Are you a self-employed small business owner? If so, let’s take a look at 7 ways to save money on your taxes.
Do you put off doing your taxes because you are too scared to find out what you’ll owe? Are you confused over what deductions you can take?
Yes. I’m talking to you the self-employed small business owner. You probably already know you owe self-employment taxes on top of any federal and possibly state income tax. Yes. That’s 15.3% for self-employment taxes on your business net profit.
However, let’s talk about the ways in which you can save money on your self-employment taxes. These are things that you should be able to do on your own.
7 Ways to Save Money on Your Taxes
1. Take internet and phone costs
This is available even to those living as a full-time digital nomad or full-time RVer. Don’t forget to take a percentage of both as an expense against your business income.
To calculate the percentage of business use take a month and record your data usage. You also need to record how much of that time is personal vs. business use. Let’s say you use 100 GB of internet use in a month and you determine 60 GB of that is for work purposes. Then your percentage of business use is 60%. If the cost of your internet plan is $100/month or $1200/year then take $60/month or $720/year of that as a deduction. Nice, right?
Do the same thing for your phone use. However, if you have 2 cell phone plans one of which is used exclusively used for business, then you can take 100% of that plan. Make sense?
2. Claim all necessary and ordinary business expenses
What is necessary and ordinary, you ask? This includes anything specific to your industry. The IRS has some good guidance on business deductions.
Let’s take a look at an example using a photographer as a business example. For a photographer, ordinary and necessary can include software, data storage, office supplies including memory cards, camera equipment, a Photoshop subscription, props used in your photos, printing costs, membership dues to a photo organization, business liability insurance, etc.
Think about what is normal for your specific industry and you can probably take it.
If you told me you want to take your new hiking shoes as a business expense, I would question that it’s necessary or ordinary.
Be reasonable here and ask a tax professional if you can’t determine what to take.
3. Take the mileage deduction if you traveled specifically for business purposes
Record your mileage for any business trip you make. This can include visiting a client at their office, running errands for your business like going to the post office or to Best Buy to buy a new camera, and also driving to a meeting over lunch.
Keep a detailed log for this including the date, number of round trip miles, the purpose of the trip – who you were meeting with or what store you visited. This will make it easy at tax time to add up your miles and get a business deduction for them.
The standard mileage rate for 2018 is 545 cents and in 2019 it goes up to 58 cents per mile.
4. Take the solar credit for that solar install
This is a nice bonus deduction for anyone who installs solar on their personal residence including an RV. However, it doesn’t go on your business Schedule C. It is part of your 1040 as a non-refundable credit which can be carried forward. This credit is worth 30% of your total installation costs which equates to a 30% discount on that solar install. Not bad, right?
To read more about this credit, check out this post specifically about the residential solar tax credit.
5. Contribute to a SEP IRA or a Solo 401k
This has a dual purpose. It gives you a tax deduction in the current year and it helps you save for your retirement. This deduction does not go on your business Schedule C. It does go on your 1040 as a deduction. It is limited by your business income, so be careful when you’re computing it.
I suggest a SEP IRA because they are usually easier to set up and cost less to maintain than a Solo 401k. A Solo 401k also requires it to be established by December 31 of the tax year even though you can contribute to it up until the April filing deadline.
Let’s see how the maximum contribution amount gets calculated.
Take your Schedule C net profit and deduct half your self-employment taxes. Then you multiply this times the plan contribution rate of .2 (which is the max) to get the max SEP contribution you can make.
For example, you have $10,000 of net profit from your Schedule C business.
Subtract half the self-employment tax which is $765 to get $9,235.
Multiply $9,235 x .2 to get $1,847. This is the max SEP IRA contribution you can make for the tax year.
If you’d like to learn more about retirement contributions, then read this post about how IRA contributions help you save on your taxes.
6. Deduct self-insured health insurance premiums
If you buy traditional health insurance from the marketplace or another private insurance company, then you qualify to take this deduction. This deduction goes on your Form 1040 and not your Schedule C. It helps bring down your income by the total of your premiums. This can be very helpful since health insurance costs are so high nowadays.
If you’re an S Corp, there is a totally different way to treat health insurance as a more than 2% business owner. Be careful there since you need to add it to your W2 salary. However, you still qualify for the deduction later on your 1040.
Health share ministries do NOT count as self-employed health insurance premiums. Therefore, they also don’t help you save money on your taxes.
Keep in mind this deduction is limited by your business income, so be careful there. Otherwise, why not take a deduction for the cost of your health insurance? It’s a great way to save money on your taxes for something you need.
7. Determine if you qualify for the 20% pass-through deduction
This is a whole new deduction starting in the 2018 tax year and is part of the Tax Cut and Jobs Act. It is complicated and can be limited by your income. The basic idea behind it is to give a 20% deduction to those with self-employment income including sole proprietors, S corps, partnerships, real estate, and a few more.
If your taxable income is less than $315,000 for married filing jointly ($157,500 for single filers) and you have a net profit from a small business, then you most likely will get to take this deduction. To calculate this you do NOT include reasonable compensation (part of an S corp) or W-2 wages, guaranteed payments from a partnership, dividends, and more. It is only based on business net profit.
It gets complicated as taxable income increases and if your business is specified service trade or business. What qualifies as a specified service trade or business? This includes lawyers, doctors, accountants, actors, consultants, financial services and any service dependent on the skill or reputation of its owner. If you fall into these categories, then the qualified business income deduction will be reduced and possibly eliminated altogether as your taxable income increases.
I highly recommend using a tax professional to help calculate this deduction.
Now that you have learned these 7 ways to save money on your taxes, which ones will you implement?