions for miscellaneous expenses.

In case a person does not fall under the various itemized tax deductions categories, there are the following above-the-line self employed methods of tax deductions:

• Fees and tuition expenses paid towards higher education - up to US $4000.
• Money paid towards alimony.
• Self employed health insurance deductions include any money paid towards insurance premium of self, spouse or dependents in the family.
• Amount paid towards shifting family from one location to another for business purposes
• Up to US $2500 on any amount paid towards student loan interest.
• Any other monetary contributions made towards IRA and health savings account.
• 50% of self employment tax which includes both, medicare and social security tax.
• Any amount paid towards self employed retirement plans.

For self employed people running their own business, there are a few other Schedule C tax deductions which are applicable:

• Amount paid towards buying domain space, hosting a website and any other website expenses related to running it.
• Payments made to independent contract labor, apart from employees, for completing some work.
• All advertising expense.
• Money spent on buying and maintaining accounts related software for business purposes.
• Post box and postage charges related to the business.
• Money spent on fuel while using the vehicle for business related work.
• In case of working from home, expenses related to maintaining the home office.
• Internet access charges including Wi-Fi access.
• Phone bills of business telephone line and cell phone used for business purposes.
• Computers or laptops purchased for business use can be depreciated over a period of years or be claimed at once.
• Amount spend on buying prizes and gifts for employees.
• Fees paid to the state in order to maintain business license.
• Cost of office stationery like paper, pens etc.
• Money paid towards any business meals are 50% deductible.

It should be kept in mind that tax deductions for self employed individuals given above should be taken only as a reference and exact amount of deductions depends on various other factors like income level, filing status and few other rules laid down by the IRS.

People looking for self employed solutions of tax deduction should keep only one thing in mind - maintaining proper books of accounts and keeping a record of any expenses incurred under Schedule C and above the line parameters. This will help in reducing the income tax by a good margin.