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Self employed car insurance

Being self-employed means taking on risks and costs that you don’t have when you work for someone else. You’re responsible for getting customers and generating income, for constantly proving the value of your product or service. You also have to pay the phone and internet bills you incur to get and keep those customers, the travel expenses to meet with them and the liability insurance in case they sue you.

Tutorial: Starting a Small Business

Numerous lines of tax code have been written to soften the blow of having to cover these extra costs. And you should claim every business tax deduction you qualify for: Your business’s profitability depends on minimizing your costs and maximizing your resources. In this article, we'll explain some common tax deductions available to the self-employed. (For more, see Can You Handle a Home-Based Business?)

Self-Employment Tax Deduction

The self-employment tax refers to the employer portion of Medicare and Social Security taxes that self-employed people must pay. Everyone who works must pay these taxes, which for 2016 and 2017 are 7.65% for employees and 15.30% for the self-employed. Here’s how the rates break down:

– 6.2% Social Security tax each for employee and employer on the first $118,500 in wages (it increases to $127,200 in 2017)

– 1.45% Medicare tax each for employee and employer with no wage limit

You will owe an additional Medicare tax of 0.9% in the following situations:

Filing Status

Income

Single

$200,000

Married filing jointly

$250,000

Married filing separately

$125,000

The income thresholds for additional Medicare tax apply not just to self-employment income, but to your combined wages, compensation and self-employment income. So if you have $100,000 in self-employment income and your spouse has $160,000 in wage income, you’ll have to pay the additional Medicare tax of 0.9% on the $10,000 by which your joint income exceeds the $250,000 threshold.

Paying extra taxes to be your own boss is no fun. The good news is that the self-employment tax will cost you less than you might think because you get to deduct half of your self-employment tax from your net income. Essentially, the IRS treats the “employer” portion of the self-employment tax as a business expense and allows you to deduct it accordingly. What’s more, you only pay self-employment tax on 92.35% of your net business income – what's left over after you subtract your other business expenses.

Remember, you're paying the first 7.65% no matter whom you work for. And when you work for someone else, you’re indirectly paying the other 7.65% because that’s money your employer can’t afford to add to your salary. At least when you’re self-employed you get to deduct part of the tax expense. (Keep reading on this in Top 4 Financial Jobs You Can Do From Home and Should You Incorporate Your Business?)

Home Office

The home office deduction is one of the more complex deductions. In short, the cost of any workspace that you use regularly and exclusively for your business, regardless of whether you rent or own it, can be deducted as a home office expense. You are basically on the honor system, but you should be prepared to defend your deduction in the event of an audit. One way to do this is to prepare a diagram of your workspace, with accurate measurements, in case you are required to submit this information to substantiate your deduction. (For more information on what is required for an audit, see Surviving the IRS Audit.)

The expenses you can deduct for your home office include the business percentage of deductible mortgage interest, home depreciation, property taxes, utilities, homeowners insurance and home maintenance that you pay during the year. For example, if your home office occupies 15% of your home, then 15% of your annual electricity bill becomes tax deductible. (For more, see How to Qualify for the Home-Office Tax Deduction and Creating a Home Business Work Space.)

You have two choices for calculating your home office deduction: the standard method and the simplified option, and you don’t have to use the same method every year. The standard method requires you to calculate your actual home office expenses. The simplified option lets you multiply an IRS-determined rate by your home office square footage. To use the simplified option, your home office must not be larger than 300 square feet, and you cannot deduct depreciation or home-related itemized deductions.

The simplified option might be a clear choice if you’re pressed for time or don’t have good records of your deductible home office expenses. However, because the simplified option is calculated as $5 per square foot, with a maximum of 300 square feet, the most you’ll be able to deduct is $1,500. If you want to make sure you’re claiming the largest home office deduction you’re entitled to, you’ll want to calculate the deduction using both the regular and simplified methods, making the “simplified” method anything but. If you choose the standard method, calculate the deduction using IRS form 8829, Expenses for Business Use of Your Home.

Internet and Phone

Regardless of whether you claim the home office deduction, you can deduct your business phone, fax and internet expenses. The key is to only deduct the expenses directly related to your business. If you have only one phone, you shouldn't deduct your entire monthly bill, which includes both personal and business use. You should only deduct costs that specifically relate to your business. If you have a second phone line that you use exclusively for business, however, you can deduct 100% of that cost. By the same token, you would only deduct your monthly internet expenses in proportion to how much of your time online is related to business – perhaps 25% to 50%.

Health Insurance Premiums

If you are self-employed, pay for your own health insurance premiums, and were not eligible to participate in a plan through your spouse's employer, you can deduct all of your health, dental and qualified long-term care insurance premiums. You can also deduct premiums that you paid to provide coverage for your spouse, your dependents and your children who were younger than 27 at year-end, even if they aren’t dependents. Calculate the deduction using the Self-Employed Health Insurance Deduction Worksheet in IRS publication 535. (For more, see Buying Private Health Insurance.)

Meals

A meal is a tax-deductible business expense when you are traveling for business or entertaining a client. The meal cannot be lavish or extravagant under the circumstances, and you can only deduct 50% of the meal’s actual cost, if you keep your receipts, or 50% of the standard meal allowance, if you keep records of the time, place and business purpose of your travel but not your actual meal receipts.

Entertainment

Wouldn’t it be great to get box seats to see your favorite sports team and write off the cost as a business expense? You might be able to, but tread carefully: The IRS has numerous restrictions on claiming the business entertainment tax deduction. For starters, you must conduct business with the person you are entertaining during, immediately before or immediately after the event. If your entertainment expense meets all the tests, it’s still only 50% deductible. Make sure you’re prepared for an audit by keeping meticulous records of what business activity you conducted, when, with whom, and how it directly relates to the entertainment expense. Keep your receipts, too.

Travel

Meals and entertainment are often intertwined with another tax deductible expense: business travel. To qualify, it must last longer than an ordinary workday, require you to get sleep or rest, and take place away from the general area of your tax home (usually, outside the city where your business is located).

Further, to be considered a business trip, you should have a specific business purpose planned before you leave home, and you must actually engage in business activity – such as finding new customers, meeting with clients or learning new skills directly related to your business – while you are on the road. Merely handing out business cards at a bar during your friend’s bachelor party won’t make your trip to Vegas tax deductible. Keep complete and accurate records and receipts for your business travel expenses and activities, as this deduction often draws attention from the IRS.

Deductible travel expenses include the cost of transportation to and from your destination (such as plane fare), the cost of transportation at your destination (such as a car rental, Uber fare or subway tickets), lodging and meals. You can’t deduct lavish or extravagant expenses, but you don’t have to choose the cheapest options available, either. You, not your fellow taxpayers, will be paying the bulk of your travel costs, though, so it’s in your interest to keep them reasonable.

100% of your travel expenses for business are deductible, except for meals and entertainment, which are limited to 50%. If your trip combines business with pleasure, things get a lot more complicated; in a nutshell, you can only deduct the expenses related to the business portion of your trip – and don’t forget that the business part needs to be planned ahead.

Car

When you use your car for business, your expenses for those drives are tax deductible. Make sure to keep excellent records of the date, mileage and purpose for each trip, and don’t try to claim personal car trips as business car trips. You can calculate your deduction using either the standard mileage rate (determined annually by the IRS) or your actual expenses.

The standard mileage rate is the easiest because it requires minimal record keeping and calculation. Just write down the business miles you drive and the dates you drive them. Then, multiply your total annual business miles by the standard mileage rate (54 cents per mile for 2016). This amount is your deductible expense.

To use the actual expense method, you must calculate the percentage of driving you did for business all year as well as the total cost of operating your car, including gas, oil changes, registration fees, repairs and car insurance. If you spent $3,000 on car operating expenses and used your car for business 10% of the time, your deduction would be $300.

Interest

Interest on a business loan from a bank is a tax-deductible business expense. Credit card interest is not tax deductible when you incur the interest for personal purchases, but when it interest applies to business purchases, it is tax deductible. That said, it's always cheaper to spend only the money you already have and not incur any interest expenses at all. A tax deduction only gives you some of your money back, not all of it, so try to avoid borrowing money.

Publications and Subscriptions

The cost of specialized magazines, journals and books directly related to your business is tax deductible. For example, a daily newspaper would not be specific enough to be considered a business expense, but a subscription to "Nation’s Restaurant News" would be tax deductible if you are a restaurant owner, and Nathan Myhrvold’s several hundred dollar "Modernist Cuisine" box set is a legitimate book purchase for a self-employed, high-end personal chef.

Education

Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business; the cost of classes to prepare for a new line of work isn’t deductible. If you’re a real estate consultant, taking a course called "Real Estate Investment Analysis" to brush up on your skills would be tax deductible, but a class on how to teach yoga would not be. (Learn more about paying for college in Invest in Yourself with a College Education and Pay for College Without Selling a Kidney.)

The Best Self-Employed Tax Deduction of All

One deduction in particular can make going into business for yourself particularly profitable: the deduction for self-employed retirement plans. Contributions to SEP-IRAs, SIMPLE IRAs and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later. For the 2016 tax year, you could feasibly contribute as much as $18,000 in deferred salary ($24,000 if you’re 50 or older) plus another 25% of your net self-employment earnings after deducting one-half of self-employment tax and contributions for yourself, up to a maximum of $53,000 total for both contribution categories, with a self-employed 401(k), for example. Contributions limits vary by plan type, and the IRS adjusts the maximums annually. (To keep reading about these plans, see 401(k) Plans for the Small Business Owner and Top Retirement Strategies for Freelancers.)

The Bottom Line

Most small business tax deductions are more complicated than this brief overview describes – we are talking about the tax code, after all – but now you have a good introduction to the basics. Remember, any time you're not sure whether a cost is a legitimate business expense, ask yourself, "Is this an ordinary and necessary expense in my line of work?" This is the same question the IRS will ask when examining your deductions if you get audited. If the answer is no, don't take the deduction. And if you're not sure, seek professional help with your business tax return from a certified public accountant so you don’t give the IRS more than you’re required to. (To read more about common deductions, see The Most Overlooked Tax Deductions. And see Tax Planning 2016 for the latest on all your taxes.)

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Personal insurance when you’re self-employed

If you’re self-employed, or thinking about going down that road, it’s important to consider your personal insurance options. This is because when you’re self-employed you don’t have an employer to rely on for sickness cover, or health insurance, for example. This guide will help you work out what you need and where to get it.

  • What insurance will you need?
  • Tips for shopping around
  • Running a business from home

What insurance will you need?

When you become self-employed, you’ll need to think about what will happen if you can’t work because of illness or injury.

Because you’re working for yourself you won’t get sick pay, although you might qualify for state benefits.

Personal insurance

?

Many self-employed people take out income protection insurance and critical illness cover in case they get too sick, or injured to work, or get a serious illness. Life insurance is also common for people who have dependents, such as a partner or children.

There are a range of personal insurance products worth considering if you’re self-employed.

Income protection

This is a long-term insurance policy, that usually lasts many years and is designed to support you if you can’t work because you’re sick or injured.

It aims to replace part or all of your previous after-tax income. It is intended to pay out monthly payments up to your normal retirement age if you lose your job through illness or injury.

Find out more in Do you need income protection insurance?

Critical illness cover

This is a long-term insurance policy which usually pays out a tax-free lump sum if you are diagnosed with one of the serious illnesses covered by your policy.

These usually include some cancers, heart attack and stroke.

It is designed to pay off debts, or a mortgage, or pay for any alterations needed to your home – for example, so you can use a wheelchair.

Only selected conditions are covered by these policies. Common illnesses that keep people off work such as back problems and stress are not covered.

Read more in Critical illness insurance – do you need it?

Life insurance

This insurance will pay your dependants a lump sum, or regular payments, if you die.

You might have had life insurance as part of your package if you were employed – this is often known as death-in-service benefit.

This will have ended when your employment stopped.

Life insurance is worth thinking about if you have children or other dependents you look after or who depend on you financially.

You can’t rely on the government to take care of your family – the money they would get from the state is much lower than most people expect.

Learn more in Do you need life insurance?

Private medical insurance

This insurance can supplement what’s available on the NHS.

Some self-employed people choose to take out medical insurance because they want to guard against being off work and losing earnings if waiting for NHS treatment.

Your employer might have offered this health insurance as an employee benefit, but once you become self-employed you’re no longer eligible for it.

If you can afford the premiums, it might be worth considering as it gives you a choice in the level of care you get and how and when it is provided.

Find out more in Do you need private medical insurance?

Tips for shopping around

If you were previously employed and benefited from insurance, for example, life insurance or private medical insurance, then you might be able to continue with the same providers.

Check with the provider how much it would cost to continue with the cover.

It’s likely to be more expensive for an individual policy than it was when you were employed.

It’s also a good benchmark to allow you to compare prices and policies when shopping around.

  • How and where to buy income protection insurance
  • How and where to buy critical illness insurance
  • How and where to buy life insurance

Running a business from home

If you run your business from your home you shouldn’t assume that your personal household insurance will cover you, even though nine out of ten home insurance policies will cover business equipment in your home.

Typically, cover will depend on the use of the home being for clerical purposes only (i.e. office work).

But you will not be covered if you have any visitors to do with your business (e.g. client visits).

If you’re setting up your business from home, the best thing to do first is to talk to your current insurer and explain your plans.

They might ask for an additional premium on your current insurance.

If you don’t tell your insurers and you need to make a claim, you might find that your insurance is invalid and that the claim won’t be paid.

Read our guide to Business insurance when you’re self-employed.

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If you're self-employed, you can use the individual Health Insurance Marketplace to enroll in flexible, high-quality health coverage that works well for people who run their own businesses.

You can enroll through the Marketplace if you’re a freelancer, consultant, independent contractor, or other self-employed worker who doesn’t have any employees.

You’re considered self-employed if you have a business that takes in income but doesn’t have any employees. If your business has even one employee (other than yourself, a spouse, family member, or owner), you may be able to use the SHOP Marketplace for small businesses to offer coverage to yourself and your employees. See "How do I know if I’m self-employed or a small employer?" to learn more.

Coverage options for the self-employed

  • When you fill out a Marketplace application, you’ll find out if you qualify for premium tax credits and other savings on a health plan. This will be based on your income and household size.
  • You’ll also find out if you qualify for free or low-cost coverage through the Medicaid and CHIP programs in your state. This will depend on your income, household size, and other factors.
  • Do a quick check to see if your expected income is in the range to save.

In the Marketplace you can choose from several categories of coverage, from plans with low premiums that mainly protect you in worst-case scenarios to plans where you’ll pay more each month but less out-of-pocket when you get health care services.

Self-employment income and Marketplace savings

When you fill out a Health Insurance Marketplace application, you’ll have to estimate your net self-employment income. Marketplace savings are based on your estimated net income for the year you’re getting coverage, not last year’s income.

When you’re self-employed, it can be hard to estimate your income for the coming months or year. Learn how to estimate your income if you’re self-employed.

If you don’t have coverage, you’ll pay a penalty

Most Americans must have qualifying health coverage or pay a penalty. This is true no matter what your job status is.

More answers

How do I know if I’m self-employed or a small employer?

If you run a business that produces income and has no employees, you’re considered self-employed. You can buy health coverage through the individual Health Insurance Marketplace.

You’re not considered an employer only because you hire independent contractors to do some work. "Employees" are generally workers whose income you report on a W-2 form at the end of the year. Get details about how to know if people who work for you are considered employees. What if I leave my job, lose my job-based coverage, and become self-employed?

If you lose job-based coverage for any reason, you qualify for a Special Enrollment Period. This means you can enroll in a health plan even if it’s outside the annual Open Enrollment period. During the Open Enrollment Period, if you qualify for a Special Enrollment Period you may be able to have your coverage start sooner than it otherwise would. Learn more about how to apply with a Special Enrollment Period.

What if I’m self-employed and then get a job that offers health coverage?

You can cancel your Marketplace plan any time and enroll in your employer’s insurance.

Once you have an offer of job-based coverage, in most cases you’ll no longer qualify for a premium tax credit and other savings on a Marketplace plan. This is true whether you enroll in the job-based coverage or not. In rare cases, your employer’s coverage won’t be considered affordable to you or won’t meet minimum standards. If this is true, you may qualify for premium tax credits and other savings on a Marketplace plan based on your income. Learn about your options if you have an offer of job-based coverage. What if I’m self-employed and my spouse has coverage through a job?

If your spouse’s plan offers coverage to spouses and dependents, in most cases you won’t qualify for premium tax credits and other savings on a Marketplace plan.

If your spouse’s job-based insurance doesn’t cover spouses and dependents, then you can buy a Marketplace plan for you and your dependents. Depending on your household income, you may qualify for a premium tax credit and other savings. In most cases, a married couple has to file a joint federal tax return to be eligible for premium tax credits and other savings on Marketplace plans. Learn about the limited exceptions to the joint-filing rule. What if I have COBRA coverage?

If you currently have COBRA continuation coverage, your options are different during the annual health insurance Open Enrollment period and outside Open Enrollment. Learn about COBRA and the Marketplace.

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