Who here doesn’t like seeing their tax liability? I think most of you just mumbled “me” to yourself. Am I right? Here are 7 ways to reduce self-employment taxes for small business owners.
By now I’m pretty sure you understand you have self-employment tax obligations as a small business owner or RV entrepreneur. Understanding self-employment taxes is one thing. Reducing them is another and that’s what this post is all about.
Yes. That’s right. There are at least 7 tax saving strategies for those who are self-employed. Woohoo! Here’s the list of ways to reduce self-employment taxes for anyone who is self-employed.
1. Don’t leave off deductions
Taking all business expenses available to you is the number one way to lower your tax liability. This means you shouldn’t leave any on the table! Business expenses are directly deducted from any income you receive to create your business net profit. The net profit is the same as the business taxable income.
Here’s a business write-off cheat sheet for those looking to still learn what counts to help reduce your self-employment taxes.
This is probably pretty obvious to most of you but there are still plenty of folks who leave deductions off their tax return. Why?
This could be because the business finances aren’t kept separate from your personal and you miss out on a few expenses you paid for personally. It could also be due to poor record-keeping. I know it’s not fun for many of you but it is super important to keep good records and this is one of the reasons why.
Some business owners also miss split deductions. In other words, those that are used for both personal and business. These could be items like your cell phone or your internet expenses. As full-time RVers, this is especially important to consider because our mobile connections can really add up. I think most full-time RV entrepreneurs have more than one cell phone plan to make sure we stayed connected. Make sure your tracking business use and taking the proper percentage as a business deduction on your tax return.
If you use one cell phone plan strictly for business, then you can deduct that plan 100%. However, most RV entrepreneurs need to piece together different data plans in order to stay connected. If this is you, then determine how much data is being used for business vs. personal. If it’s 50%, then you can deduct 50% on your taxes.
Let’s say your unlimited data plan is $150/month and you use it 50% for business. You can deduct $75/month.
How do you determine business use? I suggest you track your total data use for a couple of months. Make sure you record personal use (Netflix, music streaming, travel planning, etc.) vs. business use. Once you track a couple of month’s worth of data, you can use that percentage throughout the year. You may need to occasionally update the numbers based on what’s going on with your business or as your business grows. That’s perfectly ok. However, I would not usually recommend taking more than 75% at the maximum.
2. Take travel expenses
Travel expenses not only include the mileage deduction but also any flights, hotel stays, etc. that you incur as part of doing business.
The mileage deduction can be hard for many full-time RVers to claim unless you only take the mileage of driving your towed vehicle to get to a client’s office or run business errands. Unfortunately, the mileage between campground stays does NOT count as business mileage even for those who have a blog or YouTube channel. It’s your home and your choice to drive the mileage between spots. I urge you to understand tax home and travel expenses.
When can you take the mileage and how do you record it?
Once you’re parked at a campground, you can take the mileage from the campground to a museum, park, restaurant or other outings. You can also deduct using your towed/tow vehicle to run business errands like go to Best Buy to pick up a new computer or to meet a client for lunch at a restaurant.
I urge caution when taking mileage because high miles can be a red flag for an audit.
For 2019, the standard mileage deduction rate is 58 cents per mile. For 2020, it is 57.5 cents for mile.
How to track your miles?
My favorite way to track mileage is to use MileIQ. It records every drive you take and all you do is mark it personal or business. However, there are plenty of other ways to track miles. If you use Quickbooks, there is a way to track miles using the app. You can also go old school and keep a written log in your vehicle. If you don’t like a written log, then make it digital using Google Sheets or something similar.
3. Turn a charitable donation into an expense
What do I mean by this? If your business donates to a charity, it’s not a true business expense or deduction. Instead, it flows to you personally as part of itemized deductions. However, most full-time RVers and RV entrepreneurs don’t have enough to itemize deductions.
Since most of you won’t be able to itemize and take the charitable deduction on your personal taxes, here’s how you can turn the donation into a business expense.
The donation must directly relate to your business. This means you take a donation for sponsoring an event or program in exchange for having your business name and logo published at the event or on promo materials. This is now a marketing expense for your business. I suggest you find a charitable event that fits your business and turn it into a marketing expense. It will make you feel good about helping out and also might even drum up some business for you.
I’d like to point out that donating time or services to a charity is NOT deductible! On a positive note, if you volunteer to photograph a local church event, you can deduct the direct expenses related to that event. This could be mileage to get there or some supplies you bring to participate in the event.
4. Contribute to a retirement plan
Many people overlook setting aside money for retirement and this can add up to large tax savings. This is especially true if you’re self-employed or an RV entrepreneur. This will help reduce your self-employment taxes while saving for later.
Taxpayers can make tax-deductible contributions to traditional IRAs up to tax day. For 2019 that means you can make a contribution until April 15, 2020. However, the door closes on December 31st for opening a 401(k) plans.
The IRS caps tax-deductible contributions to a traditional 401(k) at $19,000 for 2019 and $19,500 for 2020. Workers age 50 and older can make an additional $6,000 in catch-up contributions for 2019 and $6,500 for 2020.
There are several options self-employed individuals have for retirement savings. These include a SEP IRA (Simplified Employee Pension) and a solo 401k plan. I encourage you to research the options further, discuss with a financial adviser and/or tax professional and put a plan into action.
5. Take health insurance premiums
If you’re self-employed, you know the trouble with affording health insurance. While the insurance is expensive, at least it counts as a deduction on your taxes.
Here’s the summary of health insurance as a self-employed business owner and the deduction on your taxes:
- You can’t take this deduction if you or a spouse is offered health insurance through an employer.
- You are limited by how much your business has for net profits. If your business has $10,000 in net profit and your health insurance costs you $15,000. You can only take $10,000 as a deduction.
- Health ministry payments do NOT count as health insurance for the deduction.
- Vision and dental insurance also count as part of your deduction.
- Additional tax savings are available if you enroll in a high deductible health plan with the option to contribute to a health savings account (HSA). Health savings account contributions are tax-deductible and can be used to pay for most medical expenses including co-pays, eyeglasses, prescription medicines, etc. The 2019 contribution HSA limit is $7,000 for families and $3,500 for individuals. 2020 limits are $7,100 for families and $3,550 for individuals.
I encourage you to learn about health insurance as a deduction and how you deduct it on your personal taxes.
6. Learn about the new 20% deduction
This is a part of the 2017 tax reform aka the Tax Cuts and Jobs Act. It’s officially called the Qualified Business Income Deduction and that’s most likely how it will show up on your tax return.
To put it simply, this provision allows self-employed individuals to take 20% of the net profit of their business as a deduction on your tax return. Who doesn’t want that?
For example, if you have $50,000 of net profit (aka qualified business income) from a business, you can possibly deduct up to $10,000.
This specific tax provision is way more complicated than this simplified version. However, for the most part, I see many RV entrepreneurs able to take advantage of this tax deduction to help reduce self-employment taxes.
This deduction is available to anyone with sole proprietor, partnership and even S corp income. Those are all considered pass-through entities and qualify. However, if you have an S corp, you’ll be taking a salary. The deduction then gets calculated by the lesser of 25% of your W-2 income OR 20% of the business profits passed through to you as the business owner.
For example, if your salary as an S corp owner is $50,000 and you have $25,000 of pass-through income on your K-1 from the S corp, the lesser amount would be $5,000 (.2 x 25,000) vs. (.25 or 50,000 = 10,000)
There are special considerations for those who earn larger incomes ($157,000 single and $315,ooo for those who are married filing jointly) as well as those in certain industries.
Again, this provision is complicated so I do urge plenty of research and talking to a tax professional to fully understand what’s available to you.
7. Home office deduction
I wanted to put this provision on this list because many of you ask about it. However, for most of you, this deduction is NOT available if you live in a tiny space like an RV.
A home office is defined as an area of your home used EXCLUSIVELY and regularly for business. This means it cannot be used for anything else.
Who lives in an RV that has enough space to qualify for this?
The exceptions I see to this are those with a toy hauler with the garage space dedicated 100% to an office. Also, a bunkhouse might also qualify if you use the extra bedroom as a dedicated office space.
If you plan on taking this deduction, I strongly urge you to use the simplified method. This is a newer option where the IRS allows you to take $5 per square foot.
For example, if your toy hauler has a garage that’s 10×10, then you have 100 square feet. You would qualify for a $500 home office deduction.
While this won’t add up to huge tax savings, it does offer some. A small amount is better than nothing, right?
I’ve given you the knowledge of some major ways to reduce your self-employment taxes. Now it’s up to keep good records and put these options to use on your tax return for some major tax savings.