Every commercial enterprise uses a percentage of its earnings to pay taxes. Over time, legislators have passed tax codes to reduce the tax burden of self-employed individuals. Entrepreneurs incur many expenses, some of which can subtract from the taxable income. Since businesses incur many expenses, self-employed entrepreneurs can reduce their taxes by taking advantage of the itemized deductions.
Taxes and Your Business
Businesses pay taxes depending on their type of ownership and investment activities. The following are some of the taxes businesses self-employed investors pay.
- Self-employment tax (SE tax) – Money paid by business owners working for themselves. The contributions cater to investors’ social security insurance
- Employment tax – Entrepreneurs with staff pay various levies such as Medicare and social security taxes
- Exercise tax – Organization charges value-added tax that is regulated and advised by the relevant authorities on the products that they sell. Customers pay for it at the point of purchase.
- Property tax – The business has to pay some charges for the building from which the company is operating. The local city council office usually collects it. The value of real estate determines the amount.
- Income tax – Businesses have to pay a percentage of their income as tax. The taxable amount varies from one organization to another, depending on the size, type of ownership, and business activities.
Business Tax Deductions
1. Self-Employment Taxes
Self-employed individuals have to pay social security and Medicare taxes that employers usually contribute. The fees are compulsory for every employee, and the amount payable may vary stance, the self-employed people paid 15.3 percent Medicare and social security taxes in 2019. However, the IRS allows entrepreneurs to deduct 50 percent of the Medicare and social security taxes from their net income.
2. Working From Home
If you have a home office, you can deduct the taxable income as a home office expense. You have to show the space’s actual impression, drawn to scale, as one estimates the costs in square feet.
Furthermore, other eligible tax deductions when you have a home office include property tax, mortgage interest, and utilities. For example, you can deduct the cost of cooking gas you use for business-related tasks, such as preparing lunch for the staff or laboratory heating. However, do not reduce the cost of your domestic cooking gas by including it as a business expense since that would be tax fraud. Instead, it would help if you looked for Maryland gas prices on offers to lower your monthly utility bill.
You can claim direct business bills such as the internet, telephone, power bills, and fax costs. You should be able to differentiate the business costs from your usage.
4. Insurance Premiums
If you pay for health insurance premiums, and you are eligible for coverage by your spouse’s employer. You can deduct the health insurance premium from your taxable income. These premiums include the amount you pay for general healthcare and dental programs. You can also deduct additional health insurance premiums for your family if paid directly from your business proceeds.
Treating a client to lunch or dinner and business travel meals are business expenses that are eligible for deduction from the taxable income, but only 50%. It would help if you had the receipts and supporting records for proof to IRS auditors.
6. Business Trips
For business travel that takes more hours than a typical working day, and it happens outside your enterprise’s jurisdiction, the expenses you incur are eligible for deduction from your taxable income.
Note that you can only subtract the trip expenses from your taxable revenue if you plan the trip early. You engage in a business development activity such as meeting new clients or attending an educational seminar.
It would be best if you also recorded trips you travel using your car. Once you have an accurate record of the distance you have covered, you can use the standard mileage rate to determine how much money you will deduct from your taxable profits.