top

Mon – Fri | 6 a.m. – 5 p.m. PT

Small Business

Self-employed expenses to know before going on your own

Kim Mercado image
By Kim Mercado
Sep 8, 2021 min read

Many people dream about becoming their own boss, but there will be times when self-employed expenses catch you off guard. Of course, you’re aware of the main costs going in. Yet when an unexpected bill pops up, it can be staggering enough to make you miss your former employer. (Almost. Maybe for a moment.)

So, before you go all-in on a new venture, check out this list of business expenses if you’re a freelancer or self-employed. You’ll also get a look at self-employed tax deductions to benefit from.

Self-employment taxes 

As an employee, you never really had to think much about income taxes. You had a payroll deduction for federal taxes, Social Security, Medicare and more. You then received W-2 at the end of the tax year and filed your taxes with the IRS.

However, taxes are a little more complicated for self-employed people. When you’re filing taxes as an independent contractor, no one will be deducting taxes from customer payments. The onus is on you to track revenue, pay estimated quarterly federal and sales taxes if necessary, and keep track of expenses that are deductible from your income.

With added responsibilities, it’s always prudent to consult with a professional tax advisor before and during your business run.

Insurance 

Your employer had insurance requirements and coverage decisions to make, but chances are they didn’t involve you. As a new business owner, the tables will turn. 

First, there’s the cost of health insurance. An employer is no longer helping to offset those costs, so it pays to shop around for coverage that fits your needs. Most self-employed taxpayers can deduct health insurance premiums.

Depending on the nature of your pursuit, you’ll need to design and implement an affordable business insurance program aligned with your business risks.

For example, if you own a retail business, you’ll need coverage for potential loss to inventory and possibly the building — if you own it. If not, the lease terms may require that you maintain liability insurance in case your oversight causes damage to the building.

Or, you might work from home as a freelance graphic artist, have no stock or pricey equipment and think insurance isn’t important. Not so fast. You should also maintain professional liability insurance if you miss a deadline or damage a client’s computer system. 

Business insurance helps give self-employed business owners some peace of mind, allowing them to focus on the important parts of their work. Premiums you pay will help you reduce taxable income.

Rent or mortgage

Contractors and service businesses usually need some base of operation. That could be a garage or warehouse that you own or an office or retail space you lease.

In either case, you’ll need to incorporate the monthly payments into your budget. The expense you’ll incur hinges on your situation and the type of business you have. 

Telecommuting or remote work is quite popular these days. Say you’re an independent IT person who has space to run things from your home. You’ll not only save on commercial rent or mortgage payments but could deduct home office expenses. But, be prepared for expenditures on computer systems, a desk, office supplies and more.

And if you run your business out of a home you own, in addition to a home office deduction, you might be able to deduct some of your home mortgage interest. 

Recurring expenses 

Aside from rents or mortgages, you’ll need to account for all those other recurring payments necessary to keep your company rolling along.

For instance, you’ve probably considered the functional business necessities like phone and internet services. However, you may not have considered more under-the-radar staples like heat, water and electric payments. 

You can market your small business inexpensively on social media, but you'll also want to leverage paid advertising to reach a wider audience. Online ads or other hosting a website can account for recurring expenses. Similarly, costs for traditional direct marketing such as flyers, sales materials and swag can add up.

At some point, you’ll need to decide whether your business’ growth warrants hiring help. Adding employees to the mix now means payroll will have a significant impact on your business budget.

The upside to recurring costs is most, if not all of these self-employed expenses, are tax-deductible.

Vehicle and travel expenses

Is a vehicle an important part of your business? If so, you need to account for the usual vehicle expenses — gas, maintenance, commercial auto insurance, registration fees, loan payments and even depreciation. Don't forget to include parking costs, garage fees, and the occasional parking ticket when you're on the job.

You may occasionally need to travel, but unfortunately, there’s no employer to foot the bill. Business travel costs can add up fast, but luckily you can deduct a lot of it at tax time. For example, you can write off business meals, lodging, transportation costs, car expenses and more as long as it was for business use.

While you do your best around quality assurance, things don’t always go according to plan. There will be accidents, oversights and errors despite your most diligent oversight. That means you need to prepare for and insulate your business from the unexpected. 

For example, it could be something as common as a fender-bender that opens you up to a lawsuit. So, it’s smart to retain a legal advisor and consider liability insurance premiums as an affordable means to avert a financial disaster.

This is because most small businesses don’t have deep pockets to cover costs incurred from the negligence of an owner or one of its employees. Imagine the financial fallout from a more serious accident that causes $100,000 in damage to a client’s property — for example, accidentally introducing a virus to a computer system.

Technology and equipment 

It isn’t easy to function in the digital age without the use of computers. If you’re a one-person show, a laptop, cell phone and an Internet connection might suit your needs. 

While that cost may be manageable, supplying a full staff with computers, tablets or mobile phones will set you back a lot more.

With technology comes the need to manage it. You’ll need to decide whether you want to employ an IT person or outsource that service. In either case, maintaining your electronic equipment requires a considerable investment.

Or, perhaps you’re a contractor in the construction industry. Be prepared for the cost of purchasing equipment such as tools and vehicles and the premiums to insure them.

You may need to perform a service you have neither the expertise nor the personnel to complete. Hiring subcontractors will plug that gap, and you’ll need to factor in those self-employed expenses as well.

Tax expenses 

At the end of the tax year, legitimate business expenses will likely be tax-deductible. Every category covered above will reduce the amount of your taxable income. You may want to hire an accountant to help find deductions and calculate how much these costs offset gross revenue.

You’ll also want to account for any non-deductible expenses. Any personal expenses such as family vacations or personal entertainment won’t qualify for a business deduction. Meetings or golf outings with potential or current clients must have a valid business purpose to count as deductions.

NEXT Insurance helps protect your small business from larger expenses

To be a successful small business owner, you’ll need to balance your self-employed business expenses with acquiring customers and making sales. 

The ability to do all these things will make the difference between continuing to be your own boss or working under one. NEXT Insurance helps you stay in the driver's seat. 

You can purchase the coverage you need online in less than 10 minutes. We’ll ask you a few questions about your business and create a customized insurance quote. Coverage begins right after payment, and you can access your certificate of insurance immediately.

If you have questions at any time, our licensed, U.S.-based insurance advisors are ready to help.

Get your free instant quote today.

Kim Mercado image
By Kim Mercado
Kim Mercado is the managing editor of NEXT's small business blog.
Check Prices
Check Prices