Self-Employed Taxpayers – Advantages/ Disadvantages

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Post-recession many realized that putting all eggs in one basket is not a good idea. Many started considering starting small, part-time home businesses with a future vision to upgrade it to full-time home business once it is profitable. It’s fun to be your own boss; to work for yourself; to be able to do what you’ve always wanted.

Being self-employed comes with quite a few advantages and disadvantages when it comes to income tax payment. Check out a few most important pros and cons.

The Tax Advantages You Enjoy As Self-Employed Individual

The self-employed enjoy the following advantages with income tax:

1. Running expenses deductions – equipment purchased during the year for the launching an running your business can be claimed 100% as “expenses”.

2. Health coverage deductions – checkout line 29 on the Form 1040 and you will find that self-employed people can reduce their AGI (adjusted gross income) by deducting the amount they paid a premium for health care insurance. You may also be eligible under “premium subsidy”.

3. Retirement plans – as a self-employed person, you may be able to set up a SIMPLE, SEP and 401(k) saving plan.

4. Employ family and save on taxes – children under 18 can be employed in your home business and their payment be listed under expenses. This will reduce your income for employment tax purposes, while at the same time shift assets to the child.

5. Simplified deduction for home office – there is a tax deduction offered for the self-employed home office – of $5 per square foot up to a maximum of 300 sq ft. This rule first appeared in the 2013, and it is continuing in the year 2014.

6. You have free help available – the SBA (Small Business Administration), IRS volunteers for home businesses under $51,000/ annually, and SCORE can help you with your taxes for free.

7. Mileage is tax deductible – while employees cannot deduct the amount incurred for commuting to and from their work place, as a self-employed person you can. The rate is 56 cents/ mile for 2014 and you can add to it the toll payments and parking costs.

8. Travelling is deductible – as long as the period earmarked for business is longer than the “vacation time”, the expenses are deductibe:

a. 100% on airfare
b. 50% on hotel costs
c. 50% of food costs

The Tax Disadvantages For A Self-Employed Individual

There are more advantages than disadvantages for the self-employed in the coming year, i.e. 2015.

1. Calculating taxes might get difficult – for small home businesses and freelancers, keeping track of all payments and expenses can become cumbersome and expensive. You need to maintain accurate books to ensure that you file under the right tax clauses and do not lose money.

2. Health benefits for employees – you would have to make payments for your employees.

Measures To Maximise Tax Benefits

1. Increase Income To Avoid Social Security Taxes – you need to have an income of 118,500 in 2015 to side-step the 12.4% Social Security tax.

2. Buy equipment this year – office equipment is 100% deductible. Old equipment can written off using the clause of section 179 deduction.

3. Hire a professional – the earlier you do it the better. You need to set up your business on the correct foundation so you would not attract excess taxes later on.