There's only one tax deduction available for income tax payments made to the Internal Revenue Service: you can deduct a portion of self-employment taxes paid. Unless you are self-employed, however, funds paid to meet your federal income tax bill cannot reduce your gross income when calculating your tax liability in a present or future filing year. Instead, any prepayments made to the IRS reduce your tax bill.
Self-employed taxpayers can deduct the estimated taxes they paid throughout the year, but payrolled workers cannot.
IRS Deductions for the Self-Employed
Tax filers who have payroll jobs prepay income taxes, Social Security tax and Medicare tax to the federal government through paycheck withholding, while the self-employed remit estimated tax payments to the IRS on a quarterly basis. These prepayments reduce the taxes owed when you file your return. After calculating your total tax liability with Form 1040, subtract the prepayments made through withholding and estimated taxes under the Payments section of the form. If the new tax bill is a negative number, you overpaid and will get an income tax refund. A positive number indicates the remaining taxes you must pay the IRS before the filing deadline.
If you work a payroll job, you and your employer each pay a portion of your Social Security and Medicare taxes. Your employer then writes off the cost of these taxes as a deduction when filing an income tax return for the business. If you are self-employed, you pay as both the employer and employee through self-employment taxes. When calculating your adjusted gross income on Form 1040, the IRS allows you to deduct the employer's portion of the taxes. After you determine your total self-employment tax liability on Schedule SE, the form also helps calculate the deductible portion of the payment.
If you're unable to completely pay your tax bill, the IRS lets you set up a payment plan to repay the debt over a period of time. Until your past-due taxes are paid in full, the unpaid portion accrues penalties and interest. None of the funds sent to the IRS under a repayment arrangement, including setup fees, penalties and interest, are deductible on your income tax return because they are applied to a federal income tax bill.
Local Taxes Exception
While you cannot deduct federal income tax payments from your taxable income, Form Schedule A lets you deduct taxes paid to other entities, such as your state and local government. The state income tax deduction and sales tax deduction count as itemized deductions on Schedule A. However, you must pick either income tax or sales tax, not both, as your deduction. Real estate taxes paid also serve as a deduction, but only report the portion assessed at an equal rate across your entire district. Taxes assessed on special improvements that benefit your property or neighborhood alone are not deductible.
2018 Tax Changes for the Self-Employed
If you pay self-employment taxes, the new tax laws bring a small change. Starting in 2018, earnings of up to $128,400 will be subject to the 15.3 self-employment tax. So if you make $100,000, you'll owe $19,645.20 in taxes, which means you should be making quarterly estimated tax payments of $4,867, assuming you won't have a large number of itemized deductions to offset the amount. You'll also benefit from an increased federal standard deduction, which is now $12,000.
2017 Taxes and Self-Employed
If you're filing your 2017 taxes, you'll owe 15.3 percent on up to $127,200 of your income for the year. The standard deduction for single filers in 2017 was $6,350.
Ashley Mott has 12 years of small business management experience and a BSBA in accounting from Columbia. She is a full-time government and public safety reporter for Gannett.