Self-employed workers can benefit from tax deductions on Social Security and Medicare withholding, as well as business expenses such as home office costs, supplies, and health insurance. Deductions can also be made for phone and internet usage, but only for business-specific expenses. Health insurance costs for the self-employed and their family members can also be deducted.
Self-employment tax breaks can benefit self-employed workers and home business owners in several ways. First, half of Social Security and Medicare withholding can be deducted from an individual’s total gross income. Second, individuals can use self-employment tax deductions to subtract the cost of overhead business expenses, such as home office costs, supplies, and health insurance. For taxpayers who receive both self-employment income and employment income, the earned income is taxed first for Social Security and Medicare.
Since self-employed workers must pay both the employee and employer portions of the Social Security and Medicare tax, they are allowed to deduct half of the total Social Security and Medicare tax as a business expense. In 2011, the Social Security tax rate was 13.3%, with 2.9% for Medicare and 10.4% for Social Security. Self-employment tax deductions from the year 2011 were eligible for half of this value, or 6.65% or total gross income.
The deduction cannot be itemized and must be subtracted from your gross income. Only income tax is affected by this deduction and self-employment earnings and self-employment tax are not affected. Employees are not eligible for this deduction.
Additional self-employment tax deductions include business overhead, such as supplies or furniture for a home office, contract work, or transportation mileage. Home office deductions can sometimes be complicated and require careful documentation, including maps with correct measurements, in the case of an audit. The percentage of space occupied by a home office in the total building will be the percentage an individual can deduct from utilities, property taxes, or mortgage payments.
Phone and internet usage costs can also be valid self-employment tax deductions, but only expenses specifically used for the business can be deducted. For example, if a home business accounts for 30% of your internet usage, only 30% of your total internet bill can be deducted as a business expense. Careful record keeping and receipts can help establish business costs more clearly.
In some cases, self-employment tax deductions will also include health insurance costs. If you are self-employed pay for your own health insurance and are not eligible to participate in a spouse’s insurance plan, you can deduct your health insurance costs. Additionally, if that same person also pays for their spouse or child’s health insurance, these costs may also be deducted. This deduction is classified as a personal expense, rather than a business expense, but is still available to the self-employed.
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