How to Get Money Back on Taxes When Self-Employed
Maximize your tax refund as a self-employed individual by exploring deductions, credits, and strategies for amending past returns.
Self-employment offers flexibility and independence but comes with the responsibility of managing your own taxes. Understanding how to maximize tax refunds is essential for financial efficiency. By leveraging deductions, credits, and other opportunities, self-employed individuals can reduce taxable income and potentially increase their tax refund.
Deductible Business Expenses
Deductible business expenses are a critical part of managing taxes for the self-employed. The IRS allows deductions for ordinary and necessary expenses directly related to running a business, such as office supplies, travel, and professional services. For example, using a portion of your home exclusively for business may qualify you for the home office deduction, calculated using either the simplified or regular method, depending on which provides greater benefit.
Travel expenses, including airfare, lodging, and meals incurred during business trips, are also deductible. Keeping detailed records is essential, as the IRS requires documentation. Vehicle expenses can be deducted using the standard mileage rate or actual expenses method. For 2024, the standard mileage rate is 65.5 cents per mile.
Marketing and advertising costs, such as online ads, print media, and promotional events, are deductible as long as they are business-related. Fees for accountants, lawyers, or consultants are also deductible, as these services are essential to business operations.
Depreciation for Equipment and Property
Depreciation accounts for the gradual wear and tear or obsolescence of business assets, reducing taxable income. The IRS uses the Modified Accelerated Cost Recovery System (MACRS) to determine depreciation schedules based on asset class life. For instance, computers typically have a five-year class life, while office furniture usually has a seven-year class life.
Section 179 allows immediate expensing of qualifying property, up to $1,160,000 for 2024, with a phase-out beginning at $2,890,000. Bonus depreciation, which permits accelerated deductions, allows 80% depreciation on qualifying property in 2024, down from 100% in previous years. These provisions benefit those investing heavily in equipment by providing immediate tax relief.
Health Insurance Premium Deductions
The IRS allows self-employed individuals to deduct health insurance premiums for themselves, their spouses, dependents, and children under 27. The plan must be established under the business, and you must not have access to another employer-subsidized plan. This deduction, reported on Schedule 1 of Form 1040, reduces adjusted gross income (AGI), which can impact eligibility for other deductions and credits.
The deduction is limited to net self-employment income, meaning it cannot be claimed in years when the business incurs a loss. Qualified long-term care insurance premiums are also deductible, subject to age-based limits, which range from $480 for individuals 40 and younger to $5,960 for those over 70 in 2024.
Retirement Plan Contributions
Contributing to a retirement plan is a strategic way to reduce taxable income while preparing for the future. Options like the Simplified Employee Pension (SEP) IRA allow contributions of up to 25% of net earnings from self-employment, capped at $66,000 for 2024.
The Solo 401(k), designed for business owners with no employees other than a spouse, permits both employee and employer contributions. For 2024, the elective deferral limit is $22,500, with an additional $7,500 catch-up contribution for those 50 and older. Combined with employer contributions, the total limit reaches $66,000 or $73,500 for eligible individuals. Solo 401(k) plans also allow Roth contributions, offering tax-free withdrawals in retirement.
Refundable Credits
Refundable tax credits can result in a refund even if tax liability is reduced to zero. The Earned Income Tax Credit (EITC) benefits low- to moderate-income workers and is based on income, filing status, and the number of qualifying children. For 2024, the maximum credit ranges from $600 for those without children to over $7,000 for those with three or more children. Self-employed individuals calculate eligibility based on net earnings from self-employment.
The Premium Tax Credit (PTC) helps offset health insurance costs for those purchasing coverage through the Health Insurance Marketplace. Eligibility is based on income relative to the federal poverty level. Advance payments of the PTC must be reconciled with actual income on the tax return, and discrepancies may require repayment.
Overpayments on Quarterly Taxes
Self-employed individuals must make quarterly estimated tax payments to avoid penalties. Overpayments occur when more taxes are paid than owed, leading to a refund at year-end. Payments are calculated using IRS Form 1040-ES, based on expected income, deductions, and credits. Many use prior-year tax liability as a baseline, paying 100% of the previous year’s taxes or 110% for higher incomes to avoid penalties.
To avoid overpaying, adjust quarterly payments as income fluctuates. This can be done by recalculating taxes mid-year or using the annualized income installment method. Accurate financial records and professional advice help ensure precise projections and efficient cash flow management.
Amending Prior-Year Returns
Amending prior-year tax returns allows self-employed individuals to recover money if errors or missed deductions are identified. The IRS permits amendments using Form 1040-X within three years of the original filing date or two years from the date taxes were paid, whichever is later.
Common reasons for amending include missed deductions, such as depreciation or home office expenses, or misreported income. For example, a freelancer who failed to deduct $5,000 in software expenses can amend their return to reduce taxable income and potentially receive a refund. Supporting documentation is required to substantiate changes.
Amendments can also address changes in filing status or retroactive tax benefits resulting from new legislation. While the process can be complex, the potential financial benefits often outweigh the effort, especially for significant errors or omissions.