From long hours to variable income, self-employment can be a tough way to make a living. Having to report your own business income and expenses adds another layer of complication.
Understanding the basics of what expenses you can deduct is important whether you decide to file a return on your own or hire a tax advisor to help guide you through it.
Here are some of the most common deductions that can help you reduce your taxable income and maximize your profits.
Overview of self-employed tax deductions
Working for yourself grants you a variety of tax benefits not available to traditional employees. Generally anything you purchase that's necessary to start or maintain your business may be deductible on your federal tax return. A tax deduction is subtracted from your income, reducing the amount of tax you ultimately owe.
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Home office deduction
The home office deduction allows you to deduct any portion of your home that you use regularly and exclusively for work. There are two methods of deducting home office expenses:
Simplified method: This method uses a standard deduction of $5 per square foot of home used for business, up to a maximum of 300 square feet. While it's a relatively easy way to account for such expenses, keep in mind that the 300 square-foot limit results in a maximum deduction of $1,500, says Ben Richmond, chartered accountant and managing director of North America at accounting-software provider Xero.
Regular method: This method uses the actual expenses you incur. If you opt for the regular method, there are many types of expenses you can deduct, including physical objects such as furniture and appliances as well as utilities, insurance, maintenance, and repairs. You calculate the deduction by completing Form 8829 to itemize these expenses, which makes keeping receipts very important, says Richmond.
Quick tip: While the simplified option is easier, it caps at $1,500. Try both options to see which leads to a larger deduction.
Business expenses
Equipment and supplies
You can deduct office supplies you use as part of your business. This deduction is separate from the home office deduction and includes things like pens, staples, uniforms, etc. It also includes more expensive items such as computers and printers (these are capital assets that are not deducted as supplies but rather depreciated). As usual, you should keep receipts of anything you want to deduct.
Business meals
Meals are tax-deductible when they are business-related, such as when attending a business conference or meeting with a client. However, you can't deduct expenses for your family member or friend who is in attendance unless they work for you. Plus, meals can't be extravagant or include alcohol. You don't have to choose the cheapest restaurant around, but it should be within reason.
Additionally, your business meals must be separate from entertainment. If you eat at a place of entertainment that is not exclusively a restaurant, you must be able to separate meal expenses from entertainment expenses on receipts.
Internet and phone bills
You have the option to deduct internet and phone bills incurred while conducting business, such as while working from your home office. If you use either service for both work and personal use, you should only deduct the portion associated with your business.
"There's an overarching calculation that can be used when looking to deduct internet and phone expenses related to business use of internet/phone," says Richmond. "You need to maintain a record of your internet/phone expenses, and then deduct based on the percentage used exclusively for business purposes."
Interest paid on your credit cards and loans
Interest payments are considered tax-deductible if the line of credit or loan helped finance a purchase for your business. "Interest expense that is related to a freelancer's trade or business should be fully deductible," says Daniels. "This does not include any interest related to personal expenditures or investments."
Daniels suggests using separate business credit cards for business expenses so they're not mixed in with personal expenses. This makes it easier to report and claim deductions come tax time.
The self-employment tax
In addition to income tax, there is a separate tax self-employed people must pay on net earnings called the self-employment tax. It covers Social Security and Medicare, and the rate is 15.3%, with 12.4% applying to the first $168,600 of net earnings in 2024 and 2.9% applying to all earnings. There's an additional Medicare tax of 0.9% for single filers with net earnings over $200,000 and married joint filers with net earnings above $250,000.
While this is substantial, you are able to take a deduction for half of the tax on Schedule 1, which lowers the amount of your earnings that are subject to income tax.
Travel and transportation deductions
Vehicle expenses
If you regularly use one or more vehicles as a part of your business, you may be able to deduct the use on your tax return. There are two ways to calculate these expenses:
Standard mileage rate: This method multiplies the number of business miles driven by a flat per-mile rate that can vary from one year to the next. For 2024, the rate is 67 cents per mile. If you claim the standard mileage rate you will need to break out your miles driven for business and personal use.
Actual expense method: This approach allows you to deduct specific costs associated with operating your business vehicle, such as gas, oil changes, tires, registration fees, insurance, and depreciation. If you also use your business vehicle for personal use, you will have to calculate the portion of the operating costs that you incurred during business travel.
The method that will give you the greater deduction depends on your circumstances. If you have a lot of expenses to cover, the actual expense method may be better. But if your ongoing costs to operate your vehicle are relatively low, the standard mileage rate may be preferable.
Whichever method you use, if you lease your business vehicle, you must continue to use that expense method for the duration of the lease. On the other hand, if you own your vehicle, you aren't required to use the same reporting method every year.
Business travel
If you travel for business, you may be able to deduct the expenses you incur on your trip.
"Generally travel from one business location to another is deductible as well as any travel (plane, train, or automobile) to business conventions, client meetings, or prospective client pitches," says Jim Daniels, a CPA at UHY Advisors in Albany, New York.
However, that doesn't mean every expense during a business trip is deductible. For example, if you fly to a tech conference in Las Vegas, you can deduct your flight and admission to the conference, but not the trip you take to the Grand Canyon afterward.
Quick tip: The IRS frequently scrutinizes business travel expenses. Be sure they are necessary and relevant to your business. Also be sure to keep good records of your expenses in case you get audited.
$69 federal fee, plus $64 per state
Pros
Cons
- Tell TurboTax about your life and it will guide you step by step. Jumpstart your taxes with last year’s info.
- Snap a photo of your W-2 or 1099-NEC and TurboTax will put your info in the right places.
- CompleteCheck™ scans your return so you can be confident it’s 100% accurate.
- You won’t pay for TurboTax until it’s time to file and you’re fully satisfied.
- TurboTax is committed to getting you your maximum refund, guaranteed.
Health insurance premiums
If you are self-employed and pay for your own health insurance, you may be able to deduct the cost of premiums. This deduction can also apply to your spouse, dependents, and any children under 27 who are on your health plan, regardless of whether you claim them on your return, says Monique McGrant, vice president at McGrant Tax & Bookkeeping in Charlotte, North Carolina.
Keep in mind that if you or your spouse were eligible to participate in an employer-sponsored plan, you can't deduct your health insurance premiums. You must also report a profit to deduct health insurance premiums. "If you do not have a profit, you can elect to claim the premiums on your Schedule A form instead of your Schedule C form," McGrant says.
Retirement contributions
If you are self-employed, there are several types of retirement plans on which you can deduct contributions. These plans are specific to self-employed people and business owners, and deducting your contributions allows you to reduce your taxable income.
"One of my favorite ways to advise clients to save on taxes is to contribute to a retirement plan," says Kristen Keats, founder and CEO of Breakaway Advising in Sherwood, Oregon. "Paying your future self sure beats paying the IRS and state agencies' taxes on the full amount of your hard-earned profits."
Simplified Employee Pension (SEP) IRA
Deducting SEP IRA contributions is one of the most convenient ways for self-employed people to reduce their taxable income. Self-employed people can contribute up to $69,000 for 2024, and that contribution is fully tax-deductible. Self-employment tax is calculated before SEP contributions. Thus, these contributions do not affect self-employment tax.
Note: Contributions to most retirement accounts can be made all the up until the federal tax deadline of April 15 for the previous year.
SIMPLE IRA
As its name implies, the SIMPLE IRA is an easy option for small business owners, and deducting your contributions can also lower your taxable income. SIMPLE IRA contributions are fully tax-deductible.
"Under a SIMPLE IRA, you have to have fewer than 100 employees and the employees have to receive at least $5,000 of compensation in the prior calendar year," says Keats.
While the SIMPLE IRA has some prerequisites, it does come with advantages. "They do not have to meet the non-discrimination requirements, minimum participation, and minimum coverage rules, vesting rules or other top-heavy rules applicable to other qualified plans such as a 401(k)," says Keats.
However, Keats notes that these plans come with contribution limits lower than the 401(k), capped at $16,000 for 2024, with an additional $3,500 for employees 50 and older.
Solo 401(k)
A solo 401(k) is only an option if you have no employees other than your spouse. Like a regular 401(k), you can make contributions as an employee up to $23,000 in 2024 ($30,500 if you're 50 or older), and as the "employer" you can make an additional contribution up to 25% of net earnings.
Employer contributions to solo 401(k) plans are fully tax-deductible, while employee contributions can either be deferred or can be contributed to a Roth solo 401(k).
If you expect to hire employees in the future, the solo 401(k) is not the best option for you. The SEP IRA or SIMPLE IRA are better choices in that scenario.
FAQs about tax deductions for self-employed individuals
What are the most common tax deductions for self-employed individuals?
Common tax deductions for self-employed individuals include the home office deduction, supply and equipment expenses, health insurance premiums, half of the self-employment tax, and business meals and travel.
Can I deduct my cellphone bill if I'm self-employed?
Yes, you can deduct your cellphone bill if you're self-employed and you use it for business use by tracking how many minutes are used and providing documentation. If you use the phone for personal and business use, you will need to keep very careful records and only deduct the business portion.
How do I calculate my mileage deduction for business?
You can calculate your mileage deduction for business using either the standard mileage rate method or the actual expense method. The standard mileage rate method multiples the number of business miles driven by the standard rate (67 cents per mile in 2024). The actual expense method allows you to deduct specific costs such as gas, repairs, insurance, and more.
What documentation is needed to claim self-employed deductions?
The documentation needed to claim self-employed deductions includes receipts, invoices, bank statements, and credit card statements.
