Advantages and Disadvantages to Being Self-Employed
There is a general misconception that once you become self-employed, you can write off all your meals as a business expense, take your friends out to events and claim that as a cost of running a business, deduct all your travel and transportation expenses, or write off the cost of your entire home as a home office because you work from home.
And although you cannot write all the meals, entertainment events and home costs, being self-employed does provide some tax advantages:
- You can set up and deduct contributions to a self-employed retirement plan. In some cases, you can make as much as $61,000 (or even more) in tax-deductible retirement plan contributions.
- You can deduct self-employed health insurance premiums (if not paid via spouse’s employer-sponsored plans)
- You can deduct business meals
- You can claim 100% first-year bonus depreciation on a heavy SUV, pickup, vans
- You can claim home office deduction even if you have another place of business (exceptions apply)
- You can claim 20% Qualified Business Income Deduction, again, exceptions apply
- You can choose to be organized as an entity other than sole proprietorship to get additional tax write-off’s and avoid paying self-employment taxes.
While there are many tax and non-tax advantages of being self-employed, you should also be aware of the following disadvantages before starting your self-employment journey:
- You will need to pay for things that were previously covered by your employer. Items like health insurance, retirement plan contributions, company-paid trips, company car, life insurance, disability insurance – 100% of these will now need to be covered by you.
- Self-employment tax is expensive – 15.3% tax is calculated on the first $147,000 of your income from self-employment. And that’s NOT your income tax, that comes separately!
- Increased risk of audit – it’s not a secret that a tax return with Schedule C (self-employment schedule on your income tax return) is subject to more scrutiny than a tax return with W-2 income only.
If you are self-employed or planning to become self-employed and are looking to reduce your self-employment taxes and increase deductions available to you, you can reach out to us via our New Client Intake Form for a free tax planning strategy session.