Insurance Agents: Star here for tax deductions
As an independent insurance agent, you’ll be receiving a 1099, a W-2, or both, depending on your work status and if you work for more than one insurance agency.
As an insurance agent, you can maximize your after-tax income by deducting business expenses. According to the IRS Business Expenses document, your business expenses can be deducted from your taxes so long as they’re considered “ordinary and necessary” for your business.
Take a look at this checklist of tax deductions for insurance agents that’ll help you get the most out of your tax return this year.
1. Home Office Deduction from Taxes
If you work from home, divide the total square footage of your residence by the square footage of your home office. Then, multiply the value by the standard rate of the cost of rent per square foot. This gives you the amount you can claim for home office deduction.
Other ways to calculate home office deduction are:
- Direct expense method: You can deduct the full cost of direct expenses like home office supplies and repairs.
- Indirect expense method: Divide the total cost of your home insurance, mortgage, and utilities by the percentage of your home that’s utilized for your insurance business.
Use the IRS Form 8829 for home businesses before filling out the Schedule C Form 1040.
This deduction, in particular, is heavily scrutinized by the IRS. So, before you claim this deduction make sure your home office is used exclusively for business purposes. The last thing you want is to face a fine or penalty from the IRS.
2. Travel expenses can be deducted from Insurers' tax bill
If your work requires you to travel you can also deduct those expenses. If you use your car for business purposes, keep track of the miles you spend for work purposes only, and keep all your train and airline tickets to write them off on your tax return.
Keep in mind, this deduction excludes the distance from your home to your office. In addition, you can’t use this deduction if you also claimed a Section 179 or changed your car’s depreciation value.
For insurance agents, the mileages you can record include:
- Distance to and from your office and a client meeting or a client’s office
- Work-related errands such as getting office supplies
You should also bear in mind that vehicle expenses such as gas, car repairs, oil changes, and vehicle insurance), cannot be written off.
3. Business Meal and Entertainment Deductions from Insurers' Taxes
It’s common for insurance agents to take clients out for business meetings, and luckily for you, meals and entertainment expenditures are deductible business expenses.
Generally, you can only write off half the cost of business meals and entertainment incurred during a business meeting, but there are some exceptions.
Make sure you keep all of your receipts.
4. Independent Contractor Tax
If you’re an independent insurance agent, the IRS requires that you report all your income when preparing your tax return. You’re liable to pay self-employment tax on a portion of your business income including tips and net earnings.
The self-employment tax usually consists of 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance) taxes.
You can figure out your self-employment tax using the IRS Schedule SE (Form 1040) or 1040-SR.
5. Marketing and Advertising Expenses: Deductions from Your Tax Bill
Keep track of all promotional costs related to your insurance business so you can claim this expense.
TV and radio ads, online ads, signposts, newspaper ads, business cards, postcards, are all examples of deductible business expenses. You can also write off the service cost of the professional that designed or created the ads.
6. Continuing Education Costs: Reduced from Your Tax Bill
As an independent insurance agent, you can make tax deductions on the cost of any continuing education courses related to insurance. You can also deduct the fees for obtaining and renewal of your insurance certifications and licenses.
However, you can’t deduct the costs of any examination or coursework materials required for a career change.
Every year, several conferences, conventions, and seminars are held in the insurance industry. At these events, insurance agents can network and keep up with the latest trends and innovations in the industry.
These are great opportunities for you to exchange business cards and network with other professionals. However, attending conferences can be expensive.
The IRS allows the deduction of the event cost including accommodation, travel cost, and 50% cost of your meals during the event. However, if you incur any other expenses after the end of the event, it cannot be deducted.
Working as an independent insurance agent is a lot of hard work, but there are several tax benefits. With these seven tips in mind, you’ll be able to reduce your taxable business income and get the most out of your tax return. If you still have questions about your tax deductions, make sure you reach out to a CPA or tax professional to help you.