Tax Deductions and Benefits for the Self Employed

As a self-employed person, you are responsible for handling your own taxes, or you can hire an accountant to do it for you. Either way, it’s important to remember that there are many tax deductions for the self-employed that can help lower your government tax bill when filing.

Keep in mind that while many things can be considered business expenses and are tax-deductible as a self-employed person, not everything is. It has to be an actual business expense to count.

Regardless of whether you are self-employed, e.g., as a freelancer or independent contractor, you probably have a question come tax time: how can I reduce taxes on my self-employment?

Most self-employed people want to use every deduction they are entitled to reduce their taxes, but may not know what they are entitled to.

According to Pew Research, about 16 million of America’s 150 million workers are self-employed. Self-employment can lead to more independence and more choice in terms of your working hours and where you work. But it can also come with a more complicated—and expensive—tax bill.

If you’re self-employed, you can claim a variety of deductions to help reduce your taxes. Here are 15 tax deductions freelancers, contractors, and other self-employed taxpayers can use to save money on their tax bills.

See also, What Does It Mean to Withhold Tax?

How much tax can you deduct?

Again, self-employed tax deductions are a complex matter. You must review all forms and documentation carefully to ensure you are doing everything correctly.

When preparing your tax return, you can only deduct the amount that represents an actual work-related expense. Different items you deduct have different limits.

There is also a minimum amount (i.e. minimum amount) above which you can deduct. This means that you can only deduct amounts that exceed this lower limit. Your adjusted gross income (AGI) also plays a role in what you can deduct and how much.

Tax Deductions for the Self Employed

1. Self-Employment Tax

Half of the self-employment tax you pay is deductible from your taxable income. What is self-employment tax? Because you don’t have an employer to pay your Social Security and Medicare taxes for you, you must pay this yourself through a 15.3% self-employed tax, broken down as follows:

  • 12.4% of your net business income goes to Social Security.
  • 2.9% goes to Medicare.

Only your first $142,800 of income is taxed for Social Security; All of your self-employment income is taxed for Medicare. Anyone who earns $400 or more in a year from self-employment is subject to self-employment tax.

2. Qualified Business Income

Self-employed taxpayers can deduct up to 20% of their net business income using the Qualifying Business Income Deduction (QBID). QBID applies to income from partnerships; limited liability companies (LLCs), S corporations, and sole proprietorships operating in the United States.

Qualifying business income includes the deductible portion of self-employment tax, health insurance premiums, and deductions for contributions to qualifying retirement plans.

It does not include investment gains and dividends, interest income, foreign earnings, or wages. Keep the following in mind when determining if you qualify for the QBID:

  • Your total taxable income must be less than $164,900 for a single claimant or $329,800 for joint claimants to qualify for the full deduction (based on 2021 figures). After that, the deduction begins to leak.
  • Restrictions apply to certain service providers, including lawyers, accountants, performing artists, actuaries, and medical offices. However, these restrictions only apply if your income exceeds the thresholds above.
  • Taxpayers whose income exceeds the thresholds must also comply with restrictions on deducting W-2 wages they have paid.
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3. Home Office Expenses

Remote workers cannot deduct their home office costs, but the self-employed can. This deduction only applies to regularly and exclusively professionally used space that is also your main place of business.

You can not claim the sofa as your headquarters if you also use it as a place to watch TV with your family. If you maintain a regular office and occasionally use your study as a home office, the deduction does not apply either.

  • Deductible expenses include mortgage interest or rent, utilities, insurance, depreciation, property taxes, maintenance, and repairs.
  • Direct expenses (e.g., painting your office space) are 100% deductible.
  • Indirect expenses are deductible based on the percentage of your home that is devoted to business purposes.

For example, if your home is 2,000 square feet and your office is 200 square feet, you can deduct 10% of your home’s indirect expenses.

Note: Expenses for non-commercial parts of your home – such as landscaping – are not deductible.

You can also choose a simplified option that allows you to directly deduct $5 per square foot of dedicated commercial space as a home office cost. This option is limited to 300 square feet or $1,500.

Also see, How to Apply for Tax Exemption.

4. Rent

If you rent your own room for your company, you can, of course, deduct the rental costs – and spare yourself the calculation of the home office deduction.

However, the IRS has rules for applying for a rent deduction, including that you cannot own the property you are renting, and you cannot deduct rent that you have paid in advance for future years.

5. Health Insurance Premiums

You may be able to deduct medical, dental, and qualifying long-term care insurance premiums that you paid for yourself and your family. The self-employed can deduct health insurance contributions as a business expense with two important limitations:

  • You and your spouse cannot participate in an employer-sponsored health insurance plan.
  • You must have a net business profit for the year.

6. Retirement Account Contributions

Contributions to certain retirement accounts may be deductible if you are self-employed, including contributions you make on behalf of your employees.

  • If you open a SEP IRA, you can contribute up to 25% of your net self-employment income, up to $61,000 for 2022.
  • Start a Savings Incentive Match Plan for Employees (SIMPLE IRA) and you may be able to contribute your entire net income to the plan, up to $14,000 in 2022 with a $3,000 catch-up contribution if you are 50 years of age or older.

7. Computer purchase

You may be able to deduct the full cost of a computer you purchased for your business in a single year if the computer is used for more than 50% of your business, was commissioned during the current tax year, has not been used before, and was not acquired from a relative.

Alternatively, you can use multi-year depreciation for the depreciation of computer equipment and other tangible assets you own, such as buildings, machinery, furniture, and equipment, as well as patents, copyrights, and computer software.

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8. Telephone and internet costs

If you use your cell phone for business, you can deduct a percentage of your cell phone bill from your taxes. You cannot deduct the cost of a home landline, but you can deduct the cost of a single long-distance business call or the cost of a second dedicated line for business purposes.

Likewise, you can deduct a percentage of the cost of your home internet service, as well as 100% of the cost of web hosting for your company’s website, or other strictly business-related internet costs.

9. Meals

For a limited time, businesses can deduct 100% of food and beverage charges paid to restaurants as long as the business owner or a company employee is present when food or beverages are provided.

When the Taxpayer Certainty and Disaster Relief Act of 2020 expires in late 2022, meals will again be 50% deductible.

10. Travel

Subtract the cost of airfare, taxi, lodging, meals excluding entertainment, dry cleaning, and tips for your business trips.

The IRS offers specific guidelines for qualifying business trips and warns against deducting expenses that are “lavish, extravagant, or for personal purposes.” Keep detailed records, including receipts, credit card statements, and notes from your trips and meetings.

Also see, What Is the Tax Underpayment Penalty?

11. Vehicle costs/Business mileage

The standard mileage penalty in 2022 is 56 cents per mile. You can track your mileage by keeping a log of your business trips, including the places you’ve driven, the miles traveled, and the reason for the trip. Multiply your business miles by 0.56 to get your mileage deduction.

You also have the option to deduct a percentage of your total car expenses for the year instead. Track your total miles driven and break it down into your total business miles to get your business usage percentage.

For example, if you use your car for business 20% of the time, you can deduct 20% of your lease payments, depreciation, vehicle registration, insurance, gas, repairs and maintenance.

If you use your car for work, be it driving to meetings or making deliveries, you can deduct your mileage on your tax return. However, if you use your car for private and business trips, you can only deduct business kilometers.

As with the home office deduction, you have two options for claiming the kilometers for tax purposes.

To qualify for the standard mileage rate, you must meet the following conditions:

  • You must own or lease the car.
  • You must serve five or fewer cars at the same time.
  • You must not have claimed any depreciation on your car.

Note: If you choose the standard method for a car you lease, you must use it for the entire lease period of the vehicle.

The actual cost method allows you to deduct the actual running costs of the vehicle. If you use the vehicle for both business and personal purposes, you need to determine which part is for business purposes.

Whichever method you choose, the best way to track your business mileage is by keeping a log of the dates and types of trips, mileage, and any business expenses such as gasoline, oil, licenses, registration fees, repairs , tires, insurance, lease payments are recorded , and depreciation.

You should also calculate the deduction amounts using both methods and choose the largest deduction.

If you use an online tax software program, you will be asked to enter both your actual vehicle cost and mileage for the year. It then calculates the best deduction for you.

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12. Interest on business loans or credit cards

Interest on loans or credit cards you use to cover business expenses is deductible. However, only the part of the interest that is attributable to operating expenses can be credited.

If 40% of the balance on your credit card was used for personal expenses, you may only deduct 60% of the total interest related to business expenses.

13. Professional Memberships

Business association memberships may be deductible but must be business related. Joining a country club does not qualify for a deduction, but registering with your local chamber of commerce or a professional organization associated with your industry would.

14. Education

Education and training may be deductible if they provide or improve required business skills or if required by law or regulation.

Examples include continuing education required to maintain a license or courses to update your technical skills. Education that prepares you for a new job or business is not eligible.

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15. Office Supplies and Other Expenses

The list of qualifying deductions is long—too long to list comprehensively here. Overall, most of the expenses you incur as a normal part of running your business are potentially deductible.

Keep receipts in case you get them checked. If in doubt, seek advice from a tax advisor.

Here is a short list of typical deductible expenses:

  • Office supplies
  • Advertising
  • Business insurance
  • External services (e.g. accounting, marketing, and payroll)
  • Software Subscriptions
  • Postage and Shipping
  • Research and testing costs
  • Bad Business Debts
  • Business Licenses
  •  Donation Contribution

16. Promotional Deduction

Basically, you can deduct the advertising expenses you paid for your business. The cost of getting your name out there is an example of deductible advertising expenses.

Some examples of ad spending are TV, radio, and social media marketing fees, advertising, or direct mail.

FAQs

Do deductions reduce self-employment tax?

The only guaranteed way to lower your self-employment tax is to increase your business-related expenses. This will reduce your net income and correspondingly reduce your self-employment tax. 

What tax deductions can I claim without receipts?

Car expenses, travel, clothing, phone calls, union fees, training, conferences, and books are all examples of work-related expenses. As a result, you can deduct up to $300 in business expenses without having to provide any receipts.

Can you deduct meals if you are self-employed?

If you’re self-employed, you can deduct the cost of business meals and entertainment as a work expense when filing your income tax. The cost of business meals and entertainment can be deducted at a rate of 50 percent.

Why is self-employment tax so high?

In addition to federal, state and local income taxes, simply being self-employed subjects one to a separate 15.3% tax covering Social Security and Medicare

Conclusion

You don’t have to find all of your available deductions yourself. If you are self-employed and therefore have a more complex tax return, you should consider working with a tax professional.

Not only can you find additional deductions that you weren’t aware of, but you can also deduct the cost of preparing the business portion of your tax return as a business expense.

References

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