It’s almost tax season again. As a welder, do you know about the possible tax deductions you might be able to take? Here is some information you may find useful.
Tax Deductions: Standard vs. Itemized
As a taxpayer, you can choose from one of two types of tax deductions: standard or itemized. Most people choose the standard deduction because it’s easier to calculate. You also have the option to itemize expenses instead if you think that might be more beneficial. 1 Ask a professional tax advisor about what works best for your situation.
Standard: With a standard deduction, a set amount of your income is subtracted from your taxable income, lowering the amount you are taxed on. 2
Itemized: The Internal Revenue Service (IRS) allows part or all of the cost of certain goods and services you bought relating to your work to be deducted from your taxable income. However, there are limits to how much you are allowed to claim as deductible expenses.
Deductible Business Expenses for Welders
Two criteria for deciding whether something purchased is deductible:
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- Is the item or service you purchased common and accepted in the welding industry?
- Is it helpful and appropriate to your work?
If you answered, “yes,” to both of these questions, then the item or service is most likely tax deductible. The Internal Revenue Service (IRS) IRS’ general rule for deductible business expenses is that they must be ordinary and necessary to your field. 3
Many taxpayers can also itemize medical bills, home mortgage points, charitable contributions, and other expenses. 4 You’ll want to talk to a tax professional to learn more about the complete process of taking itemized tax deductions.
Examples of Tax Deductions for Welders
Your deductible business expenses may vary depending on whether you’re an employee or an independent contractor (self-employed).
Employee or Contractor?
If someone else controls when, where, and how you do your job, then you’re considered an employee. There are some job-related expenses you might be able to deduct from your taxable income. They must be items that aren’t paid for by your employer. 5 6 These are called “unreimbursed employee expenses.”
Examples of Unreimbursed Employee Expenses
- Union, trade, and professional association dues and subscriptions to welding magazines and organizations.
- Regulatory and licensing fees, occupational taxes, business liability insurance, and work-related legal expenses.
- Welding tools and supplies that must be replaced on an annual basis.
- Mandatory welding uniforms and safety gear that cannot be worn outside of the workplace.
- Welding training and education that maintains or improves skills required in your current position. Programs to become a welder or enter another profession are not covered. 7
If you control when, where, and how you work, then you’re considered an independent contractor. Welders may work for themselves as one-person operations, or they may own businesses and have employees. 8 If you are considered a contractor, you’ll likely want to keep very careful track of all potential expenses which may be tax-deductable.
Examples of Independent Contractor Tax Deductions
- The cost of operating and maintaining work vehicles and welding equipment that travel to multiple work sites. 9
- Advertising, rent, insurance, employee wages and benefits, and any taxes directly related to your welding business.
- Education for you or your employees that maintains or improves welding skills.
- The cost of welding tools and supplies that must be replaced each year.
- Expenses for travel, meals, and entertainment that are directly related to your welding business.
Saving Time and Money during Tax Season
Knowing which goods and services you can claim as itemized deductions, tracking your spending, and keeping your receipts throughout the year can help you save time and possibly money when tax season comes around. 10 These are important tax basics to understand, but you should still talk to a qualified tax representative to get the most out of your welder tax deductions.
Note: This article does not constitute tax advice. Please consult a certified tax advisor on which options are best for you.
1 – http://www.investopedia.com/ask/answers/081114/how-do-i-know-whether-itemize-deductions-or-take-standard-deduction.asp
2 – http://www.investopedia.com/terms/s/standarddeduction.asp
3 – https://www.irs.gov/pub/irs-pdf/p535.pdf
4 – https://www.irs.gov/taxtopics/tc500.html
5 – https://www.eeoc.gov/policy/docs/threshold.html#2-III-A
6 – https://www.irs.gov/publications/p529/ar02.html
7 – https://www.irs.gov/publications/p529/ar02.html
8 – https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-defined
9 – https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses#what
10 – http://www.investopedia.com/articles/tax/09/overlooked-tax-deductions.asp