You use a Schedule C where you enter all of your income, and then you enter all of your expenses, withhold expenses from income, and that ‘s how you come up with your actual business income.
Most of what we talk about in this guidebook has to do with that income and those expenses. All of that gets handled in the income depart of the income tax process .
And then there are your tax deductions. For most deductions, you have to choose whether to claim the Standard Deduction or whether it ‘s better to itemize them .
That standard discount is so high now that it ‘s more unusual than ever to itemize. unfortunately, that means if you take the standard discount, there are a lot of things you ca n’t claim .
The Delivery Driver’s Tax Information Series Disclaimer
here ‘s the other thing to think about in all of this. Tax deductions are different than business expenses. That remainder is important, because expenses on Schedule C will lower your Self-Employment tax. Tax deductions are applied later, so they do n’t bring down those taxes .
With all that said ,
There are four special deductions for independent contractors that don’t fit on Schedule C OR in Itemized deductions.
The bad news is that those deductions wo n’t bring down your self-employment tax. That ‘s a flat rate and wo n’t change because of deductions .
The good news is, they ‘re handled outside of the enumerate deductions. That means we can claim them even when just taking the standard tax write-off .
These are pretty hearty AND they ‘re reserved just for the freelance such as humble occupation owners, sole proprietors, autonomous contractors and others who pay taxes for their business on their personal income tax forms .
We ‘ll talk about each of these special deductions, and then talk about where you claim them on your 1040 tax restitution .
1. Self Employed Health Insurance
If you are self employed and have to purchase your own health indemnity, you can deduct the premiums from your taxable income for income taxes. It will not reduce your net income and thus will not reduce your self use tax .
There are a number of limitations to this. You have to have earned a profit and you can not claim more than what your profit was. If you were eligible for subsidize health care through your employer or your spouse ‘s employer, you may not qualify .
This deduction is taken on Schedule 1 that you would include with your tax form. agenda 1 lists adjustments to income that do n’t rely on whether you itemize your deductions .
Some of the calculations can be a morsel involve, so it ‘s better if you have your tax pro aid with your taxes on this deduction .
2. Retirement Savings for Self Employed Individuals
Anyone, whether freelance or not, can save up to $ 6,000 in an Individual Retirement Account ( or IRA ). That money can be written off on Schedule 1 of your tax reappearance, frankincense reducing your taxable income. If you ‘re 50 or older, you can bump that up to $ 7,000 per year .
however, when you are freelance, you have options that will let you save more than that $ 6,000 or $ 7,000 limit .
A elementary IRA lets you invest up to $ 14,000 tax free for any given. A SEP IRA will let you save up to $ 58,000 in a given class. There are a fortune of different rules about how to set them up and you can find out more from this article by BankRate .
I ‘m not going to try to explain what qualifies and what does n’t. This is best to get with your fiscal planner or tax professional. You can besides see IRS Publication 560 .
One thing I will say about this : In the gig economy we have a huge tax advantage because we can write off all the miles that we drive. That means our taxable income is often far less than our actual income. few people get this kind of advantage .
however, that besides reduces our Self-Employment tax which covers Social Security. THAT means you will get lower Social Security benefits when you retire. It ‘s very important that you set away some of those savings in some imprint of retirement report to make up for that .
The deductions go on the same Schedule 1 as health policy premiums. This means it would entirely deduct your taxable income for income tax but would not impact self employment tax .
Self Employment Tax Deduction
The IRS lets you write off the 7.65% that you have to pay to make up for the “employer’s part” of your self employment tax.
The deduction for self employment tax reduces is the one deduction that actually reduces both your self use tax AND your income tax. Basically it ‘s a deduction that allows you to write off the ’employer half ‘ of your self employment tax .
An employer has to pay half of the employee ‘s social security and medicare taxes. however, they can write that off as a occupation expense .
This deduction was given as a way to level the acting airfield for the freelance .
We ca n’t write this off on Schedule C, probably because we do n’t know so far what our self-employment tax will be when we ‘re filling out Schedule C. That character comes later .
On your schedule SE where you calculate your self use tax, you take 7.65 % off your clientele profit before you start calculating the self employment tax. What that ‘s doing is deducting the employer half of social security BEFORE figuring out the final self-employment tax circular .
It ‘s basically the same as writing it off as an expense, barely in a different manner .
unfortunately, that only reduces self-employment tax. What about income tax ?
Line 14 of schedule 1 ( 2021 ) has a position for that. It ‘s the deductible part of self-employment tax. The deductible part is 50 % of the sum self-employment tax total on Schedule SE .
4. Qualified Business Income Deduction
If you had a net income on your Schedule C, you can most likely deduce 20 % of that net income from your taxable income. This is the one deduction of the four that actually goes directly on Form 1040 .
Of course, there ‘s another shape to fill out before it gets there. On form 8895 you list your certified clientele income from whatever businesses you own. There ‘s a bunch of other lines on there that apply to specialize situations.
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On shape 8895, you figure out your qualify income. then multiply that by 20 %. That amount gets moved over to Form 1040 Line 13 ( for the 2021 mannequin, anyhow ) .
For exemplar, if you had $ 20,000 profits delivering for Doordash, Grubhub, Uber Eats, Instacart and early spear platforms, you can take a $ 4,000 income tax subtraction, whether or not you itemize .
That ‘s pretty huge .
here ‘s how it works. This is a special tax write-off for pass through business income .
What pass through means is that your business profits are personal income. You pay taxes on those profits as though they were any other character of personal income. This is called a pass through .
The IRS has a list of qualifications for what type of clientele qualifies. From everything I can see, delivering for gig economy companies like Doordash, Uber/Uber Eats, Instacart, Grubhub and others qualifies as qualified business income .
The Good News and Bad News of taxes for us self employed contractors.
here ‘s the good news. We get a distribute of tax breaks from our self employed income. You can start with deducting your standard or itemize deductions .
then you get your self-employment tax discount AND your Qualified Business Income deduction. Those two add up to more than a quarter of your freelance income .
then if you had extra retirement savings or health policy premiums, you have that much more that you can take off .
For income taxes, that in truth helps. A batch of drivers and gig workers can end up with extremely low income taxes thanks to these .
The bad newsworthiness is, of course, self employment tax. only one of these four items reduce that amount. And the early trouble is, your self employment tax is on every dollar of profit. There are no tax brackets or standard deductions here .
That hurts .
But if you had a profit, you should decidedly take advantage of the QBI and Self-Employment tax deductions. then check with your tax pro to see if the others apply to you .
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