Maximizing Your Tax Deductions as an Independent Insurance Agent
tax deductions for insurance agents

Maximizing Your Tax Deductions as an Independent Insurance Agent

There are a lot of upsides to being an independent insurance agent, but taxes aren’t one of them. If the IRS considers you self-employed, you must pay both the employer and the employee portions of taxes. This can result in a large tax bill, but you can reduce it by maximizing your tax deductions.

How Do Deductions Work?

Traditionally employed individuals typically have taxes withheld from their paychecks and then file taxes once a year by the deadline in April. Self-employed individuals (including self-employed independent insurance agents) don’t have payroll withholdings, so they are generally required to pay estimated taxes every quarter. They also file taxes once a year by the April deadline (just like traditionally employed individuals), and this is when they can submit their deductions.

Deductions reduce your taxable income. For example, let’s say you earn a gross amount of $100,000 in a year. If you have $10,000 in deductible expenses, your net income is $90,000. This means you only pay taxes on $90,000 instead of $100,000. When you’re paying a high tax rate that includes both regular taxes and self-employment taxes, this can result in savings of thousands of dollars.

To claim deductions, you’ll typically use Schedule C when you file Form 1040. Some deductions are made using Schedule A. You may need to use additional forms provided by the IRS to calculate your deductions. For example, if you have a home office, you’ll use Form 8829 to deduct your home office expenses.

What Can Independent Insurance Agents Deduct?

The IRS says that self-employed individuals can deduct business expenses that are “both ordinary and necessary.” In other words, the expenses must be considered common and accepted in your industry (ordinary) and helpful and appropriate for your business (necessary). But don’t let the word “necessary” confuse you. The IRS says an expense doesn’t need to be absolutely indispensable to count as necessary. As long as the expense supports your business efforts and is considered a common expense for insurance agents, you can probably deduct it.

Common expenses for agents include things like marketing materials, continuing education fees, and website costs. You can also deduct travel expenses – that’s huge for agents who visit their clients’ homes in person or at an office location for appointments. Whether you work from a home office, rent a separate office space, or utilize space at your upline office or FMO, you can also deduct your office expenses. Each deduction may be small, but it can all add up to a big difference on your tax bill.

Keeping Track of Your Deductions

Don’t fall into the trap of overlooking tax deductions until it’s time to file. Stay ahead of the game by proactively seeking out potential deductions. This will not only save you time and money come tax season, but it will also ensure that you are taking advantage of all the benefits available to you.

You should retain receipts of all business expenses, and keep records of your expenses; a program like QuickBooks may be the easiest way to do this. While it’s not generally required for sole proprietorships, you may also find it useful to have a dedicated checking account or business credit card so you can keep your business expenses separate from your personal expenses and track them more easily.

If you’re deducting mileage (a big deduction for many agents!), you also need to keep records of your miles for the year. If you’re ever audited, you’ll need this proof to support your deductions. It’s a bit of work because you have to record the details of each trip, including the date, purpose, starting mileage, ending mileage, starting point, and destination, but the deduction you receive can be worth the effort. The good news is that there are mileage-tracking apps like MileIQ and TripLog to make this process easier.

Investing in Professional Services

Although you may be tempted to do your own taxes to save money, you may be better off paying for professional tax preparation services. A professional tax preparer may be able to help you claim deductions that you might have overlooked on your own while avoiding issues with the IRS, and these benefits may provide more than enough value to make up for the cost involved in paying for tax services.

If you decide to go the DIY route, you’ll need to make sure you’re familiar with all of the relevant IRS rules. You may also want to use a self-service program for self-employed individuals, such as the ones offered by H&R Block or TurboTax. Considering how many forms and calculations are required for various deductions, this can be much easier than trying to use paper forms and do everything manually.

Running an independent agency can be challenging, but Western Asset Protection is here to support you.

Download our Insurance Agent’s Tax Deduction Checklist for a handy reference tool, and contact us if you’d like to learn more about joining our agent network.

Western Asset Protection is not a registered investment, legal, or tax advisor or broker/dealer.  Our content is intended for informational purposes only.   All investment/financial opinions expressed by Western Asset Protection are from personal research and experience and are intended as educational material.  Please contact your accounting consultant for any independent tax/financial advice.