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How to offset self employment tax

how to offset self employment tax

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Business Expenses

You can write off most of your business expenses on Section II of Schedule C. This includes the business use of your car, equipment and supplies, advertising, insurance, interest on business loans, and legal fees and expenses. If you have employees, their wages and benefits are deductible too. The IRS says you can deduct any expenses that are "ordinary and necessary" -- meaning they're helpful for your business and accepted as standard in your profession.

Home Office

If you use part of your home for business, you can take the home office deduction. To qualify, you have to use that part of your home regularly and exclusively for business. It has to be your primary place of business -- where you meet clients, or where you handle all your administrative work, for instance. You can take a flat deduction of $5 per square foot for the area devoted to business, or take a percentage deduction. If, say, 9 percent of the square footage is devoted to business, you can write off 9 percent of your mortgage interest, utilities and property taxes.

Cost of Goods Sold

If you sell products -- like cosmetics, jewelry or baked goods, for example -- the deduction for the cost of goods sold is separate from other business expenses. To calculate it, first take the cost of your inventory at the start of the year. Then add the cost of adding to your inventory -- raw materials, finished goods, parts and labor, not counting payments for your own labor. Total up all those expenses and subtract the value of your year-end inventory to get the cost of goods sold.

Form 1040

After you've completed Schedule C, don't forget the deductions for the self-employed available on Form 1040. For example, you can write off 50 percent of the self-employment tax you pay for the year. If you pay for health insurance, you may be able to deduct the entire cost of covering yourself, your spouse and your dependents. This is only an option if you couldn't get coverage through a spouse's or dependent's employer. If, say, you marry Sept. 1 and your spouse can get you coverage, you can only take the deduction for January through August.

Category: Taxes

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