If you’ve read through this tax guide, by now you’ve come to figure out that most of your deductions for self employed work aren’t really deductions. They’re expenses. You use a Schedule C where you enter all of your income, and then you enter all of your expenses, deduct expenses from income, and that’s how you come up with your actual business income.
Most of what we talk about in this guide has to do with that income and those expenses. However, there are four things you need to know about as a self employed contractor when filing your taxes. These four things are things you can claim because you are self employed that can reduce your taxes. One of the beautiful things about these four items is, they are not part of the normal itemized deduction process. That means you can claim them whether or not you claim the standard deduction or you itemize.
Self Employed Health Insurance
If you are self employed and have to purchase your own health insurance, you can deduct that from your taxable income for income taxes. It will not reduce your profit and thus will not reduce your self employment tax. For example, say your Schedule C profits were $10,000 and you had $4,000 in qualified healthcare premiums. You would pay income tax on $6,000 (the difference). You would still pay self employment tax on the whole $10,000.
There are a number of limitations to this. You have to have earned a profit and you cannot claim more than what your profit was. If you were eligible for subsidized health care through your employer or your spouse’s employer, you do not qualify.
This deduction is taken on Schedule 1 that you would include with your tax form. Schedule 1 lists adjustments to income that don’t rely on whether you itemize your deductions. Some of the calculations can be a bit involved, so it’s better if you have help with your taxes on this deduction.
Retirement Savings for Self Employed Individuals
If you are saving for a retirement plan, you may have a nice advantage in being able to deduct some of those savings as a self employed person. The deductions go on the same Schedule 1 as health insurance premiums. This means it would only deduct your taxable income for income tax but would not impact self employment tax. I’m not going to try to explain what qualifies and what doesn’t. This is best to get with your financial planner or tax professional. You can also see IRS Publication 560.
Based on your income, you my also qualify for a tax credit to help you in your savings. It is called the Saver’s Credit. You could potentially get a credit back for between 10% and 50% of your retirement contributions. Understand the difference between a deduction and a credit. A deduction only reduces your taxable income by the amount. A credit is treated more like a payment that you already made. This is a non-refundable credit. What that means is that if the credit is greater than your tax bill, only the amount for the tax bill will be applied. Turbotax has a good explanation of the difference in credit types.
Qualified Business Income Deduction
If you had a profit on your Schedule C, you are likely able to deduct 20% of that profit from your taxable income. This is a deduction that goes on line 9 on your 1040 form.
This is a deduction that does not require itemization. It is a deduction that reduces taxable income for your federal income tax but not for your self employment tax. Using the example we used above where you had $10,000 profit on your schedule C. Taking this deduction would reduce your income tax income to $8,000. But you would still have to pay the 15.3% self employment tax on the entire $10,000.
Self Employment Tax Deduction
The deduction for self employment tax reduces is the one deduction that actually reduces both your self employment tax AND your income tax. Basically it’s a deduction that allows you to write off the ’employer half’ of your self employment tax.
If you are an employer, you have to pay half of the employee’s social security and medicare taxes. You can write that off as a business expense. This deduction was given as a way to level the playing field when you are self employed. You can’t write it off in Schedule C but there are two places where this deduction happens.
First, it happens when figuring self employment tax. You multiply your self employment income by .9235 (giving it a 7.65% deduction). So using the $10,000 profit example, that means your income is now considered to be $9,235. You multiply that by 15.3% ($1,413). That is the self employment tax you owe. You can then deduct half of that ($707) from your taxable income for income taxes. You do not need to itemize to take this deduction.
The Good News and Bad News of taxes for us self employed contractors.
Here’s the good news. We get a lot of tax breaks from our self employed income. You can start with deducting your standard or itemized deductions. Then essentially you can take about 27% of your self employment income on top of those deductions. For income taxes, that really helps. In fact, for a lot of drivers, that income tax deduction can mean zero INCOME tax bill.
The bad news is, of course, self employment tax. Only one of these four items reduce that taxable amount. And the other problem is, your self employment tax is on every dollar of profit.
But if you had a profit, you should definitely be taking advantage of the last two deductions. And then keep an eye out for if the others apply.
The Delivery Driver’s Tax Information Series
- Introduction to the Delivery Driver’s Tax Information Series
- Your Taxes are Based on your Profits, not Revenue
- Understanding your Revenue: Money In
- Understanding your Expenses: Money Out
- Filling Out Your Taxes
- Preparing for next year: How much should I save?