All tax filers in the U.S. may claim a standard deduction rather than to itemize each deductible expense individually, even if you're self-employed. In fact, most self-employed people will get a higher benefit from taking the standard deduction. Unfortunately, though, this doesn't mean you can throw away all those receipts just yet. Even if you don't itemize personal deductions, you do need to track your business expenses.
Sole proprietors pay two types of taxes at once: business and personal. When you work for yourself, your business income is your salary. Self employed taxpayers complete Schedule C as part of their Form 1040 tax return each year, calculating the profit of the business for the year as the net of income less expenses. This value is then added to your total income for the year.
Business expenses are known as deductions, and serve to lower the overall taxable income for the business owner. This itemization is important, as sole proprietors bear the full tax burden for the business. Qualified deductions include office supplies and equipment; business-specific meals and travel; and the cost of office space and insurance. IRS Publication 535 outlines exactly which expenses are deductible.
Self-employed people may deduct health insurance premiums, contributions to small business retirement plans (SEP and SIMPLE IRAs, and 401k plans) and self-employment taxes. These deductions are separate from (and in addition to) business expenses and the standard deduction. Taxpayers may take all three types of self-employment deductions without itemizing any additional deductions.
Most people will find that the self-employment and business deductions cover most qualified expenses and additional itemization does not offer a benefit. Others may benefit from itemization if they had uninsured medical or dental expenses totaling more than 7.5 percent of adjusted gross income, were a victim of theft or natural disaster, or made large charitable contributions. In addition, some people are ineligible for the standard deduction. These include those who file separately from a spouse who itemizes deductions, those filing a short tax year due to a change in accounting, nonresidents and dual-status aliens.
There are number of resources to help the self-employed taxpayer determine how to track expenses and deductions. IRS Publication 334 offers a basic outline of accounting and taxpaying for self-employed people and small businesses. In addition, the Self-Employed Individuals Tax Center at IRS.gov provides web links to educational information, forms and other helpful information for small businesses (see Resources). Many people choose to hire an accountant or work with a tax preparer to ensure proper tax filing. Make sure any professional you hire has experience working with self-employment taxes.
Nola Moore is a writer and editor based in Los Angeles, Calif. She has more than 20 years of experience working in and writing about finance and small business. She has a Bachelor of Science in retail merchandising. Her clients include The Motley Fool, Proctor and Gamble and NYSE Euronext.