4 Self-Employment Tax Benefits & Deductions That Could Save You Money
There are many benefits of being self-employed, but sometimes it can feel as though there are just as many challenges. Many business owners find staying abreast of tax laws and changes to be tedious and frustrating, so partnering with an expert is generally in your best interest. If you’re looking for some positives, consider these tax benefits and deductions to help make your tax bill a little lighter.
1. Qualified Business Income
Out of the 2017 Tax Cuts and Jobs Act was born the Qualiﬁed Business Income deduction or QBI. This tax break allows owners of select businesses, like S corps, partnerships, and sole proprietorships, to deduct up to 20% of their business’s yearly income on their personal tax return. However, to be eligible, an individual must make $170,050 or less, and joint ﬁlers must make less than $340,100 combined.1
2. Self-Employment Tax
Medicare and Social Security taxes that self-employed individuals pay are deductible as a self-employment tax. Unlike income tax, self-employment tax rates are 15.3% of net earnings (12.4% Social Security tax on the first $147,000 plus 2.9% for Medicare on the first $200,000 plus 3.8% on all self-employment income above $200,000). You can deduct half of this on your income taxes on your Form 1040 when tax time rolls around.2
3. Continuing Education
You’ve got to stay sharp to run a business, and luckily, you can catch a tax break for investing in yourself. Self-employed individuals can deduct qualifying work-related education from their tax bill. The central qualiﬁer states that expenses must maintain or improve the skills needed for your present work, such as classes, tuition, and supplies.
4. Retirement Savings
If you invest in a solo 401(k), then you may have a retirement-related tax deduction option. Contributions to a solo 401(k) or one-participant 401(k) can be tax-deductible. In 2022, the deductible sum is $61,000 ($20,500 as an employee + $40,500 as an employer) along with a $6,500 catch-up contribution if you’re over age 50. As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income (your net profit minus half your self-employment tax and the plan contributions you made for yourself). The limit on compensation that can be used for your contribution is $290,000 in 2021 and $305,000 in 2022.3
Running a business is hard enough, so why carry the burden of knowing all the tax rules and changes? As financial professionals, we’re here to help you navigate the changing laws related to your business! Feel free to contact our office at 614-300-9501 to speak with our business specialist.
This content is developed from sources believed to be providing accurate information. This information is for educational purposes only and is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. The firm providing this document is not affiliated with the Social Security Administration or any other government entity. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities.