As a self-employed person, you’re in charge of handling your own taxes or hiring an accountant to do them for you. Either way, it's important to remember that there are plenty of self-employment tax deductions that can help lower your tax bill to the government when filing.
Remember that while many things can be considered business expenses and serve as self-employed tax write-offs, not everything can. It will have to be an actual business expense for something to count.
Self-employment allowable expenses
According to the IRS, a business expense must be both “ordinary and necessary.” But what does that mean?
An ordinary expense is considered commonplace in your industry and that you need to run your business. Similarly, necessary expenses are helpful and appropriate costs for your business. So, for example, if you’re a caterer, travel expenses, cooking equipment and your kitchen rental space could all be deducted.
There is an almost endless list of things that can count as legal tax deductions for self-employed people. Check the IRS for full details on what is and isn't a business expense. From there, you can get information about actual products and services that are deductible, the maximum tax refund you can get and the rules for taking the deduction.
Potential income tax deductions for the self-employed
To give you an idea, here are the most common self-employment tax deductions you can write off:
1. Retirement plan deduction
Many people see this as the best tax deduction. You get the double benefit of tax savings, plus money saved for retirement. There is some complicated math here, but basically, you can deduct however much you paid into your 401(k) or IRA. Beyond a 401(k), other options are available, so it’s worth checking with the IRS.
2. Self-employment taxes deduction
When you’re self-employed, you pay extra taxes to be your own boss — that’s no fun. This is because you're paying both the employer and employee sides of Social Security tax and Medicare taxes — that’s a tax rate of 15.3% of net earnings.
The good news is that the IRS considers the employer portion of the self-employment tax as a business expense, so you can deduct half of it.
3. Home office expenses deduction
Working from home is more commonplace these days, so you can deduct some expenses if you use part of your home for business purposes. These may include mortgage interest, insurance, utilities, repairs and depreciation.
While your home office needs to meet certain criteria, any workspace you use exclusively and regularly for your business — regardless of renting or owning — can be deducted.
4. Internet and phone bills deduction
Regardless of if you qualify to claim a home office deduction, you can write off the business portion of your internet and phone bills (smartphone and landlines). So, if you have an e-commerce shop, you can deduct the internet costs for running that shop.
With smartphones, you can expense this one twice over. First, you get a tax break on the purchase of your actual mobile device. Second, you can deduct your cell phone plan, or more accurately, the portion of the phone plan you use for business calls.
However, the IRS doesn’t allow you to “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 business-related long-distance calls on that line. If you have a separate second line for your business, you may deduct that.
5. Office supplies deduction
Whether you work in a home office or a commercial space, you can deduct all sorts of supplies used in running your business. This includes paper, ink and even your computers for an office space.
Office supplies aren’t limited to computers and printers. Tax deductions for construction contractors could include things like your standard work tools and materials like paint and glue. Or, if you’re a hairstylist, it could include the cost of renting a chair at a salon and styling products.
6. Consulting and professional services deduction
Generally, the fees charged by accountants and attorneys directly related to operating your business are deductible as business expenses. There are certain instances where their fees are not deductible — for example, fees to acquire business assets — but you can write it off as long as it's an ordinary and necessary expense.
So, come tax time, you could hire a tax professional to help you prepare your Schedule C (Form 1040) and deduct the expense!
7. Travel deduction
Do you meet clients out of state or go to industry conferences? If so, you can deduct travel-related expenses such as airfare, hotel costs, transportation and meals, so keep those receipts organized.
To qualify for this deduction, you need to show that the travel is truly business travel and that you're engaging in business activities. The IRS scrutinizes lavish expenses (remember, ordinary and necessary), so it's in your interest to keep it reasonable.
8. Meal deduction
Taxpayers can deduct meals, so long as it has a business twist, say with a prospective client or potential partner. Meals are also a tax-deductible business expense when you're traveling for business or attending a conference.
To note, the Consolidated Appropriations Act, 2021 temporarily amends this deduction. Usually, taxpayers can only deduct 50% of business meals. But, in 2021 and 2022, you can take a 100% deduction if a restaurant provides the food or beverages. This provision will expire at the end of 2022.
9. Vehicle use deduction
If you’re going from job to job or making deliveries, your car can start to feel like an office. Good news: vehicle expenses and business miles can be a big deduction for entrepreneurs. Your self-employed status means that you can write off all sorts of car expenses. This can include things like purchasing your car, gas, insurance, licensing, parking and even your car’s depreciating value.
The IRS standard mileage rate for tax deductions is 56 cents per mile in 2021 and 58.5 per mile in 2022. The rules for calculating the rate are updated every tax year, so it's good to stay current.
10. Health insurance premium deduction
When you’re a small business owner, you’re often paying for your own health insurance. If you’re not eligible for participating in your spouse’s employer and are paying for it out of pocket, you can deduct the premiums.
This includes medical, dental and vision premiums. You can also write off medical-related expenses such as glasses, nonprescription medications, and acupuncture treatments. These deductions are also applicable if you cover your spouse, dependents and your children younger than 27 (even if they’re not listed as dependents on your tax form).
11. Business insurance premium deduction
Speaking of insurance, if it’s a necessary cost of your business, then it’s deductible. For example, since contractors insurance is considered a standard and accepted expense for most contractors, it counts.
12. Rent expense deduction
Speaking of commercial properties, you can deduct it if you rent an office or other commercial space specifically for your business. However, you cannot own the property in any way; if you have equity or a title to the property, the rent is not deductible.
Renting isn’t limited to property; you can also deduct equipment rentals necessary for business use. For example, if you are a landscaper and rent lawn mowers, this counts as a write-off.
13. Education deduction
Suppose you take a continuing education course to brush up on your professional skills or attend training to maintain skills and licenses. In that case, these are tax-deductible for self-employed individuals. For instance, a lawyer can deduct the cost of attending Continuing Legal Education (CLE) classes required by their state's bar association to maintain their law license.
However, if you’re taking classes to prepare yourself for a new line of work, it’s not deductible.
Educational expenses are not limited to classroom learning. You can also potentially deduct expenses related to webinars, virtual conferences, registration fees, business-related books and subscriptions to professional publications.
14. Marketing and advertising expense deduction
If you're spending money to advertise your business, you're in for some good news. You can write off pretty much any expense related to promoting your business, from local ads down to business cards and even branded giveaways. Digital advertising such as Facebook, Google or LinkedIn ads, and website design and maintenance all count.
What doesn't count is the amounts paid to influence legislation, aka lobbying. No deductions there.
How much tax can you deduct?
Again, self-employment tax deductions are a complex matter. You will need to review all forms and paperwork properly to make sure you’re doing it right.
When itemizing your tax returns, you will only be able to deduct the amount that is a work-related actual expense. Different items you deduct have different limits.
There is also a minimum (i.e., floor) amount after which you can deduct. That is, you can only make deductions on amounts that exceed this floor. Your adjusted gross income (AGI) also plays a role in what you’re able to deduct and how much.
To figure your self-employment tax deductions out properly, the IRS can be helpful. Or, of course, consult with a certified public accountant (CPA).
Use tax deductions to boost your business
Getting all that tax money back is great. Now the question is, what are you going to do with it? Sure, you can splurge on a new big-screen TV. However, an even better idea is to reinvest it in your business.
Need some ideas? You can:
- Use other businesses to help grow your business by outsourcing
- Gain new customers through marketing
- Use the money to buy new tools
- Attend industry conferences or networking events
- Improve your skills or learn some new ones to improve your business
Besides helping boost your business, many of these expenses will, in turn, be tax-deductible.
Learn more about tax deductions for your business
Generally, the self-employed tax deductions listed above can apply to your business, but it's important to consult with a tax professional to see if any exclusions apply.
Learn more about tax deductions for various professions with these articles:
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