As a new IT contractor (see the other posts in this series) you should be acutely aware of what legitimate business expenses you might incur that can lower your tax bill.
Local travel expenses
If your travel is for commuting only then the expense isn't deductible. But you can deduct trips to visit clients, trips from one workplace to another, and trips from home to a temporary work location. The key to a temporary work location is anywhere you expect to be working for less than one year. And even if you continue working at that location for more than a year you are still ok if you had good reason to believe that you would not.
Before you despair and think that local travel expenses cannot be deductible remember that if you can claim the [[home office deduction]] then theoretically you aren't commuting from your home to your client's site, rather from your home office to your client site. I think the home office deduction is the key here. If you can claim that then you can claim local travel expenses. Why everyone says you should be leery of the home office deduction is totally beyond me. It is not an immediate audit red flag like many people are led to believe.
You can deduct a trip within the US if it was primarily for business, outside of your city, and away at least overnight. You can tack on some personal sightseeing on the trip but can't deduct that portion. But all airfare is deductible.
I outline the big business expenses in their own posts, coming next.
[[Home Office Deduction]]
[[Health Insurance Premiums]]
[[Life Insurance Premiums]]
[[Hiring Your Family]]
Deductible Tax Expenses
Certain taxes are business expenses and can be used as deductions to reduce your federal taxes. >
- state unemployment taxes
- state income taxes
- the employer portion of SE tax
The key is that before starting a business you are paying for just about everything out-of-pocket, with a few things being deductible at the end of the year. However, if those are legitimate business expenses then you can deduct those to relieve your SE taxes (assuming a pass-through entity). Even if you elected S Corp treatment it seems wise to separate legitimate business expenses from personal expenses just to see how profitable your business is.
Consider also how you fund your retirement. I'll cover this later under [[SIMPLE IRAs]], but if you personally make an IRA contribution it won't reduce your SE tax, but if your S Corp makes it on your behalf then it is not subject to SE tax. The same is true of HRA (Health Reimbursement Arrangements) payments, but only if you are a C Corp or elect C Corp taxation.
Next post...[[Home Office Deduction]]