Filing taxes when you’re self-employed is tough.
You have to pay more than your W-2 employed peers, and you have to withhold that increased tax burden from your own paycheck rather than having an employer do it for you. If you don’t, you may find yourself scrambling to come up with a huge amount of cash before April 15.
As you file your taxes, be sure to check on these commonly overlooked self-employed tax deductions. They’ll help you lower your tax burden whether you did well with your withholding or not.
1- Health Insurance Premiums
You may be able to deduct your health insurance premiums from your income–as long as you and your spouse are not eligible for healthcare coverage from an employer. Eric Nisall, accountant and creator of the online course Bookkeeping for Bloggers, stresses this point.
“Even if one [spouse] is eligible, it eliminates the ability of the other to claim the Self-Employed Health Insurance Deduction,” he says. “But, they can still deduct this expense if they itemize.”
If you are eligible for this deduction, be sure to take it. It can significantly lower the base on which your taxes are calculated.
The insurance policy must be in the sole proprietor’s name. Your spouse, dependents and children under age 26 can be covered by the plan—and their portion of the premiums are deductible, too.
Let’s say you paid $7,500 in insurance premiums in 2017. But you only made $6,000 in profit. You can deduct $6,000 of the premium, but not the other $1,500. If you earned $7,500 or above, you can claim the whole of your insurance premiums for the year as a deductible expense.
Where to input this information: Line 29 of your 1040. You can find further details in the 1040 instructions on page 27.
2 – Give Yourself Per Diem When You Travel
If you’re traveling for business, you can deduct a portion of the cost of food and incidentals while you’re away. You can do this by holding onto every last receipt and deducting 50% of your food costs on your Schedule C.
However, if you’re a sole proprietor, it may be easier to claim the federal Meals & Incidental Expenses (M&IE) rate. This is the rate the federal government pays their employees when they travel to different locations around the world. Each rate is set based on the economy of the area you visited. There’s a higher M&IE rate for San Diego than Pittsburgh, for example.
Normally when employees travel, their company will give them a per diem—a set amount of money to spend on food and incidentals while they’re out of town. Because you’re a sole proprietor, the IRS knows you don’t have an employer to issue that per diem. That’s why they allow you to claim the federal M&IE rate as a business expense on your return.
You can look up the rate for different business destinations here. Make sure you’re looking at current year rates as you file your tax return, and remember that the rate will be abbreviated for the day of arrival and departure.
Also keep in mind that if you’re a big spender, you’re not allowed to deduct more than the federal M&IE rate for each day you’re in town—even if you spent a ton of money on steak and champagne.
Where to input this information: Line 24b of your Schedule C. You can find further details in the Schedule C instructions on page 9.
3 – SEP IRA Contributions
Contributions to SEP IRAs are tax deductible. When you’re making your contributions, keep in mind that you may not know how much you’re allowed to stash in the account until filing your return for the respective tax year.
“One bad month at the end of the year can make all previous deposits ‘excess contributions,’” explains Nisall.
Excess contributions are subject to an excise tax. According to the IRS,
The contributions you make to each employee’s SEP-IRA each year cannot exceed the lesser of:
• 25% of compensation, or
• $56,000 for 2019 ($55,000 for 2018 and subject to annual cost-of-living adjustments for later years).SEP Plan FAQs – How much can I contribute to my SEP? via IRS (2019)
If you’ve already saved too much, you can withdraw the excess contributions before the filing deadline for your federal return in order to avoid the excise tax.
As a first step, figure out how much you contributed to your SEP IRA. Hopefully you’ve been keeping good records!
Then, enter your information on the worksheet found on page 22 of Pub 560. This worksheet will help you figure out the maximum amount that you’re allowed to deduct. Once you have completed the worksheet, you’ll enter your deduction on your 1040, which helps lower your taxable income.
Where to input this information: Line 28 of your 1040. Use Pub 560 to figure out your maximum deduction. You should not enter anything on your Schedule C about your SEP IRA unless you have employees and made contributions to their SEP IRA accounts.