Of course, being your boss comes with its own set of perks and perils: you can wear your pajamas to your home office or take a day off anytime you like. However, these advantages look bleak when you sit down to file your taxes, don’t they?
Moreover, tax filing as self-employed gets complicated if you are a self-employed non-resident Indian (NRI) in the US. So, we’ve put together a guide to help NRIs claim their tax breaks and reap the benefits.
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What are the Tax Implications for Self-Employed NRIs in the US?
There are over 3.1 million NRIs in the United States, and most of them are self-employed. The Tax Cuts and Jobs Act (TCJA) of 2017 provides a 20% tax deduction on qualified business income (QBI).
NRIs and US residents can claim this deduction on their QBI. Thus, any income you earned while in the US is eligible for this deduction which expires in December 2025. In addition, there are 28 other deductions you can claim during tax filing as self-employed. Below we list out 14 such deductions:
14 Deductions and Benefits of Tax Filing as Self-Employed Individuals in the US
Freelancers and small business owners often worry about paying a significant chunk of their earnings to the IRS as taxes. However, they can avail of 28 other deductions and reduce their tax burden while filing as self-employed.
In addition, they can reinvest the saved money to grow their businesses.
Let’s take a look at some of these deductions:
1) Self-employment tax deduction
Self-employed individuals must pay 15.3% of their income as self-employment tax. The 12.4% goes to social security and 2.9% to Medicare.
This tax is paid by employees and employers jointly. However, you have to pay the entire amount as a self-employed individual. The good news is that you can deduct half of it from your taxes while filing as self-employed.
2) Home office deduction
If you work from home, you can claim a tax deduction for it. However, there are two formulas for calculating the amount: standard and simplified. For the standard option, you must keep track of all expenses such as electricity bills, repairs, and so on.
There is a pre-determined IRS rate for the simplified formula that changes each year. The current rate is $5 per square foot, and your home office should be no more than 300 square feet.
The best way is to calculate which formula provides the most benefit for you and apply it accordingly. For example, you can debit mortgage interest and depreciation if you own the home.
3) Deduction for internet and phone bills
Nowadays, almost all businesses are online and have a website. In this tax benefit, you can claim the costs of running the website, including internet connectivity.
Moreover, if you work from home and have a single phone line, you can deduct 100% of long-distance business phone calls. Nevertheless, if you have a second line for work only, you can claim back the entire phone bill from your taxes.
4) Health insurance premium
If your spouse’s healthcare plan does not cover you, deduct your healthcare premiums from your tax bills. However, if your plan covers your spouse, dependents, and children under the age of 27, you will gain extra benefits.
5) Meal deduction
The burger you ordered for work lunch is not tax-deductible. However, meals ordered during business travel or to entertain a client falls into this category.
The cost of entertainment, on the other hand, is not covered. Only food and beverages purchased from a restaurant qualify for this deduction. Currently, a full deduction is allowed, but it will expire after December 20, 2022.
6) Travel deduction
This deduction is available for business trips to meet new clients or learn new skills. While it covers the entire cost of transportation, only 50% of meals are covered. Moreover, the travel should be away from one’s work city and purely for business reasons.
7) Vehicle use deduction
If you are a baker, you can deduct the cost of driving your car to deliver your sweet treats. Instead, you can opt for the standard rate of 58.5 cents per mile.
Alternatively, you can opt for actual expenses that require you to record the times you drove your car for work. You can also claim tax incentives on vehicle repairs, insurance, and depreciation. Choose the formula which gives you the most benefit.
8) Interest deduction
The interest you pay on your business loan may be credited back to you through tax refunds. Nevertheless, you should use it for business purposes. For example, if you use the money for a quick trip to Hawaii, you will not receive tax benefits.
9) Education deduction
Being a student for life not only keeps you young but also generates tax benefits. As a result, taking courses to improve your current business skills will earn you a tax deduction. However, if you are a travel agent, a drawing course on Craftsy is not tax refundable.
10) Deduction for business insurance
Insurance is taken to protect your business, office space, and equipment, such as fire insurance, car insurance, and credit insurance, which is also tax-deductible.
11) Rent deduction
Renting office space, office equipment, or canceling a business lease is tax-deductible. However, you cannot deduct the rent if you own the space.
12) Deduction for startup costs
Startups can claim a maximum of $5000 for a business. In addition, startups can deduct their market research costs, travel expenses, attorney and accountant fees, and advertising costs in this segment. If their startup is an LLC or corporation, they can deduct an additional $5000 in organizational costs.
13) Advertisement deduction
Money spent on Facebook and Google ads, as well as on billboards, are tax-deductible.
14) Deduction for retirement plan contributions
This deduction is an investment in your future security. When you purchase a Simplified Employee Pension plan, the premium is tax-deductible.
These and other deductions are detailed in Schedule C of Form 1040, downloadable from the IRS website. Take advantage of it now and reap the rewards later. First, however, keep all records, receipts, and documents for the mentioned expenses if you are filing as self-employed. If the IRS conducts an audit, these will be used to support your claims.If you are a self-employed NRI in the United States and are unsure how to file your taxes, contact AOTAX. With over 15 years of experience in US taxation laws, we have helped over 2 million tax compliant. Our tax experts will assist you in tax filing as self-employed.