4 tax deductions you need to know if you are self-employed

Be clear in your understanding of how you can benefit from a work-for-yourself setup

The prospect of long term work-from-home life may be enticing to some and terrifying to others. Regardless of your feelings on the matter, 2020 is a year in which you'll likely want to know how you can take advantage of certain tax deductions related to the new realities of work -- particularly if you're self-employed or an independent contractor.

Continue Reading Below

A KILLER TAX BREAK COULD BE YOURS THIS YEAR IF YOU MAKE THIS 1 MOVE

Knowing the right tax deductions, and how to apply them on the most basic level, will create great benefit for you come tax time if you are careful with your record keeping. Below you'll find four of the most visible deductions that could ultimately impact how much tax you owe for the year.

1. Regular deductible business expenses

If you're self-employed, you also want to be sure you're keeping meticulous records of any business expenses incurred throughout the year. This means keeping receipts, screenshots, and any other evidence that shows a pursuit of independent income.

CORONAVIRUS IMPACTS SELF-EMPLOYED WORKERS MOST IN HARDEST-HIT STATES: REPORT

This includes office supplies, work-from-home setup materials, insurance, and anything else directly related to your business operations. It's also important to note that all of these expenses are applied against your independently earned income.

2. The home office deduction

For self-employed people who have worked at home this year, you can claim a home office deduction if you've used a portion of your home "regularly and exclusively, and as your principal place of business." If you use the simplified method, you'll be able to deduct $5 per square foot, up to 300 square feet, for a maximum deduction of $1,500.

HOME OFFICE DEDUCTIONS FOR THE SELF-EMPLOYED

You also have the option of using the "actual expenses" method, through which you'll need to keep track of specific expenses related to your home office, and add a proportionate share of your overall home expenses to figure your true deduction. In most regular cases, the simplified method will be easier to calculate and simpler to use.

3. Mileage deductions

If you have a car or truck, you'll be able to deduct expenses related to business travel (for example, visiting clients or traveling between clients). This doesn't include commuting, because the IRS sees the relationship between your primary home and principal place of business as a choice. If you choose to live far from your workplace, you won't receive any benefit come tax time.

UNEMPLOYED IN FOCUS AS LAWMAKERS CONSIDER NEW STIMULUS BILL

Similar to the home office deduction, the IRS gives you a choice of two calculation methods: the "standard mileage" method or the "actual expenses" method. Under the standard mileage method, you simply multiply the IRS standard rate of 57.5 cents per mile (2020) by the number of business miles driven over the course of the year. To provide evidence of miles driven, you could take odometer readings at the beginning and end of the year, and then subtract out any non-business-related miles.

Under the actual expenses method, you'll need to carefully track any expenses related to the use of your business vehicle -- including registration, repairs, depreciation, and gas. In some cases, this can lead to a significantly higher deduction. But this method also requires a lot more work to calculate accurately.

4. Half of self-employment tax

Before you calculate your tax liability due on self-employment income, you're eligible to deduct one half of self-employment tax. This represents the share of Social Security and Medicare Tax that your employer would have deducted on your behalf if you were a W-2 employee.

GET FOX BUSINESS ON THE GO BY CLICKING HERE

This is in place to level the playing field for independent workers. Employers get a deduction for the 7.65% tax they pay for their employees. It's only fair to give self-employed workers that same deduction as well.

Be mindful of your records

2020 is a year in which good record-keeping is as important as ever. Luckily, it's also easier than ever to track your expenses with the variety of business and accounting tools that exist in the marketplace. As the year progresses, it's best to be very deliberate in determining how your money is allocated and to ensure that you will actually receive deductions for amounts you direct toward your business. The landscape of work is continuously changing, and it will reward those who adapt by reading the fine print.

CLICK HERE TO READ MORE ON FOX BUSINESS