Self Employed Benefits

Self Employed Business Deductions

Self employed professionals have the added advantage of greater tax reliefs under the self employed tax deduction scheme. Taxes can be filed under Schedule C or Schedule C-EZ and the social security number can be used for identification. This helps in getting tax relief through self employed business deductions that would have been difficult for an otherwise employed professional.

Schedule C and Schedule C-EZ are different and both of them should be carefully read and the differences noticed. Form Schedule C-EZ is used by those who have small business expenses, which end the year with a profit, which do not have any employees and which do not need to claim a home-office deduction.

It is useful to be acquainted with some deductions which will reduce the amount of income tax that one needs to pay. It is also recommended that one hire an accountant to prepare one's tax returns. However, one should meet with one's accountant well before the end of the financial year and not leave it till the last moment to update the records for tax calculation.

One may try to make use of some of the following small-business tax deductions.

1. Employee benefit plans: One can deduct contributions to employee benefit plans like retirement plans and health insurance plans. The maximum contribution that one can deduct per employee in a qualified retirement plan can be $41,000 for a SEP-IRA or Keogh $44,000 for a 401(k) plan $100,000 or more for a defined benefit plan

2. Automobile expenses: One can deduct the actual expenses incurred (including gas, tires, repair, maintenance, insurance, rent or lease charges, depreciation) from one's automobile expenses used for business. Alternatively, one can take the national standard mileage rate which, in 2004, was 37.5 cents per business mile.

3. Taxes: One can match required withholding on personal property tax or real estate tax paid on business assets, employee wages, sales tax, federal unemployment tax, and then deduct Social Security and Medicaid taxes paid accordingly.

4. Home Office: Based on whether one uses one's home or other real estate for business purposes, one can deduct part of or the entire mortgage interest paid, if any; part of or the entire maintenance and repair costs incurred on the property in addition to the cost of business utilities and supplies.

5. Depreciation: Depreciation can be taken on passenger cars, recreational equipment or entertainment devices such as cameras, cell phones, computers and such other office accessories if these are used exclusively for business purposes.

6. Professional Fees: One can deduct professional fees that one pays for legal advice or for technical help such as those of an accountant.

7. Meals and entertainment: One can deduct 50% of meal and entertainment expenses directly associated with the business.

It is essential to keep the necessary documentation (such as bills) to substantiate all these deductions. One should keep these documents ready as and when they are acquired so as to prevent a year-end rush.

This is not intended to be used as tax or investment advice and for specific information contact your financial advisor or the IRS.

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