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Self-employed individuals can deduct half of their Social Security and Medicare taxes and general business expenses, including home office supplies and health insurance costs. Careful record-keeping is necessary for deductions, and only expenses specifically used for business may be deducted. Salaried employees are not eligible for this deduction.
Self-employment tax deductions can benefit self-employed individuals and home-based business owners in several ways. First, half of the Social Security and Medicare taxes withheld can be deducted from an individual’s total gross income. Second, people can use self-employment tax deductions to subtract the cost of general business expenses, such as the costs of a home office, supplies, and health insurance. For taxpayers who receive both self-employment income and earned income, earned income is taxed first for Social Security and Medicare.
Since self-employed individuals must pay the employee and employer portions of Social Security and Medicare taxes, 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 for 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 gross income. Only income tax is affected by this deduction, and self-employment earnings and self-employment tax are not affected. Salaried employees are not eligible for this deduction.
Additional self-employment tax deductions include general business expenses, such as home office supplies or furniture, contract labor, or transportation mileage. Home office deductions can sometimes be complicated and require careful documentation, including maps with correct measurements, in the event of an audit. The percentage of space occupied by a home office in the total building will be the percentage that an individual can deduct from utilities, property taxes, or mortgage payments.
Telephone and Internet usage costs may also be valid self-employment tax deductions, but only expenses specifically used for business may be deducted. For example, if a home business accounts for 30% of Internet usage, then only 30% of the 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 a self-employed person pays for their own health insurance and is not eligible to join their spouse’s insurance plan, then health insurance costs may be deducted. Also, if that same person also pays for a spouse’s or child’s health insurance, those costs can also be deducted. This deduction is classified as a personal expense, rather than a business expense, but it is still available to the self-employed.
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