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5 Often-Overlooked Tax Deductions for Self-Employed Workers (The Street)

This tax season, self-employed business owners and contract workers have a slew of potential deductions that could put a significant dent in their tax bill. But oftentimes these substantial write-offs are overlooked.

"There's a great opportunity for small business owners to take advantage of a variety of write-offs and deductions that can pay off," said Neal Frankle, a certified financial planner for Wealth Resources Group. "But you really don't want problems with the IRS. You want to make sure everything you do is justifiable and you have backup for it."

The nation's 14.6 million self-employed workers account for 10% of the U.S. workforce and provide jobs for about 29.4 million employees, according to a Pew Research Center analysis. Roughly 30% of the U.S. workforce is comprised of both self-employed workers and the employees they hire.

When it comes to filing taxes, these self-employed workers can cite a variety of expenses related to business operations and employee expenses. From laptops to retirement contributions, here are seven key ways self-employed workers can find deduction savings:

Home Office Space Expenses
Home office space deductions like mortgage payments or rent payments are often forgotten by self-employed workers, but they can add up to substantial discounts on your tax bill.

"If there's a bonafide use of the home, make sure you take advantage of that," Frankle says. "There are a couple ways to do this -- there's a simplified version by square foot and there's a more complicated itemized breakdown."

After first calculating what percentage of your home is used for business purposes, self-employed tax filers can then use a standard $5-per-square-foot deduction for up to 300 square feet of the home used for business purposes. Or they can take some time to calculate out exactly how much of their rent or mortgage is going toward business use and deduct that amount.

Wages for Family Members
Business owners who get help from their children -- or any family member for that matter -- can pay them a salary, not just an allowance or gift, and then claim those wages as a deduction. Children under 18 who earn $6,000 or less per year do not have to pay income taxes on those wages, so essentially that's tax-free money.

"There's a great opportunity for small business owner to hire their own kids," Frankle says. "They can earn their own money in a way that you can deduct it from your taxes."

Creating a job in this way, whether the child helps deliver products or assists in advertising, is one of the most innovative and legal ways to shave-off tax bills, says President and CEO of the National Association for the Self-Employed Keith Hall. "As long as you do the appropriate paperwork. ... It's like tax-free money." 

Retirement Contributions
When it comes to investing in your retirement, the IRS is willing to match small businesses owners dollar-for-dollar for a significant portion of contributions.

Self-employed workers can set up a retirement program like a traditional IRA, a 401(k) or a SEP plan (Simplified Employee Pension Plan) and contribute as much as 25% of the net earnings, up to $18,000 to a 401(k) and up to $53,000 to a SEP, from their business. Traditional IRA contributions in 2015 are capped at $5,550 for those under 50 and $6,550 for those over 50.

"Small business owners often forget about deductions from contributions to a qualified retirement plan," says Hall. "Many small business owners get to the end of the year and they're rushing around. It's hard to stop and plan for your long-term future."

Automobile Expenses
Like home office space, self-employed workers can deduct a portion of their auto expenses that they use for business purposes. And also like the home office deduction, tax filers have one of two ways of approaching the deduction -- the standard 57.5-cents-per-mile version or itemized in detail.

"You have two ways to calculate it and you can choose the one that works best for you," Hall said. "The benefit of the standard deduction is that it's just easier," Hall said. "A lot of small business owners don't take the detailed version because it's very complicated."

In the itemized version of auto expense deduction, business owner might find they can deduct more. They can count many expenses including mileage spent for business purposes, the cost of repair in proportion to the percentage of time they use the automobile for business reasons and business-related parking fees. Insurance, garage fee, registration, licenses and toll can also count.

Business-related Items
Self-employed workers can also deduct business-related expenses like office supplies, phone services and equipment like laptops.

For many larger items like computers, tax filers can choose whether to deduct the full expense in the year of the purchase or on a depreciating timeline over several years for the life of the product, generally five to seven years. Nearly any costs toward business items and equipment can be deducted in some form.

"The deduction has to be what's considered 'ordinary and necessary' and it doesn't have to be indispensable to be necessary," Frankle said. "It just has to be commonly used in the trade."

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