Jenieva Bacchus, CPA
Philadelphia, PA- Self-employment not only offers control over your time, arguably your most precious resource, but also provides a myriad of tax benefits that are not available to traditional employees. Following are snippets of five tax advantages available to self-employed individuals.
Business Expenses Deduction
Self-employed individuals are legally allowed to deduct expenses incurred in order to produce their income. For example, as a Turo Host, whereby you list your vehicle on a shared platform that targets potential customers who are looking for vehicle rentals. If structured correctly, you may be able to deduct the lease payment of the vehicle listed, or take advantage of the depreciation expense deduction for the car/SUV that you own, along with other costs such as insurance, tolls, cleaning and maintenance etc.
20% Pass-Through Deduction
Small business owners can generally take a 20% deduction on business income that is reported on their personal tax return, also known as pass-through income. This deduction is not available to corporations. There are certain circumstances where the deduction is disallowed.
Employees usually have both federal and state income taxes withheld from their paychecks by their employer. In contrast, self-employed individuals normally pay “estimated taxes” directly to the IRS, quarterly. Therefore, self-employed individuals get to keep their earned dollars for a while longer before remitting to the IRS.
The Tax Cuts and Jobs Act suspended the deduction for work-related expenses for employees for the years 2018 through 2025. Prior to this Act, employees were allowed to deduct certain expenses such as work-related driving expenses. However, these deductions are still available to the self-employed individuals.
Retirement Plans and Solo 401K Plans
Today, there is still a widely accepted misconception that self-employed individuals are unable to access beneficial retirement plans. Contrary to popular belief, there are various types of Retirement Plan choices available to the self-employed. Often, these plans can be used to shelter a substantial part of their income, enabling them to shift taxes to a later date.
These are just a few of the tax advantages available to self-employed individuals. If you have a passion that you would like to pursue full time, and are thinking of transitioning to self-employment, be sure to do your own research.