7 Tax Deductions Allowed For Self-Employed Individuals

(Last Updated On: August 27, 2021)

It’s no doubt that most people around the world are turning to self-employment businesses. Self-employment can be one of the best ways to earn a living. However, it requires persistence, dedication, and sacrifice to start and run a self-employed venture. Self-employment allows you to be your own boss—you get to decide your working schedule, and more importantly, you get to enjoy valuable tax deductions.

This article walks you through some tax deductions allowable for self-employed individuals. But before that, it’d be a good idea to understand what self-employment is. Read on to get enlightened.

What Is Self-Employment?

Self-employment is the practice of working for oneself rather than for an employer. This means self-employed individuals aren’t under any employers and don’t earn any salaries. They earn money by working for themselves. Examples of self-employed individuals include freelancers, independent contractors, farmers, and sole proprietors. 

What Is A Tax Deduction?

A tax deduction is an amount of money that the national revenue authority allows you to deduct from your total taxable income. This puts you under a lower income tax bracket, reducing the amount of tax you pay to the government. Essentially, a tax deduction is a tax allowance that’s legally accepted to help reduce the tax burden.

Allowable Tax Deductions For Self-Employed

Working as a self-employed allows you to claim a variety of tax write-offs. Some of these incentives include tax deduction allowable on:

1. Cost Of Assets

Cost is the amount of money spent to purchase an asset and any other incidental costs like transport and insurance. The cost of an asset can be charged on its useful period through a process known as depreciation. 

Depreciation is the loss in value of an asset, and it’s treated as an expense to the business. So, depreciation reduces the amount of tax payable. In other words, depreciation is an allowable tax expense. However, to better understand how the different types of assets can affect your taxable income, you need to understand some of the asset write-off rules developed by the government. 

2. Home Office

When you conduct your business from your house, then your home becomes your office. In such a case, you’re entitled to a home office tax deduction. However, to qualify for this deduction, you must regularly and exclusively use your house or part of it for business purposes. 

Some of the eligible expenses for home office deductions include utility costs, a portion of the rent, mortgage interest, repair and maintenance, property taxes, and much more.

3. Private Vehicle

Sometimes, you can use a private vehicle to attend to your business-related concerns. Some of these matters may include delivering products to clients or traveling to attend business meetings. So, if you use your vehicle to attend to business issues, you can take advantage of deductions available for vehicle mileage and other related expenses like wear and tear.

There are two options for vehicle-related tax deductions. The first option is the standard mileage that allows you to make deductions based on the number of miles you’ve traveled using your personal car to address business matters. The second type is the actual option that allows you to claim deductions based on real costs of depreciation, fuel, car maintenance, and other related expenses. 

4. Health Insurance Premiums

Another tax-allowed deduction entitled to self-employed individuals is on health insurance premiums. The revenue authority allows you to deduct the total cost of health insurance premiums for yourself and your dependents like your spouse and children. This amount is deductible from the total taxable income, thus allowing you to pay less tax. 

5. Professional Development

Though there are several ways of promoting one’s skills and knowledge, the most common way is through education. Expanding your knowledge is one of the ways to help you stand out from your competitors. 

So, if you’re a professional and decide to go back to school, you can claim a professional development or a continuous education deduction. However, you must confirm that you’ve used business funds to settle your school fees and other related expenses. 

6. Business Insurance

The future is always uncertain. For that reason, it’s a good idea to protect your business against eventualities like fire and theft. That’s where payment of insurance premiums comes in. Some of the assets you can consider insuring include business vehicles, buildings, and inventories. So, if you’ve insured your business, you can claim your business insurance tax deductions.

7. Retirement Scheme Contributions

One of the best ways a self-employed individual can take care of their future is by establishing an old-age retirement plan. A retirement plan is a practice of setting aside some amount of your business profits and save them in a retirement scheme.

A retirement saving plan ensures you remain financially stable even after retiring or when you won’t be productive enough. Apart from taking care of your old age, contributing to a retirement scheme helps reduce the tax payable to the government. 

Takeaway

Taxation is a complex business concept that keeps changing now and then. Some new taxes can be introduced while others can be abolished at any time. That’s why you must keep updating yourself about tax regulation. But most importantly, you need to understand which deductions are tax allowable and which ones aren’t. This ensures you reduce your tax burden, allowing you the opportunity to maximize your profits.