Lesser-Known Small Business Tax Deductions

Tax season is stressful for everyone from those who file taxes to those in the tax and accounting industry who prepare and review the taxes. It is especially stressful, however, for small businesses and independent contractors. Independent contractors can be thought of essentially as single-person small businesses; they are the sole proprietors of a one-man shop. Independent contractors provide services for individuals or businesses but are not employees of the individual or business. The independent contracting employment structure has benefits and drawbacks that are largely dependent on a person’s circumstances. If one is not prepared and knowledgeable about the rules of independent contracting, however, tax season can become a serious drawback. This is because independent contractors do not have taxes withheld from their pay as regular employees do; as a result, they usually have a relatively higher proportional tax bill than their regular employee counterparts. If one plans accordingly and sets aside portions of independent contracting income aside throughout the year, the extra taxes are expected and manageable. For those independent contractors—first-time and otherwise—who fail to prepare, though, the tax bill can be quite a shock. The good news is that there are several tax deductions available to independent contractors, as well as small businesses, that are not available to regular employees. The most commonplace of these deductions—home office, office supplies, equipment and mileage—are to some degree well understood. Here is a look at some of the lesser-known small business tax deductions that a Zanesville tax services professional can help identify and quantify.

Software

This deduction is relevant for both individual independent contractors and multiple-person small businesses. Computer software that is integral to a business’s work can be completely deducted from a business’s taxes the year it is purchased. This tax break is enough incentive for many independent contractors and small businesses to invest in the latest industry-specific software. A related tax break involves magazine subscriptions: any business or industry-related subscriptions can also be fully deducted.

Phone Bill

No, personal cell phone bills are not tax deductible for independent contractors and small businesses. Business-related calls, however, are tax deductible. One way to assess the amount of this deduction is to look at a phone statement and identify the number of calls and minutes were devoted to business and deduct the specific associated charges. Another way to claim this deduction is to figure out what percentage of a total phone bill was generated by work-related calls and deduct that percentage of the overall phone bill.

Retirement Contributions

As discussed earlier, independent contractors do not have taxes withheld in the same manner as regular employees; they also often do not have the option of contributing to a company-sponsored retirement plan. To address this, the IRS allows those who are self-employed to deduct from their taxes any retirement contributions they make.

Social Security

Again, independent contractors have to pay their social security taxes in one lump sum (or 4 quarterly sums), as opposed to having a little deducted at a time as regular employees do. The good news is that half of the 15.3% social security tax on a person’s total income is deductible for self-employed workers.

Others

There are other tax deductions, like insurance premiums and even gifts that are potentially available to independent contractors. A professional tax consultant can help identify exactly the deductions that a person is entitled to. It is important to remember, however, that the best thing one can do to ensure they receive their deductions is to keep and save detailed records of all work-related and personal expenses. Good record-keeping will make an accounting professional’s job—and the contractor’s tax savings—that much easier.