If you are one of the many individuals who found themselves pursuing self-employment or a variety of freelance jobs where you work as an independent contractor, doing your taxes is going to be a little different this year. There are different deductions you can qualify for and use on your taxes when some or all of your income comes from self-employment activities.
As a self-employed individual, you have to pay both the employee and the employer portion of your required Social Security and Medicare tax.
This is often referred to as the "self-employment tax" as you pay a higher percentage of your income to Social Security and Medicare when self-employed than a W-2 employee would. However, half of what you pay in self-employment tax, which is essentially the employer contribution, can be deducted from your income.
As a self-employed individual, you have to pay for your health insurance on your own. It can be an expensive purchase that costs you thousands of dollars a year in order to main health care coverage. When it comes to your health insurance though, you can deduct the premium that you paid for yourself, as well as for your spouse and children if you also financed health insurance for them as well.
This is different than the health insurance deduction you can get for out-of-pocket expenses if you itemize your tax deduction. The health insurance premium deduction can take some of the bite out of paying for health insurance as a self-employed individual.
Business Insurance Premiums
Another type of insurance that you can deduct as a self-employed individual is any business insurance premiums that you paid. This can include all types of business insurance, from workers' compensation insurance to general liability insurance to errors and omissions insurance, as well as business property insurance.
If you contributed to a retirement plan for yourself while you are self-employed, you can still enjoy some retirement savings on your taxes. The amount of savings you can enjoy depends upon the type of retirement vehicle you invested in, from a SEP to an H.R.10 or Keogh plan, your income bracket, and your age.
Each tax deduction you take reduces your taxable self-employed income, which in turn will reduce the taxes that you pay on that income. If you are near the edge of an income bracket, and you are able to lower your taxable income to the next lower tax income bracket, your savings may be even greater. If this is your first year navigating your taxes as a self-employed individual, you may want to work with an income tax service to help you accurately complete your taxes.