Self employment tax deductions can benefit self employed individuals and home business owners in several ways. First, half of the Social Security and Medicare tax withheld can be deducted from an individual’s total gross income. Second, individuals can use self employment tax deductions to subtract the cost of general business expenses, such as the costs for a home office, supplies, and health insurance. For taxpayers who receive both self employment income and wage income, the wage income is taxed first for Social Security and Medicare.
Since self employed individuals must pay both the employee and the employer portions of the Social Security and Medicare tax, they are allowed to deduct half of the total Social Security and Medicare tax as a business expense. In 2011, the Social Security tax rate was 13.3%, with 2.9% for Medicare and 10.4% for Social Security. Self employment tax deductions from the 2011 year were eligible for half of this value, or 6.65% or total gross income.
The deduction cannot be itemized and it must be subtracted from the gross income. Only income tax is affected by this deduction, and self employment earnings and self employment tax are not affected. Wage earners are not eligible for this deduction.
Additional self employment tax deductions include general business expenses, such as supplies or furniture for a home office, contract labor, or transportation mileage. Home office deductions can sometimes be tricky and require careful documentation, including maps with correct measurements, in the case of an audit. The percentage of space occupied by a home office in the total building will be the percentage that an individual is allowed to deduct from utilities, property taxes, or mortgage payments.
Phone and Internet usage costs can also be valid self employment tax deductions, but only the expense specifically used for business can be deducted. For example, if a home business accounts for 30% of Internet usage, then only 30% of the total Internet bill can be deducted as a business expense. Careful record keeping and receipts can help establish the business costs more clearly.
In some cases, self employment tax deductions will also include health insurance costs. If a self-employed individual pays for his or her own health insurance and is not eligible to join a spouse’s insurance plan, then health insurance costs can be deducted. Additionally, if that same individual also pays for a spouse’s or child’s health insurance, those costs can be deducted as well. This deduction is classified as a personal expense, rather than a business expense, but it is still available to the self employed.