As an independent contractor or small business owner, it's critical to make the most of your business deductions. For every dollar you write off, you save 15.3 cents in self employment tax (Social Security and Medicare) plus up to 39.6 cents in income tax.
To help you reduce your tax liability and save as much money as possible, here's a look at five common mistakes related to small business deductions and a few tips on how to avoid them.
1. Using the Simplified Home Office Deduction
If you qualify for the home office deduction, the IRS gives you an option on how to calculate it. To save time, the simplified home office deduction takes the square footage of your home office times $5, but you can only claim up to $1500 with this deduction. Most small business owners or independent contractors actually spend more than that.
To save money, opt to use the regular method. With this option, you calculate the size of your home office as a percentage of your home's entire size. Then, you add up all your home's utility bills (electricity, heat, trash, water, etc) as well as rent payments or mortgage interest, and you multiply the total by the percentage you calculated.
That's your deduction. If it's more than $1500, you're saving money. Note that you can also include repairs that affect the entire home in this calculation. That includes everything from a new roof to painting the exterior of your home.
2. Only Claiming Contractors to Whom You Paid More Than $599
Under the IRS's rules, you only have to issue a 1099-MISC to contractors whom you paid $600 or more. Because of this, some business owners forget to deduct small payments issued to contractors. Whether you paid someone $50 or $598, it's important to note that on your tax return.
All of those payments add up, and they can save you money. Even if you don't have to issue the 1099, get the payee's Social Security Number or Employer Identification Number, and include those payments on your tax return.
3. Failing to Optimize Vehicle Deductions
As you know, when you use your vehicle for work, you get to deduct expenses on your tax return. However, you don't necessarily want to approach this write off the same way every year. Rather, you want to calculate all of the possibilities and claim the most valuable write off.
You can write off mileage. As of 2017, that is 53.5 cents times the number of miles driven. The other option lets you take all of your vehicle's expenses for the year (gas, repairs, etc) and multiple them by the percentage of time you use your vehicle for business compared to personal use.
Ideally, you should keep records for both scenarios. At tax time, you should calculate the deduction both ways, and you should take the larger write off.
4. Always Taking the Section 179 Deduction
Section 179 is a fabulous part of the tax code that applies to business purchases under $500,000. With this rule, you can write off the entire expense in the year of purchase rather than deducting its value slowly over time.
This saves you money right away, but that's not always the best approach to take. If you anticipate making more money in future years, you may want to only write off a portion of the expense and save the remainder for a future year.
5. Doing Taxes Yourself
Whether it comes to crunching the numbers or figuring out the most advantageous steps toward taking a Section 179 deduction, it helps to have a specialist working with you. If you are an independent contractor or a small business owner, you may want to outsource your accounting needs. As an added bonus, you can write off the cost of paying an accountant to handle your business taxes as a small business expense.
Give Jendrach Accounting a call today. We handle business taxes as well as individual income taxes, and we'd love to work with you.'