What Are Tax Deductions For Businesses Of One
Maybe you've recently been laid off and are considering brancing out on your own, or maybe you've been working on a side hustle that's now generating enough income to cover your living expenses (and maybe a little more). In any case, it's crucial to ensure that you're taking advantage of every deduction that you're legally entitled to.
One of the main ways businesses can reduce their tax burden is through using credits and deductions. These are reductions in the amount of tax you owe, and they can be a powerful tool for reducing the overall cost of doing business.
When you’re running your own business, your time is spent on ensuring its growth. But tax season can get in your way. If you want a guide on what to know about business of one taxes, deductions, and credits, this blog can help.
What should my business of one know about taxes?
The amount that businesses of one (also known as sole proprietorships) pay in taxes will depend on various factors, including the business's income, expenses, and the specific tax credits and deductions your business is eligible for.
Generally, businesses of one are required to pay income tax on their business income and self-employment tax (Social Security and Medicare) on their net earnings from self-employment. The first $147,000 of net earnings from self-employment are only subject to the Social Security portion, about 12.4% of the tax in 2022. After that, the tax rate becomes 15.3% for most individuals.
In addition to income tax and self-employment tax, businesses of one may also be required to pay state and local taxes, such as sales tax or property tax.
It's important to note that your specific tax obligations will depend on the business's specific circumstances. For example, the business's location, industry, and specific expenses may affect its tax liability.
Some more tax tips for your business of one are:
- Tax credits are valuable: Tax credits are generally more beneficial than deductions because they reduce your tax liability dollar-for-dollar. For example, if you have a $1,000 tax credit, it will reduce your tax bill by $1,000. On the other hand, a deduction only reduces your taxable income, so the benefit is may be less substantial.
- There are many different credits and deductions available: There are a wide variety of credits and deductions available to businesses, and they can be based on things like your industry, the type of business you operate, and the specific expenses you incur. Some common examples include credits for hiring certain types of employees, deductions for business-related travel and entertainment expenses, and credits for investing in energy-efficient equipment.
- Credits and deductions have specific requirements: Just because tax credits and deductions exist to give you a potential refund, doesn’t mean you immediately qualify for most. For example, you may need to maintain documentation to prove that you are entitled to the credit or deduction, or you may need to meet certain criteria (such as hiring a certain number of employees).
- Keep track of your credits and deductions: You should track all documents and receipts related to your business during the year. That’s because when it comes to discerning which credits or deductions you qualify for, having your documents in order can help you navigate the process. This helps ensure you get the maximum benefit from these tax breaks and minimize your overall tax burden.
- Keep good records: As a business of one, it's important to keep track of your income and expenses throughout the year. This will help you to accurately report your business income and expenses when you file your tax return. Keep receipts, invoices, and other documentation to support your income and expenses.
- Know your tax obligations: As a business of one, you'll need to pay self-employment tax (Social Security and Medicare) in addition to any income tax you owe. You'll also need to file a tax return to report your business income and expenses.
- Take advantage of deductions: As a business of one, you may be eligible for a wide variety of deductions that can help to reduce your tax liability. Some common deductions for businesses of one include home office expenses, business-related travel and entertainment expenses, and the cost of business-related equipment and supplies.
What credits and deductions apply to my business of one?
As a business of one, you may be eligible for a variety of tax credits and deductions. Here are a few examples of credits and deductions that you may be able to claim:
- Home office deduction: If you use a part of your home exclusively for business purposes, you can claim a home office deduction for a portion of your mortgage or rent, utilities, insurance, and other related expenses.
- Business-related travel and entertainment expenses: You can deduct the cost of business-related travel and entertainment expenses, such as meals and lodging while traveling for business, or the cost of entertaining clients.
- Business-related equipment and supplies: You can deduct the cost of business-related equipment and supplies, such as computers, office furniture, tools, supplies, and other items that you use in your business.
- Self-employed health insurance deduction: If you're self-employed and pay for your own health insurance, you can claim a deduction for the cost of your premiums.
- Self-employment tax: As a business of one, you'll need to pay self-employment tax (Social Security and Medicare) in addition to any income tax you owe. You may claim a deduction for a portion of your self-employment tax.
Why should a business of one use a tax professional to file taxes?
Your business is your expertise. With the regular changes in tax laws, staying up to speed in that area is challenging. For that reason, there are several reasons why a business of one might consider hiring a tax professional to file their taxes:
- Expertise: Tax professionals are experts in tax law and can provide valuable guidance on minimizing your tax liability. They can help you to identify credits and deductions that you may be eligible for, and ensure that you're taking advantage of all available tax breaks.
- Accuracy: Filing your own taxes can be complex, and it's easy to make mistakes. A tax professional can ensure that your tax return is accurate and complete, which helps avoid potential penalties or fines.
- Time-saving: Preparing your own tax return can be time-consuming, especially if you need to become more familiar with the process. A tax professional can handle the entire process, freeing up your time to focus on running your business.
- Peace of mind: Working with a tax professional can provide you with the peace of mind that your tax return is being handled correctly. This can help you to avoid any potential headaches or stress during tax season.
- You can save money using a tax professional: A tax professional has the necessary experience to help you get the most out of your tax return. By maximizing potential tax credits and deductions, you’re minimizing your tax expenses, and by extension, you may end up with more money despite hiring a tax pro.
How can Taxfyle help?
Finding the right tax professional for your needs can be challenging. With Taxfyle, we get rid of that issue. We have a network of thousands of CPAs and EAs each uniquely experienced to handle any tax need.
This tax season, focus on what matters: your business. When you choose Taxfyle, you choose having the peace of mind knowing a Pro handles your taxes. The best part: they do the work for you. Don’t worry about filing your taxes yourself, get a Pro’s help this tax season.