In Your Self Employed Hidden Paycheck – How to Pay Yourself More with Less (Part 1), I showed that my 2008 hidden paycheck from being self employed was $23,606. Here is how the numbers add up. We’re talking about items my family gets direct benefit from, but can be attributed to the business and are taken as small business tax deductions. If you are self employed your family also gets paid in “stuff” that employees normally buy after they get their paycheck, but you can buy before you take your paycheck. The business purchase of this stuff, instead of you personally constitutes a hidden paycheck.
Most articles found on the web and elsewhere focus on self employed taxes and the tax savings aspect. Like the $6,610 savings I made last year in self employed taxes. But this article focuses on the hidden paycheck produced by legitimately buying goods and services used for you business that also has personal benefits.
Make sure you check with your CPA before you take any of these deductions since your situation is most certainly different.
My Self Employed Hidden Paycheck items for 2008:
Self employed health insurance – First, the big one. As an employee, it’s not deductible even if you pay the whole thing. Being self employed, it’s entirely deductible. I spent $5,068 last year.
Cell phone – I have five lines for my family. These cost $179 a month after subtracting the kid’s lines, although all are necessary to my business and my sanity.
Home/business phone – Working from home allows me to write off my phone ($45/mo) and my long distance VOIP line with BroadVoice ($35/mo).
Internet – My Internet at home costs $50/mo. Who could run a business without that?
Lunches/dinners out – Meeting with clients and prospects over lunch or dinner is a relaxing way to build business. Even after the 50% deduction, I spent $129/mo.
Party leftovers – My client party at my house had 146 clients and prospects last year. In Berks County, it’s a mortal sin to run out of food, so I ended up with a steak, shrimp, appetizers and alcohol left to freeze. Although extremely hard to estimate, I would say safely about $500 total was the value of what we ate later in the year with family and friends.
Travel – I have a lot of clients near San Jose, California where I used to live, many began as close friends. Traveling there three times last year to see them and the clients they refer is like a vacation for me. Since I stay with my mother-in-law (who I just love), I only spent $2,772 on three trips last year.
Vacation – When many people go on vacation, they work part of the time and deduct part of the cost. I didn’t last year, so my business deductible vacation was $0. This can be a significant amount as we will see in a future article.
Home office deduction – Working from home allowed me to take $3,484 last year off my taxable income. Think of it as the business paying part of the electric, mortgage, pool maintenance, and everything that goes into maintaining a house divided by the square footage used for your business.
Per diem meals – I found this little known tax deduction works for me because I stay at my mother-in-law’s house when I visit my clients in CA. Per diem meals is a daily rate based on where you travel allowed for deduction where you don’t need a receipt. California is $59/day and I spent 47 days there last year. So I get to take $2,802 as business expenses.
Office supplies – With two teenagers in school and various Boy Scout projects, we use extra office supplies such as paper, toner, and notebooks. Maybe it’s not worth mentioning at only about $200 a year, but it illustrates that there are probably things you haven’t thought of yet.
Auto mileage – If you routinely stop at the grocery store, department store, or friend’s house on your way home from a client or meeting, you have saved yourself a trip and pocketed the mileage. Make it a habit and it is money your household is getting without spending. With .55 cents a mile, that was around $1,294 last year.
Computer equipment – Who could run a business without a computer? It also serves as my personal entertainment, shopping aid, and correspondence tool. We tend to buy a laptop about every year for either my husband or me and give the older one to our kids or assistants. Patrick’s MacBook and all its software, cases and parts was $2,052. Yes, we bought other computer stuff, but I’m only counting here what we would have had to buy for the family (and unable to deduct) if we weren’t self employed.
Telephone equipment – Between dropping my Ipaq and being a woman with the ‘no pockets’ problem, I need to upgrade my cell phone nearly each year. Without extending my contract, it cost $299. At home we have a TalkSwitch PBX which died after 5 years and we replaced it for $826.
NOW, a big disclaimer, I do not do taxes! I work with an excellent CPA who specializes in self employed taxes. She is a tremendous help to me. I then pass onto my self employed clients whatever they are missing. So if you have any questions regarding whether something is business deductible in your situation, ask your CPA. I am only helping to stimulate your brain and get this stuff recorded in the first place. You can’t count it if you don’t track it.
How do you figure your hidden paycheck? Comment now.
Now stop reading about your hidden paycheck and start doing! Let’s create your personal profit strategies for growing profit. Call small business profitability coach Merra Lee Moffitt, CFP®. She can be reached at, 888-920-2030 or by email at email@example.com.
As self employed, we’re pulled in two directions. We want better income from being self employed, yet we want our self employed taxes to be as low as practical. We want our family to benefit from having a better income and all the luxuries it can buy: travel, TVs, cell phones, dining out, and more. But the more dollars in your paycheck, the more self employed taxes you pay.
Fortunately there are common, regular and necessary expenses in your business that have direct benefit to your family. The average employee must pay for all these items AFTER he gets his paycheck. Being self employed, you can count these items against your business and pay for them BEFORE you take your paycheck. Your self employed income will seem lower but your family gets “paid” in the stuff the business pays for. This, in turn, builds your hidden paycheck.
This hidden paycheck is part of what makes being self employed worth the effort. Many items in our daily lives are also used for business. For the purposes of tax reporting, we get to take those expenses against the business because they are necessary for running the business. Depending on your business, this adds up to a hidden paycheck of $15,000 to $25,000 a year.
Your CPA can help you figure out exactly which costs fall into the various buckets and where to report them on your tax forms. Let’s go over some examples. Better income from your hidden paycheck comes from:
I’ll go into detail in part 2, here are just some totals. Last year, my hidden paycheck amounted to $23,606. I’ll show you how I got there in Your Self Employed Hidden Paycheck – Little Things Add Up (Part 2)
Here are the categories I used:
Self employed health insurance
Home office deduction
Per diem meals
What’s in your self employed hidden paycheck? Comment now.
Now stop reading about your hidden paycheck and start doing! Let’s create your personal profit strategies and demand growing profit. Call small business profitability coach Merra Lee Moffitt, CFP®. She can be reached at, 888-920-2030 or by email at firstname.lastname@example.org.