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Every pay period, your employer deposits the equivalent of 6.2% of your salary into the program as a matching social security tax contribution. That 6.2% of your salary is withheld and deposited with the U.S. government's Old-Age, Survivors, and Disability Insurance program (OASD) - commonly known as Social Security.
Unexpected Social Security Tax Traps
If you are self-employed, defined by the Social Security Administration as running a trade, business, or profession with yourself or with a partner, the social security tax rate due to OASD on net business income (income minus costs) is 15.3%. Although the self-employed can deduct half of their federal self-employment taxes from their net income when it comes time to pay federal income tax, it is important to avoid social security tax traps that can unnecessarily increase what they owe the government.
Remember to Deduct Half Your Social Security Tax on Your 1040
You can deduct half of your Social Security tax from your gross income on IRS Form 1040. This deduction is not itemized, and cannot be listed on your Schedule C.
Clearly Separate Your Business Records From Your Personal Expenses
The IRS considers most self-employment income as wages and taxes it as wage income. So be sure to keep separate bank records clearly dividing your self-employment expenses from personal expenses. Without separate records, the IRS will consider most self-employment expenses as non-deductible personal expenses and you might end up paying more in social security tax than you needed to pay.
Allowable Self-employment Business Tax Deductions
Establish a Flexible Spending Account
Money deposited during the year into a flexible spending account is subtracted from your gross income and reduces your social security tax burden. Examples of flexible spending accounts are dependent care flexible spending accounts and health care flexible spending accounts. Be sure the spending from these accounts are clearly documented.
Lower Your Taxable Investment Income
Consider reducing your taxable investment income by converting your traditional IRA accounts into a Roth individual retirement account.
Unexpected Social Security Tax Traps
If you are self-employed, defined by the Social Security Administration as running a trade, business, or profession with yourself or with a partner, the social security tax rate due to OASD on net business income (income minus costs) is 15.3%. Although the self-employed can deduct half of their federal self-employment taxes from their net income when it comes time to pay federal income tax, it is important to avoid social security tax traps that can unnecessarily increase what they owe the government.
Remember to Deduct Half Your Social Security Tax on Your 1040
You can deduct half of your Social Security tax from your gross income on IRS Form 1040. This deduction is not itemized, and cannot be listed on your Schedule C.
Clearly Separate Your Business Records From Your Personal Expenses
The IRS considers most self-employment income as wages and taxes it as wage income. So be sure to keep separate bank records clearly dividing your self-employment expenses from personal expenses. Without separate records, the IRS will consider most self-employment expenses as non-deductible personal expenses and you might end up paying more in social security tax than you needed to pay.
Allowable Self-employment Business Tax Deductions
- A dedicated work space
Even if your work space is only a portion of a room, measure your work area and divide it by the square footage of your home. That is the percentage of your home office business expenses - i.e., mortgage, utilities, insurance - you may claim as a business expense.
- Office equipment
For the self-employed with home offices, It is especially important to remember that if a piece of home office business equipment, such as a computer, can be used for non-business purposes, the burden of proof is on you to prove that the equipment is used exclusively for business. If it is the only home computer and there are school-age children living with you the IRS is going to assume your children use the computer. It is easier to prove that the computer is dedicated solely to business if there is another computer for general family use.
- Mileage
Your commute from your home to the office is not considered a business expense. But business to business car travel is a deductible business expense. When you have a home office, your home is now a place of business. When you must travel from your home to another place of business the mileage is deductible. Be sure to document your business to business mileage and deduct it from your taxes.
- Daycare
Daycare expenses are now tax deductible for both employed and self-employed if they have a child 13 or under living with them, or a child who is disabled. The caretaker cannot be a dependent of the taxpayer. Married couples must both be employed for the period of time the deduction is taken, and they must file jointly to take this deduction.
Establish a Flexible Spending Account
Money deposited during the year into a flexible spending account is subtracted from your gross income and reduces your social security tax burden. Examples of flexible spending accounts are dependent care flexible spending accounts and health care flexible spending accounts. Be sure the spending from these accounts are clearly documented.
Lower Your Taxable Investment Income
Consider reducing your taxable investment income by converting your traditional IRA accounts into a Roth individual retirement account.
