Expenses like a home office, car, insurance, and even your education bills could get you a big tax break
WATCH: 8 Tax Benefits For The Self-Employed
Profitability in business depends on minimizing costs and maximizing resources and tax deductions can certainly help. There are several tax benefits that are available for the self-employed. This video examines 8 different tax deductions that help a self-employed worker get the best deduction possible.
Reviewed by Lea D. UraduFact checked by Suzanne KvilhaugReviewed by Lea D. UraduFact checked by Suzanne Kvilhaug
Self-employed people have extra costs that they have to bear as they do business. But there are numerous deductions that can soften the blow when tax season comes around.
The Tax Cuts and Jobs Act (TCJA introduced new deductions, like the qualified business income (QBI) deduction (see number 16, below), but it also eliminated or changed others, including the entertainment and fringe benefit deduction, the local lobbying expenses deduction, and the domestic production activities deduction. However, key provisions of the TCJA are set to expire at the end of 2025: the standard deduction and income tax rates are set to return to pre-TCJA levels, and the cap on the state and local tax (SALT) deduction will be lifted.
Here are 16 current tax deductions for self-employed individuals.
Key Takeaways
- Reviewing what you can deduct each year is important to make your business as profitable as possible if you’re self-employed.
- You can calculate a deduction for a home office and a vehicle used for business purposes.
- Meals with clients and business travel are deductible, but meals included with entertainment may not be.
- Premiums for insurance that you pay for to protect your business and health insurance are legitimate deductions. And don’t forget startup, advertising, and retirement plan costs.
1. Retirement Plan Contributions Deduction
What It Is
The deduction for self-employed retirement plan contributions is an incredibly worthwhile tax break. Contributions to simplified employee pension individual retirement accounts (SEP-IRAs), savings incentive match plans for employees (SIMPLE) IRAs, and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later.
Potential Savings
You could feasibly contribute as much as $23,000 in deferred salary to a solo 401(k) for the 2024 tax year. You can make catch-up contributions of $7,500 for a total of $30,500 if you’re age 50 or older.
Your total maximum contributions to a self-employed 401(k) can’t exceed $69,000 for 2024, not counting catch-up contributions of $7,500 for both employee and employer contribution categories.
Is It Hard to Claim?
You can establish a SEP plan with a simple, one-page form, according to the IRS. Fidelity and Charles Schwab offer a free solo 401(k), which also can be a good plan choice. Plan contributions are deducted on Form 1040, Schedule 1, on the line for self-employed SEP, SIMPLE, and qualified plans. It can be helpful having a tax preparer advise you on claiming this deduction on your taxes.
What Else to Know
Contribution limits vary by plan type, and the IRS adjusts the maximums annually. Of course, you can’t contribute more than you earn, and this benefit will only help you if your business leaves you enough profits to take advantage of it.
2. Self-Employment Tax Deduction
What It Is
The self-employment tax refers to the Social Security and Medicare taxes that self-employed people like freelancers, independent contractors, sole proprietors, and small business owners must pay. These taxes help fund Social Security and Medicare. The self-employment tax rate is 15.3% on net earnings (12.4% for Social Security and 2.9% for Medicare). Employers and employees share these taxes, each paying 7.65%. People who are fully self-employed and therefore subject to self-employment tax have to pay for both parts themselves.
Where does the deduction come in? The Internal Revenue Service (IRS) treats the employer portion of the self-employment tax as a business expense and allows you to deduct it accordingly.
Investopedia’s Tax Savings Guide can help you maximize your tax credits, deductions, and savings.
Potential Savings
You can deduct half of your self-employment tax from your net income when you’re calculating your income tax. So, if your self-employment tax amounts to $3,500 for the year, for instance, at tax time $1,750 would be deductible on your Form 1040. Keep in mind that this doesn’t reduce the net earnings from self-employment or the self-employment tax itself.
Is It Hard to Claim?
You’ll need to fill out Schedule SE to calculate your self-employment tax, which includes a calculation for the deduction. Once you have the amount to deduct, you enter it on line 15 of Schedule 1 (Form 1040).
What Else to Know
If your income is above a certain threshold, there’s an additional 0.9% Medicare tax that you have to pay. The income thresholds for 2024 are:
- Married filing jointly – $250,000
- Married filing separately – $125,000
- Single – $200,000
- Head of household (with qualifying dependent) – $200,000
- Qualifying widow(er) with dependent child – $200,000
The income thresholds for the additional Medicare tax apply to your combined wages, compensation, and self-employment income. So, for example, you’d have to pay the additional Medicare tax of 0.9% on the $10,000 by which your joint income exceeds the $250,000 threshold if you have $100,000 in self-employment income and your spouse has $160,000 in employee wages.
3. Home Office Deduction
What It Is
The home office deduction is one of the more complex tax breaks. The cost of any workspace that is part of your home and that you use regularly and exclusively for your business, whether you rent or own it, can be deducted as a home office expense.
Potential Savings
The expenses you can deduct for your home office include the business percentage of rent, deductible mortgage interest, utilities, homeowners insurance, and repairs you pay for during the year. Fifteen percent of your annual electricity bill becomes tax deductible if your home office occupies 15% of your home.
You have two choices for calculating your home office deduction: the regular method or the simplified option. You don’t have to use the same method every year.
With the regular method, your tax deduction is based on the percentage of your home that your office occupies. You can deduct direct business expenses in full. Then divide your office’s square footage by your home’s square footage and multiply the resulting percentage by the amount you spent on allowable house expenses to get a bigger deduction.
The simplified option is a quicker method that lets you multiply an IRS-determined rate by your home office’s square footage. You basically multiply your office’s total square feet by $5, up to 300 square feet, making $1,500 the maximum you can claim via this method. With this option, you cannot deduct depreciation or home-related itemized deductions.
Calculate the deduction using both the regular and simplified methods to determine which will give you the greater benefit.
Is It Hard to Claim?
If you use the simplified option, you can report the entire deduction for business use of your home on line 30 of Schedule C. However, If you choose the regular method, you’ll need to outline your deductions on IRS Form 8829, Expenses for Business Use of Your Home.
What Else to Know
You are basically on the honor system, but you should be prepared to defend your deduction in the event of an IRS audit. One way to do this is to prepare a diagram of your workspace with accurate measurements that uses its square footage in the calculation.
Important
You can deduct the amount that you pay to rent an office space that’s not in your own home. You can also deduct amounts paid for any equipment that you rent. The expense of having to pay a fee to cancel a business lease is also deductible.
4. Health Insurance Premiums Deduction
What It Is
If you’re self-employed and you pay for your health insurance premiums, you can deduct all your health, dental, and qualified long-term care (LTC) insurance premiums.
Potential Savings
This is not an itemized deduction; instead, it’s an adjustment to income. That means you don’t have to itemize to claim it. And given the high cost of healthcare, this could be a valuable way to lower your tax bill. Calculate the deduction using the Self-Employed Health Insurance Deduction Worksheet in IRS Publication 535. But be forewarned: If you’re eligible to enroll in your spouse’s employer-subsidized plan (even if you elect not to), you aren’t allowed to take the deduction.
Is It Hard to Claim?
This one requires some calculations to determine the adjustment to income you can get. Review the instructions for Form 7206 to learn more.
What Else to Know
Another tax break: You can also deduct premiums you paid to provide coverage for your spouse, your dependents, and your children younger than age 27 at year’s end, even if they aren’t dependents on your tax return.
5. Internet and Phone Bills Deduction
What It Is
Here’s another tax write-off: You can deduct the business portion of your phone and internet expenses.
Potential Savings
The key is to deduct only the expenses that are directly related to your business. For example, you could deduct the internet-related costs of running a website for your business. Or the business use percentage of your cell phone bill. But you shouldn’t deduct your entire monthly bill, including both personal and business use, if you have just one phone line. This may limit the amount of this deduction.
Is It Hard to Claim?
These expenses shouldn’t be included as a cost of using your home for business, but deducted separately on the appropriate form or schedule.
What Else to Know
According to the IRS, you can’t deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. However, you can deduct 100% of the additional cost of long distance business calls or the cost of a second phone line dedicated solely to your business.
6. Meals Deduction
What It Is
A meal is a tax-deductible business expense when you are traveling for business, at a business conference, or entertaining a client, although entertainment expenses per se are generally not tax deductible.
Potential Savings
The meal can’t be extravagant under the circumstances. When traveling, you can either deduct 50% of the meal’s actual cost, if you kept your receipts, or 50% of the standard meal allowance, if you kept records of the time, place, and business purpose of your travel but not your actual meal receipts. Unfortunately, that desk lunch is not tax deductible.
Is It Hard to Claim?
Taking meal deductions requires good record keeping. The information is entered onto Schedule C, line 24b, “Deductible meals.”
What Else to Know
The standard meal allowance is the federal meals and incidental expenses (M&IE) rate, updated every fiscal year effective Oct. 1. The rate and M&IE breakdown by location can be found on the U.S. General Services Administration (GSA) website. Meals can’t be deducted if they’re not separately identified on the receipt.
7. Travel Deduction
What It Is
Business travel must last longer than an ordinary workday, require sleep or rest, and take place away from the general area of your tax home (usually outside the city where your business is located) to qualify as a tax deduction. You should have a specific business purpose planned before you leave home, and you must engage in business activities while you’re on the road, such as finding new customers, meeting with clients, or learning new skills directly related to your business.
Potential Savings
Deductible travel expenses include the cost of transportation to and from your destination (such as plane fare), transportation at your destination (such as car rental, Uber fare, or subway tickets), lodging, and meals. If you travel a lot for your business, the savings may be substantial. Be sure to keep complete and accurate records and receipts for your business travel expenses and activities because this deduction often draws scrutiny from the IRS.
Is It Hard to Claim?
Like the deduction for meals, deducting travel expenses requires detailed record keeping. They are recorded on Line 24a of Schedule C.
What Else to Know
You can’t deduct lavish expenses, but you don’t have to choose the cheapest options available.
Note
Handing out business cards during a family vacation does not make your trip tax deductible.
8. Vehicle Use Deduction
What It Is
Your expenses are tax deductible when you use your car for business. However, make sure to keep detailed records of each trip’s date, mileage, and purpose. Don’t try to claim personal car trips as business trips.
Potential Savings
You can calculate your deduction using either the standard mileage rate determined annually by the IRS or your actual expenses. The standard mileage rate is $0.67 per mile for 2024. If you drove 1,500 miles for business, for example, you could deduct $1,005 ($0.67 x $1,500).
Is It Hard to Claim?
Using the standard mileage rate is easier than calculating your deduction because it requires minimal record-keeping and calculation. Just write down the business miles and the dates when you drive them, then multiply your total annual business miles by the standard mileage rate. Then enter this amount, along with any parking fees and tolls you paid, on Schedule C, Line 9.
What Else to Know
To use the actual expense method for this tax break, you must calculate the percentage of driving you did for business all year and the total cost of operating your car, including depreciation, gas, oil changes, registration fees, repairs, and car insurance. For example, your deduction would be $300 if you spent $3,000 on car operating expenses and used your car for business purposes 10% of the time.
You must use the standard mileage rate method on a car you own in the first year when the vehicle is available for use in your business. After that, you can use either the standard mileage rate or actual expenses in later years.
9. Interest Deduction
What It Is
Interest on a business loan from a bank is a tax-deductible business expense. Credit card interest isn’t deductible when you incur it for personal purchases, but it’s deductible when the interest applies to business purchases.
Potential Savings
The business portion of the loan’s interest expense is allocated based on the allocation of the loan’s proceeds if the loan is used for both business and personal purposes. Track the disbursement of funds for various uses if the entire loan isn’t used for business-related activities. Separate out business-related credit card purchases that carry interest.
If you have a business credit card and carry charges from month to month, the interest can add up over a year’s time.
Is It Hard to Claim?
The answer depends on whether you’re deducting interest from a loan (and what type of loan) or a credit card. Interest to be deducted is entered on Schedule C, Line 16b.
What Else to Know
Even if you don’t have a business credit card, you generally can still deduct qualifying interest charges on business expenses paid for with a personal credit card.
10. Dues and Publications Deduction
What It Is
The cost of specialized magazines, journals, and books directly related to your business is tax deductible as supplies and materials, as are dues or fees for certain professional membership organizations.
Potential Savings
A daily newspaper wouldn’t be specific enough to be considered a business expense for most businesses, but a subscription to Nation’s Restaurant News would be deductible if you’re a restaurant owner. Nathan Myhrvold’s $625 Modernist Cuisine boxed set would be a legitimate book purchase for a self-employed, high-end personal chef.
As for membership dues or fees, you can’t deduct them for belonging to clubs “organized for business, pleasure, recreation, or any other social purpose.” Examples include “country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions.” Still, the IRS does make exceptions for groups that it considers to not exist for entertainment purposes, such as:
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations, such as bar associations and medical associations
- Real estate boards
- Trade associations
Is It Hard to Claim?
There is no expense line on Schedule C for dues and publications, but it’s possible to add these costs to Part V, Other Expenses, where additional business expenses can be described and listed.
What Else to Know
If the usefulness of supplies and materials extends substantially beyond the year, you must generally recover their costs through depreciation.
11. Education Deduction
What It Is
Any education expenses you want to deduct must be related to maintaining or improving your skills for your existing business. The cost of classes to prepare for a new line of work isn’t deductible. Taking a course called “Real Estate Investment Analysis” to brush up on your skills would be tax deductible if you’re a real estate consultant, but a class on teaching yoga would not.
Potential Savings
The things that are deductible include tuition, books, lab fees, supplies, and transportation to and from classes, but again, only if they are required to build the skills you need in your present work. If you are a doctor in private practice, for example, you may be able to deduct the cost of continuing medical education (CME).
Is It Hard to Claim?
You deduct these expenses on Schedule C. Just be sure they qualify. The cost of taking classes to meet the minimal requirements of your line of business or to change your line of work won’t qualify for this deduction.
What Else to Know
If your classes don’t qualify for the continuing education deduction, check out the lifetime learning credit or the American opportunity tax credit.
12. Business Insurance Deduction
What It Is
You can deduct your premiums for insurance to protect your business, such as fire insurance, credit insurance, car insurance on a business vehicle, or business liability insurance.
Potential Savings
Line 15 on Schedule C is for “Insurance (other than health).” Publication 334 from the IRS lists the different types of business insurance for which it allows the premiums to be deducted, including liability, business interruption insurance, and group hospitalization and medical insurance for employees, as well as eight more. Your savings will depend upon the type(s) and costs of insurance you have.
Is It Hard to Claim?
Insurance other than health insurance is reported on Line 15 of Schedule C. How time consuming it is to claim depends on the number and types of insurance you have.
What Else to Know
Some people don’t like paying insurance premiums because they perceive them to be a waste of money if they never have to file a claim. The business insurance tax break can help justify the expense.
13. Startup Costs Deduction
What It Is
The IRS usually requires that you treat major expenses as capital expenses that have to be deducted over time rather than all at once. However, you can deduct up to $5,000 in business startup costs in the first year of active trade or business.
Potential Savings
For this tax write-off, startup costs include market research and travel-related expenses for starting your business, scoping out potential business locations, advertising, attorney fees, and accountant fees. You can also deduct up to $5,000 more in organizational costs, such as state filing fees and legal fees if you set up a corporation or LLC for your business. The $5,000 deduction is reduced by the amount that your total startup cost exceeds $50,000.
Is It Hard to Claim?
If you choose to take the first-year deduction, it needs to be reported on your business tax form. That would be Schedule C for a sole proprietor. If your expenses exceed $55,000, you lose the deduction, but you can amortize them in equal installments over 15 years starting in your second year of operation.
What Else to Know
Professional fees to consultants, attorneys, and accountants are also deductible at any time, even if they aren’t startup costs. Business expenses such as buying equipment or vehicles aren’t considered startup costs, but they can be depreciated or amortized as capital expenditures.
14. Advertising Deduction
What It Is
If you pay for Facebook or Google ads, billboards, TV commercials, or mail fliers, the costs that you incur to advertise your business are tax deductible.
Potential Savings
Depending on the type of business you operate, these costs may be high and worthwhile to deduct. You can also deduct the cost of an ad that encourages people to donate to charity while also putting the name of your business before the public in the hope of gaining customers. So a sign advertising “Holiday Toy Drive Sponsored by Robert’s Hot Dogs” would be tax deductible.
Is It Hard to Claim?
For a sole proprietorship, advertising is included on Schedule C—Line 8 under “Expenses.” According to the IRS, advertising and marketing costs must be “ordinary and necessary” to be tax deductible—that is, accepted in the industry and helpful and appropriate for the trade or business.
What Else to Know
Generally speaking, you’re not allowed to deduct lobbying expenses. Nor can you deduct advertising in a publication if the proceeds from it are for, or intended for, the use of a political candidate or political party.
15. Office Supplies Deduction
What It Is
You can deduct the cost of business supplies and materials that have been “consumed and used during the tax year.”
Potential Savings
Mundane items such as copy paper, postage, paper clips, printer ink, and pens can all be deducted. The IRS also allows deductions for books, professional instruments, and equipment, as long as they’re used within the year. If an item’s use extends beyond one year, you must generally recover its cost through depreciation.
Is It Hard to Claim?
No. Office supplies and postage should be claimed on Line 18, “Office expense,” of Schedule C.
What Else to Know
You may still deduct the cost of certain supplies that you keep on hand on a regular basis from year to year if:
- You don’t keep a record of when they are used.
- You don’t take an inventory of the amount on hand at the beginning and end of the tax year.
- This method doesn’t distort your income.
16. Qualified Business Income (QBI) Deduction
What It Is
The qualified business income (QBI) deduction, introduced in the Tax Cuts and Jobs Act, allows eligible self-employed people and small businesses to deduct a portion of their income from their taxes. The deduction is for “pass-through” income, which is business income that you report on your personal tax return. QBI is the net amount of qualified items of income, gain, deduction, and loss from a qualified trade or business.
Potential Savings
Eligible owners of sole proprietorships, partnerships, S corporations, and certain limited liability companies (LLCs) can deduct up to 20% of their QBI from their taxes. If your total taxable income (which is your adjusted gross income (AGI) minus allowable itemized or standard deductions) in 2024 is at or below $191,950 for single filers and $383,900 for joint filers, you may qualify for the full 20% deduction on your taxable business income. If your income is above the limit, you may still be able to claim the pass-through deduction, depending on the specific nature of your business.
Is It Hard to Claim?
As noted, at higher income levels, limitations on the QBI deduction come into play. Depending on the nature of your business and number of employees, consulting a tax accountant can help you get the full benefit of the QBI deduction.
What Else to Know
The qualified business income deduction is available whether you itemize deductions on Schedule A or take the standard deduction. However, it is set to expire on Dec. 31, 2025.
What Deduction Can I Claim Without Receipts?
The standard deduction is a fixed amount that can be claimed by individuals and married couples, is deducted from their taxable income, and doesn’t require any receipts. But if you are itemizing deductions, one deduction you can claim without receipts is for home office expenses. You simply multiply the IRS-determined rate of $5 by your home office’s square footage up to 300 square feet, so the maximum amount you can deduct is $1,500.
Similarly, if you itemize and you use a vehicle for business, you can calculate your deduction using the standard mileage rate determined annually by the IRS ($0.67 per mile for 2024). Simply keep track of your business miles and the dates when you drove them, and at the end of the year, total them up and multiply the result by the standard mileage rate to determine your deduction.
I Rent My Home. Do I Qualify for the Home Office Deduction?
Yes, you can qualify for the home office expense deduction if you meet all business use requirements. A renter can use the simplified or actual expense method based on the percentage of the home that’s dedicated to business use.
Is a C Corporation Eligible for the Qualified Business Income Deduction?
No. According to the IRS: “income earned through a C corporation or by providing services as an employee is not eligible for the deduction.” A C corporation files Form 1120, U.S. Corporation Income Tax Return and is not eligible for the deduction.
You also can’t deduct any portion of wages paid to you by an employer that is reported on a Form W-2, Wage and Tax Statement. Independent contractors and pass-through businesses are eligible for the deduction. They report their percentage of business income on a Schedule C, Profit or Loss From Business that accompanies Form 1040, U.S. Individual Tax Return.
Which Method Is Better for My Business Vehicle: Standard Mileage or Actual Expense?
It depends on the vehicle-related expenses that you’ve incurred during the year. It may be more beneficial to use the actual expense method if you’ve spent significant money on maintenance (oil changes, brake pad replacements, new tires), car inspections, and registration.
The Bottom Line
There are more deductions available than those that are listed here, but these are some of the biggest ones. Credit card processing fees, tax preparation fees, and repairs and maintenance for business property and equipment are also deductible. Other business expenses can be depreciated or amortized. You can deduct a small amount of the cost each year over several years.
Ask yourself, “Is this an ordinary and necessary expense in my line of work?” if you’re ever unsure whether a cost is a legitimate business expense. This is the same question the IRS will ask when examining your deductions if you’re audited. Don’t take the deduction if the answer is no. Seek professional help with your business tax return from a certified public accountant (CPA) or other credentialed tax preparer if you’re unsure.
Read the original article on Investopedia.