Filing taxes when self-employed can lead to a heavier tax burden due to having to pay the employer's share of Medicare and Social Security tax along with your own. However, you have many ways to lower your taxes through subtracting your business expenses, taking advantage of business income tax deductions and looking into general credits and deductions that may be available. How you pay your estimated quarterly taxes can also lead to a refund or additional taxes due.
Make Accurate Estimated Tax Payments
An easy way to get a larger tax refund – or at least not get a surprise tax bill – is to estimate your yearly income and make quarterly tax payments of the right amount. When estimating your business income, you can subtract expected expenses to get your estimated net profit and then use various tax calculators online to determine the yearly tax due. You can also refer to last year's income if it's very similar.
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Divide that by four and make the payments to the IRS online or by mail each quarter. If you end up sending in extra or have additional deductions and credits, you'll get a tax refund later. Just avoid shortages as this can mean tax penalties and more money to pay at tax time.
Take the Home Office Deduction
If you're like many self-employed people, you have part of your home that you use as a main place of business regularly. For example, you might do all your work there on the computer or at least use the space to handle management and administrative tasks.
As long as you can meet its criteria, the IRS allows you to deduct this usage to lower your tax bill. For an easy deduction, measure your home office space in square feet, and if it's a max of 300 square feet, just multiply the area by $5 to get a home office deduction. If it's larger, consult Form 8829 to enter relevant home office expenses – such as utilities, rent, mortgage interest and insurance – in proportion to your home's size and calculate your home office deduction.
Deduct Other Business Expenses
To get a larger self-employed tax refund, you'll want to deduct all relevant business expenses as this will help you cut both self-employment tax and federal income tax. You do this on Schedule C, where you put all your income and then input information for 27 business expense categories.
As long as the expense is 100 percent for business, you can usually deduct the full amount for costs like advertising, office supplies, business insurance, licenses, relevant travel, utilities and office rent. Equipment expenses like computers and machinery may require accounting for depreciation over time, and you'll need to consider any personal usage for such items to deduct only the relevant business portion.
Consider Automatic Business Tax Deductions
The IRS offers a few automatic deductions for those who qualify that can make filing taxes when self-employed less painful. First, as long as you have a qualified business type and end up with a taxable income less than $163,300 when filing as single or $326,600 when filing jointly, you can deduct a maximum of 20 percent of your qualified business income from your adjusted gross income for the year. Another automatic deduction lets you deduct half your self-employment tax when your AGI gets figured.
Other Self-Employed Tax Refund Tips
Even though you're self-employed, keep in mind you could still benefit from various general tax deductions and credits available, especially if you report business income on a personal tax return. This means cutting your taxable income and potentially getting a bigger tax refund thanks to things like the standard deduction or itemized deductions, child tax credit, lifetime learning credit or saver's credit. If you itemize deductions, you can deduct things like various types of charity donations, out-of-pocket medical expenses, state/local taxes and gambling losses.
To have the best results getting a bigger self-employed tax refund, consider meeting with a tax professional who can help you take full advantage of all deductions and credits for which you qualify. If you do your taxes yourself, your software likely will walk you through all these deductions and credits and may offer live support for tax help.
- IRS: Estimated Taxes
- IRS: Topic No. 509 Business Use of Home
- IRS: Form 8829
- IRS: Schedule C
- NerdWallet: What Is the Qualified Business Income Deduction (QBI) & How Can I Get It?
- Investopedia: 15 Tax Deductions and Benefits for the Self-Employed
- NerdWallet: Tax Deductions Guide and 20 Popular Breaks for 2020