Some people have to pay federal contributions on their social security benefits. This generally happens when you have any other significant income, such as wages, self-employment interest, dividends, or other taxable income, that must be reported on the tax return, in addition to benefits.
No one pays federal income tax on more than 85% of your social security benefits as limited by the Internal Revenue Service (IRS) rules. If you:
- File a federal tax return as an “individual” and your combined income*
o Between $25,000 and $34,000, up to 50% of your benefits may be taxable.
o Greater than $44,000: up to 85% of your benefits may be taxable.
- You are married and you and your spouse file separate tax returns, you will most likley pay taxes on your benefits.
In January of each year, you will receive a Social Security Benefit statement (Form SSA- 1099) detailing the amount of benefits you received during the previous year you can use this statement of benefits when you complete your federal tax return to see if your benefits are taxable.
If you need to pay taxes on your social security benefits, you can make quarterly payments to the Internal Revenue Service or choose to have federal taxes deducted from your benefits.
Tax Deductions and Benefits for the Self-Employed
A review of the most common self-employed taxes and deductions is necessary to help inform you of necessary changes to your business withholdings and income changes
- Home Office
The home office deduction is one of the more complex deductions. In short, the cost of any workspace that you use regularly and exclusively for your business, regardless of whether you rent or own it, can be deducted as a home office expense. You are basically on the honor system, but you should be prepared to defend your deduction in the event of an IRS audit. One way to do this is to prepare a diagram of your workspace, with accurate measurements, in case you are required to submit this information to substantiate your deduction, which uses the square feet of your workspace in its calculation.
In addition to the office space itself, the expenses you can deduct for your home office include the business percentage of deductible mortgage interest, home depreciation, property taxes, utilities, homeowners insurance, and home maintenance that you pay during the year. If your home office occupies 15% of your home, for example, then 15% of your annual electricity bill becomes tax deductible. Some of these deductions, such as mortgage interest and home depreciation, apply only to those who own rather than rent their home office space.
You have two choices for calculating your home office deduction: the standard method and the simplified option and you don’t have to use the same method every year. The standard method requires you to calculate your actual home office expenses. The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than 300 square feet and you cannot deduct depreciation or home-related itemized deductions.
If you want to make sure you’re claiming the largest home office deduction you’re entitled to, you’ll want to calculate the deduction using both the regular and simplified methods. If you choose the standard method, calculate the deduction using IRS form 8829, Expenses for Business Use of Your Home.
- Health Insurance Premiums
If you are self-employed, pay for your own health insurance premiums and are not eligible to participate in a plan through your spouse’s employer, you can deduct all of your health, dental and qualified long-term care insurance premiums. You can also deduct premiums that you paid to provide coverage for your spouse, your dependents and your children who were younger than 27 at year-end, even if they aren’t dependents. Calculate the deduction using the Self-Employed Health Insurance Deduction Worksheet in IRS publication 535.
- Travel
To qualify as a tax deduction, business travel must last longer than an ordinary workday, require you to get sleep or rest and take place away from the general area of your tax home (usually, outside the city where your business is located).
Further, to be considered a business trip, you should have a specific business purpose planned before you leave home and you must actually engage in business activity such as finding new customers, meeting with clients or learning new skills directly related to your business while you are on the road. Handing out business cards at a bar during your friend’s bachelor party won’t make your trip to Vegas tax deductible. Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws scrutiny from the IRS.
Deductible travel expenses include the cost of transportation to and from your destination (such as plane fare), the cost of transportation at your destination (such as car rental, Uber fare or subway tickets), lodging and meals. You can’t deduct lavish or extravagant expenses, but you don’t have to choose the cheapest options available, either. You, not your fellow taxpayers, will be paying the bulk of your travel costs, so it’s in your interest to keep them reasonable.
Your travel expenses for business are 100% deductible, except for meals, which are limited to 50%. If your trip combines business with pleasure, things get a lot more complicated; in a nutshell, you can only deduct the expenses related to the business portion of your trip and don’t forget that the business part needs to be planned ahead.
- Interest
Interest on a business loan from a bank is a tax-deductible business expense. Credit card interest is not tax deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is tax deductible. That said, it’s always cheaper to spend only the money you already have and not incur any interest expenses at all. A tax deduction only gives you some of your money back, not all of it, so try to avoid borrowing money. For some businesses, though, borrowing may be the only way to get up and running, to sustain the business through slow periods, or to ramp up for busy periods.