15 Tax Breaks for Self-Employed Clients
If you focus on what you lack you will lose what you have.
With the recent uptick in self-employed workers, chances are that some of your clients might be looking to freelance or register their own businesses. In either case, you can advise them on how to lower their self-employment taxes by considering the tax breaks below, including the new business income deduction. Your self-employed clients will thank you!
Self-employed workers have become a prominent demographic amidst the COVID-19 pandemic. Labour Market Information Council reports that in Canada, as much as 73 percent of self-employed people are working for their solely-owned businesses. While the numbers are less clear in the U.S., where nearly anyone can set up an LLC, the chances are that many workers are looking into self-employment, either as freelancers or as registered businesses. In any case, though, these individuals still have to pay taxes. However, thanks to the many tax breaks available to small businesses, self-employed folks may be able to keep a significant portion of their income. Accounting professionals should advise their self-employed clients about the following tax breaks.
1. Health Insurance
This deduction is conditional, based on whether a self-employed individual is qualified to join their spouse's medical plan. If they don’t qualify, they can deduct medical and dental premiums for spouses, dependents and children below the age of 27. This deduction is an income adjustment, not an itemized deduction, so it's not necessary to itemize it to claim it.
2. Transportation
A self-employed person may deduct mileage costs for business-related travel using their own car. However, they will need a mileage log to prove their travel. Alternatively, they can opt to deduct car-related expenses such as gas, oil, depreciation, licenses and so on. If they have five or more cars registered to their business, they will have to choose the latter.
3. Education
If your self-employed client pays to earn skills that they can use at work, the cost of that education is deductible. This deduction covers tuition, lab fees, supplies, books and transportation to campus.
4. Home Offices
Most self-employed individuals have a dedicated workspace at home. If so, your client can claim for the percentage of their floorplan the home office takes up. The deduction may apply to a portion of the mortgage paid on the entire house. Alternatively, your client can opt for a simplified deduction, which allows them to deduct five dollars per square foot, up to 300 square feet. That amount would cover a 17x17 workspace, which is larger than many home offices.
5. Self-Employment Taxes
One of the most common self-employment deductions is using self-employment tax. The deduction applies to income tax, and your client is allowed to deduct up to half of their self-employment tax from their income taxes.
6. Retirement Savings
Retirement options for self-employed people may also yield deductions. If the client is signed up for a solo 401K, they can leverage deductions up to $58,000 (in 2021) on the contributions to that fund. If your client is over 50, they get an additional $6,500.
7. Office Supplies
While they don't seem that costly, expenses from office supplies do add up. Home offices typically require a lot of supplies, from pens and paper clips to paper and ink for printers. Even if your client didn't use the supplies, they can still be included on the deduction once receipts prove their purchase. For items that have a shelf-life of longer than a year, your client can deduct the cost of the item in the year when they bought it.
8. Business Insurance
Insurance premiums can be deducted for self-employed individuals in Schedule C. Business insurance, accident insurance and employee health insurance are all covered under this single deduction.
9. Phone and Internet Costs
If a self-employed individual's business relies on the internet, these utilities can also be deducted from tax payments. If the connection is registered to the company, your client can deduct the entire amount of the bill.
10. Loan and Credit Card Interest Payments
If the business has loans registered to itself, the loan payments can be deducted from the company's taxes. Many people believe that this is limited to a business credit card, but that's not strictly true. If the company uses a personal credit card to purchase something for business use, the payments can be deducted just the same.
11. Start-Up Costs
Up to $5,000 in start-up costs and $5,000 in organization costs can be deducted under this schedule. These costs include registration fees and other monetary details that the business must pay to get started as a company.
12. Business Travel and Meals
In the event that your client has to travel, the business can deduct the travel expenses, including the cost of meals. However, if your client is considering using the travel expenses to cover the cost of a vacation, the deductions don't cover travel for a spouse or children.
13. Membership Fees
Some professionals, such as engineers and lawyers, are required to join professional organizations that charge fees. If your client must pay membership fees as part of their self-employed business, they can claim deductions for those fees.
14. Advertising
Advertising that helps promote your client’s business can contribute to deductions, but keep in mind that advertising toward lobbying cannot. Conventions and political parties are also not acceptable for advertising deductions.
15. Qualified Business Income Deduction
This deduction, which is fairly new, allows business owners who made less than $163,300 in the previous calendar year to claim up to a 20-percent deduction on their taxable business income. This amount isn't just for business income, but from all sources. Even if the client's income is above the limit, they may be able to claim some amount of deductions on their taxable income.
Don't Overlook Deductions
As any self-employed person who has started a business over the last year knows, each dollar counts. You should advise your client on these tax deductions regardless of whether they qualify for them to signal that you are looking out for their best interests. This will help build trust with your client and, if they qualify for deductions, it gives them a little more to spend at the close of the financial year.
Credit Given to: Mark Pierce. Published in accountingweb on Oct 8, 2021.
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