Sole proprietorships represent 81% of small businesses in the U.S. If you belong to the club, you know working for yourself comes with advantages like flexibility and greater control of your future.
However, not having a boss also means a bigger bill on tax day. Luckily, numerous tax deductions can help save you money.
Here are the top 6 tax deductions for sole proprietors:
Self-Employment Tax Deduction
As a sole proprietor, you take on the role of employer and employee. That means you’re responsible for paying Social Security and Medicare taxes.
The current self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare, which is a combined 15.3%. With the self-employment deduction, half of what you pay is deductible. For example, paying $1,000 in self-employment taxes can reduce your taxable income by $500.
Startup Costs Deduction
Is your business brand new? The IRS lets you write off $5,000 in startup costs during your first year. This deduction covers advertising costs, consulting fees, trainee wages, etc.
Additionally, you can deduct $5,000 in organizational costs. Eligible expenses include legal and accounting fees accrued when setting up your business. For example, If you file as a single-member LLC and get expert help, the cost of their services is deductible.
Home Office Deduction
A home office is a common setup in the self-employed crowd. Using the home deduction lets you recoup some of the costs. You can deduct part of your property taxes, utilities payments, and more. However, the deduction is not as straightforward as it seems.
To qualify, the home office space must be exclusively devoted to work purposes. You’ll need to determine what percentage of your home is used as an office. If it’s 10%, you can deduct 10% of your home expenses.
Even if you don’t have a separate room for an office, you may still be eligible for the home office deduction. The IRS now allows a simplified option to take the deduction, which is $5 per square foot of the workspace, up to a maximum of 300 square feet.
Travel Deduction
Do you travel to conventions or to see clients? You can write off some of your costs as deductions. Potential deductions include:
- Airfare
- Hotel costs
- Rental car fees
- Parking fees
- etc.
The list is broad, but there is a catch. The trip must be about work. If you tack on an extra weekend in Las Vegas after your business convention ends, nothing you do over the weekend is deductible. You can only claim business-related expenses.
Health Insurance Deduction
You don’t receive a tidy healthcare package as a sole proprietor. But, if you have no employees and meet specific criteria, you can deduct up to 100% of the premiums you pay for yourself and any dependents.
If your sole proprietorship has employees, the Small Business Health Options Program (SHOP) may be an option. You can receive up to 50% of your employee premium contributions as a tax credit.
Retirement Deductions
Running your own business means there are no employer-sponsored retirement plans to fall back on. You have to maintain your own plan.
Popular options include:
- Individual Retirement Account (IRA)
- Simplified Employee Pension Plan (SEP IRA)
- Solo 401(k).
Your contributions to any of these plans are tax-deductible.
The Bottom Line
Managing taxes can be one of the most stressful parts of running a business. But, figuring out the best tax deductions for sole proprietors is worth the effort. Remember to save receipts and keep detailed records throughout the year so it’s easy to determine your business expenses when you file taxes.
Kondler & Associates, CPAs, can help you identify all relevant tax deductions and credits. We offer comprehensive services, including tax preparation and planning for businesses. Our team keeps track of ever-shifting tax regulations to ensure you save as much money as possible on your tax bill. Give us a call or fill out our online contact form to set up a free consultation.
