Self Employed / Small Business
Common deductions for the self-employed
This list is relevant for many self-employed professionals, including rideshare drivers, such as Uber or Lyft drivers, who claim large mileage deductions, or writers who might take the home office deduction.
These business deductions can also apply to designers, housekeepers, photographers, construction workers, consultants or any other professionals who work for themselves. Here are some of the most common deductions:
Travel and hotel
If you travel to visit clients or attend trade shows, you may be able to deduct the cost of travel. Business travel expenses include transportation and accommodation costs. The IRS allows a 50% deduction for business meal expenses, but a recent tax law change makes the deduction more difficult to calculate. Have a CPA review your business meal expenses.
You shouldn’t attempt to deduct any expenses associated with sightseeing and leisure travel, which can trigger an audit.
A number of self-employed people work out of their homes.
Many freelancers work out of their homes, and the IRS allows self-employed persons to deduct the portion of their mortgage (including property taxes) or their rent that goes toward a home office.
To qualify for this deduction, you must have a specific area in your home designated for working, and you must refrain from using it for other purposes. When claiming this deduction, you can calculate the deduction’s value, using either the regular or simplified home office deduction option.
The home office deduction may also include a portion of your home utility costs.
Freelancers who work at home can deduct a portion of utility costs as a home office expense. The percentage of your utility costs that are tax-deductible is proportional to the percentage of your home occupied by your office.
Along with gas and electricity, freelancers can deduct the costs of heating, air conditioning and phone service. Be aware, however, that you cannot deduct the actual cost of utilities if you claim the simplified home office deduction.
Your professional development costs may also be tax deductible.
As a freelancer, it’s important that you find ways to stand out from your competitors. To keep ahead of the pack, many freelancers attend classes and educational seminars.
The cost of these expenses can add up, so the IRS allows freelancers to deduct expenses related to professional development on their tax returns. Additionally, self-employed persons can deduct their dues for professional organizations and membership fees.
Every business needs to get attention and generate interest.
Advertising and marketing
In our increasingly connected society, self-employed people have to engage in marketing and advertising if they hope to stay competitive. The IRS permits freelancers to deduct the cost of flyers, web advertisements, business cards and print ads, along with other marketing expenses.
Your website may be your primary tool for marketing your business.
With a majority of consumers using the internet to research purchases, creating a mobile-friendly, responsive website is crucial for a freelancer’s success.
Self-employed persons can deduct costs related to their business websites, including domain fees, web design, web building and maintenance.
These days, most freelancers spend their days staring at computer screens. From sophisticated video editing programs to more basic options like Microsoft Office and Adobe Acrobat, software can be expensive. Software costs are a common tax deduction for small business owners and freelancers.
Mileage and gas
Do you regularly drive to meet clients or suppliers? If so, you should take advantage of the tax deductions available for vehicle mileage or normal vehicle wear and tear.
You can choose between two types of vehicle-related deductions: the standard mileage option or the actual expense option.
The standard mileage option allows you to make a deduction based on how many miles you use for business purposes. The actual expense option requires that you figure out how much it costs you to maintain and operate your car expressly for business use.
If your freelance business is successful, you may consider incorporating in the future. The IRS permits new businesses to deduct expenditures associated with incorporation, including state registration fees and legal costs.
One of your biggest costs may be for health insurance coverage.
Self-employment health insurance deduction
Most full-time employees receive their health insurance through their employer. However, many self-employed professionals must pay for their own healthcare out of pocket, and those monthly premiums can add up to a hefty chunk of change every month.
Self-employed individuals who meet certain criteria may be entitled to a special tax deduction that allows them to deduct the cost of health insurance premiums. The deduction includes coverage for dental expenses, vision, long-term care and short-term care. You can deduct the cost of coverage for yourself, your spouse and any dependent family members.
If you meet the following requirements, you can deduct the cost of your health insurance plan:
Your business is generating a profit. If your business claims a loss for the tax year, you can’t claim the health insurance deduction.
You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in a health plan and chose not to, you cannot claim the health insurance deduction.
You are only attempting to deduct premiums paid for the months when you were not eligible for an employer’s health plan.
Note that health insurance costs are not posted with other expenses on Schedule C, Business Profit and Loss.
Instead, self-employed workers who use Schedule C deduct health insurance costs using Schedule 1 of Form 1040. Schedule 1 computes adjustments to income on your personal tax return.
Once you understand the self-employed business deductions, you can gather information to complete your tax return.
How do those deductions translate into paperwork?
Some of the self-employment tax deductions above may not apply to your profession, but you might be surprised by the number that do.
When you’re ready to file, you’ll list the majority of your deductions on Schedule C (Form 1040).
Your individual tax return is due April 15th. If April 15th falls on a weekend or holiday, the due date is the following Monday.
Take a look at Schedule C and the instructions, so you have an idea of how the form is organized. A quick review will help you understand your allowed business deductions.
Common Schedule C tax deductions
Less common Schedule C tax deductions
You might also encounter some of these business expenses in your line of work, but they’re generally less common.
Additional deductions on other tax forms
Most of the deductions listed above will be found on your Schedule C tax form. However, there are a couple other deductions of note that you can find on Schedule 1 of Form 1040:
Health insurance deduction: Self-employed workers
As mentioned above, deducting the cost of your self-employed health insurance is one of the biggest deductions you can take. The expense is posted to Schedule 1 of Form 1040.
Self-employed FICA tax deduction
If you’re a traditional employee, your Federal Insurance Contributions Act tax burden, known as FICA, is split between you and your employer. If you’re self-employed, you’re responsible for paying the entire FICA tax amount, which pays for Social Security and Medicare contributions.
You can deduct a portion of the FICA tax as a business expense on Schedule 1 of Form 1040. Complete Schedule SE to determine the exact amount of your FICA tax deduction.
If you have the right tools, you can prepare your business and personal tax returns in less time.
Keep the paperwork in perspective
Filing taxes as a freelancer can be stressful, and the self-employed tax forms may be confusing. However, by taking advantage of all possible deductions and understanding what’s expected of you, you can minimize your tax burden and grow your business.
Preparing your taxes can also be time-consuming. However, if you invest the time to claim all of your deductions, you’ll pay less in taxes.
Use financial software—like QuickBooks® Self-Employed—to track expenses throughout the year and automatically post the expenses as deductions.