Today’s technology strives to make self-employment easier than ever. However, those who work for themselves can face some distinctive self-employment tax challenges. Such individuals can step into the following three “lanes” to help overcome these obstacles.
Lane #1: Learn Liabilities
Because self-employed individuals are liable for self-employment tax, they must pay both the employee and employer portions of Federal Insurance Contributions Act (FICA) taxes. The good news is that the self-employed may deduct the employer portion of these taxes. Additionally, they might be able to make significantly larger retirement contributions than they would as an employee.
However, self-employed individuals are likely to be required to make quarterly estimated tax payments because income taxes are not withheld from self-employment income as they are from wages. If an individual fails to fully make these payments, then s/he could face an unexpectedly high tax bill and underpayment penalties.
Lane #2: Distinguish What is Deductible
Under IRS rules, deductible business expenses for the self-employed must be “ordinary” and “necessary.” In other words, these costs are commonly incurred by similar businesses and readily justifiable as needed to run operations.
Although the IRS states that “[a]n expense does not have to be indispensable to be considered necessary,” pushing this gray area too far can trigger an audit. Common examples of deductible business expenses for the self-employed include licenses, accounting fees, equipment, supplies, legal expenses, and business-related software.
Lane #3: Remember the Home Office
Self-employed individuals may deduct many direct expenses (e.g., business-only phone and data lines, as well as office supplies) and indirect expenses (e.g., real estate taxes and maintenance) associated with their home offices. The tax break for indirect expenses is based on how much of the home is used for business purposes. Individuals can determine this amount by either measuring the square footage of the workspace as a percentage of the home’s total area or using a fraction based on the number of rooms in the home.
Those who can answer “yes” to the following questions are likely to qualify for the home office deduction:
- Is the specific area of the home that is used for business purposes used only for business (rather than both business and personal needs)?
- Is the space used regularly and continuously for business?
The idea that taking the home office deduction could increase an individual’s audit risk is one of many debunked tax myths.
Spare the Burden of Self-Employment Tax Challenges with CRI’s Guidance
If you are a self-employed individual who may need assistance addressing your unique tax challenges, then please contact CRI’s CPAs and advisors. We may not be professional bowlers, but we can help you “strike” down potential barriers to your best tax outcome.