15 Tax Deductions for the Self Employed
Self-employment can give you more freedom and more options when it comes to where and when you work. But it can also come with a tax bill that is harder to understand and costs more. Self-employment tax deductions are important for business owners to remember because they can lower the amount of taxes they have to pay to the government.
Also, keep in mind that not everything can be claimed as a business expense or a tax deduction for self-employed people. It has to be a real business expense for it to be taken into account.
According to the IRS, a business expense must be both “ordinary and necessary.” This is how the IRS defines both:
- An "ordinary" expense is anything that is "common and accepted” to a specific trade or business.
- A "necessary" expense is anything that is "helpful and appropriate,” but not indispensable.
These expenses are outlined in Section 162(a) of the Internal Revenue Code and must pass basic tests of relevance to business, as well as necessity. However, the taxpayer is responsible for determining what expenses qualify as usual and are essential to the pursuit of operating a company or carrying on a trade because the IRS does not publish a compendium of such expenses.
Here are 15 tax breaks that self-employed people should keep an eye out for:
1. The Home Office Deduction
Even if you're a renter, you can still be eligible if you're self-employed and use a portion of your house for business purposes. These may include mortgage interest, insurance, utilities, repairs, and depreciation standard procedure and the simplified approach are the two ways to make a claim during tax season.
The standard procedure: Determine the proportion of your home's square footage that you use "exclusively and regularly," in the words of the IRS, for work-related activities. For instance, that portion of your rent or mortgage is now deductible. Therefore, 10% of your housing expenses for the year may be deducted if your home office occupies 10% of the total square footage of your residence. This method might work better if the business makes up a large part of the home. Many instances are described in IRS Publication 587, but it is important to remember that only costs directly connected to the area of your home used for business purposes, such as replacing a broken door in your home office, are often entirely deductible.
The simplified procedure: Selecting this option will allow you to deduct $5 per square foot of residential space used for business purposes, up to a maximum of 300 square feet, or roughly a 17 by 17-foot area. The simplified method can work well for single-room offices and small operations. Though you won't need to keep as many records, you might get a smaller deduction, so think about it before filing. You can use Form 8829 to see the expenses you can deduct.
2. Credit Card and Loan Interest
Interest accrued on purchases that were business expenses can be deducted. Purchases that are "ordinary and necessary" for the functioning of the business are regarded by the IRS as qualifying business purchases. Your mobile phone, internet, meals, salary and wages, rent, utilities, and interest are a few examples. To deduct eligible interest charges, you don't absolutely need a business credit card. For instance, you can typically still deduct the interest costs if you use a personal card only for business purposes. So, remember to check your credit card statements for potential self-employment tax deductions.
Note: You can’t deduct credit card interest accrued from business expenses if the purchase was made on someone else’s credit card.
3. Retirement Savings
When it comes to self-employment tax deductions related to retirement, you may have more alternatives than you realize. The solo 401k is one option that is common (k). For example, a solo or one-participant 401(k) plan allows for deductions of up to $58,000 in 2021 and $61,000 in 2022 (plus an additional $6,500 if you're 50 or older), or 100% of earned income, whichever is less.
Your contributions to classic solo 401(k)s are pre-tax, and distributions made after age 5912 are taxed. With salary deferrals of up to $19,500 in 2021 and $20,500 in 2022, plus a $6,500 catch-up contribution if you're 50 or older, you can contribute both as the employer and as the employee (of yourself). Additionally, you may include around 25% of your net self-employment income, up to a maximum of $61,000 in 2022 and $58,000 in 2021.
4. Advertising Costs
In general, you are able to write off the costs you incurred for business advertising. An example of deductible advertising expenses is the price of maintaining your brand's visibility in the public: TV, radio, commercials, social media promotion, online banner ads, billboards, print media and business cards, and direct mail are a few advertising costs. There's a line on Schedule C dedicated to reporting your advertising expenses.
Note: The costs of lobbying are not deductible. Additionally, if any of the publication's earnings are used by, or are intended for, a political party or candidate, you cannot deduct advertising from any publication, including a political party's convention program.
5. Continuing Education
You might be able to claim a deduction on your tax return if you paid for work-related education costs throughout the year. Your compensation must go toward education that upholds or enhances your expertise in your current field of employment. However, it might not be seen as deductible if the education makes you eligible for a new position or line of work.
You can deduct it from your taxes, for instance, if you offer services for college funding and choose to take a course to further your knowledge. This course is deductible since it keeps and enhances your present abilities. You may be able to write off expenses like tuition, books, supplies, fees, and travel if you're qualified. For more information please see the IRS Publication 970 for the requirements.
6. Mileage or Vehicle Expenses
You can write off your miles on your tax return if you use your vehicle for work, whether you're making deliveries or just traveling to meetings. You can only deduct business mileage if you drive for both personal and commercial purposes.
You have two choices when it comes to deducting mileage from your taxes, just like with the home office deduction.
a) The Standard Mileage Method: at the end of the year, calculate the number of miles you drove in the car for business, and multiply that by the IRS’s standard mileage rate, (56 cents per mile in 2021 and 58.5 cents per mile in 2022) and deduct the total. Remember to hold on to your mileage log; you’ll need it if you’re audited.
To claim the standard mileage rate, you must meet the following requirements:
✔️ You must own or lease the car
✔️ You must operate five or fewer cars at one time
✔️ You must not have claimed depreciation on your cars
b) The Actual Expense Method: allows you to deduct the actual business costs to operate the car. This technique enables you to write off your actual business vehicle operating expenses. You must decide whether a section of a vehicle is used for business purposes if you utilize it for both personal and professional purposes.
Whichever method you decide on, it is best to keep track of your business mileage by keeping a log of the dates and nature of your travels, the odometer reading, and any costs associated with running your business, such as gas, oil, registration fees, licenses, repairs, registration fees, tires, insurance, lease payments, and depreciation. Additionally, you should estimate the deduction amounts for each approach and pick the highest deduction. If you're utilizing an online tax preparation tool, it will ask you to enter both your actual car expenses and yearly mileage. The best deduction will subsequently be determined for you.
Check out IRS Publication 463 for rules about the number of lease payments you can deduct.
Click here for the best mileage rate apps for 2022!
7. Business Travel and Meals
When you travel for work, you can write off your travel costs. The deduction, however, cannot be exorbitant or extravagant nor may it be utilized for private purposes. Airline tickets, taxi or ride-sharing fees, hotel, and housing costs, luggage fees, and dry cleaning costs are a few examples of travel expenses. The IRS counts any business trip that keeps you away from home for longer than a workday and necessitates relaxation while you're gone as such.
You can utilize a regular daily meal allowance rather than subtracting the actual cost of each meal, which can necessitate a lot of receipt hoarding. Instead of recording each and every meal expense, this method allows you to deduct a fixed amount (though you should still save your receipts in case an audit is conducted). IRS Publication 463 has all the details.
8. Self-Employment Taxes As Tax Deductions
Self-employment tax is deductible as a business expense. It's actually one of the most popular tax deductions for self-employment. 15.3 percent of net income is the self-employment tax rate.
Together, the 12.4% Social Security tax and the 2.9% Medicare tax on net income make up this rate. Income tax is different from self-employment tax. On your income taxes, you can write off half of your self-employment tax. To offset the extra cost, the IRS allows a deduction of half a person's self-employment taxes. While that won't reduce how much self-employment tax is owed, it can help reduce income taxes So, for instance, if your Schedule SE form indicates that you owe $4,000 in self-employment tax for the year, you must pay that amount as it is due throughout the year, but $2,000 will be deducted from your taxable income on your Form 1040 at tax time.
9. Start-Up Deductions
Typically, you have up to 15 years to write off your business startup costs. However, startup and organizational expenses for businesses paid after October 22, 2004, are immediately deductible up to a maximum of $5,000.
Business start-up costs include expenses related to developing, purchasing, or researching a firm, training salaries and wages, travel expenses to find suppliers or clients, and consultation fees. The expenses involved in forming a company or a partnership are considered organization charges. Organizational and startup costs are typically classified as capital expenditures, which means they are recognized as assets rather than expenses. So, your start-up costs may be deductible as a business expense because you can depreciate them over time.
10. Self-Employed Health Insurance Premiums
Health insurance can be expensive if you work for yourself, but you can write it off on your taxes. Your health insurance premiums you paid for yourself, your spouse, any dependents, and any children under the age of 27 who are covered by your health plan are included in the amounts, regardless of whether you deducted them from your tax return. To take advantage of this deduction, you must file a net profit. If you didn't, Schedule A of your federal tax return on Form 1040 can be used to claim your premiums as an itemized deduction.
11. …..and Your Business Insurance Premium
Your tax bill can be protected by insuring your business. You can write off the cost of employee accidents, health, and business insurance premiums. Schedule C has a specific section where you can deduct your insurance premiums. However, be careful to only deduct the proper items. Details can be found in IRS Publication 535. You might be able to deduct some or all of your health insurance premiums if you're self-employed, as we mentioned above.
12. Office Supplies
You may be able to deduct part of your business expenses from your self-employment taxes. Pens, staples, paper, mail, and similar expenses that you need regularly to conduct your business are all deductible. The majority of the time, you are able to write off the cost of office supplies that you really used throughout the tax year. Office supplies, on the other hand, are often deductible in the year you acquire them even if you don't typically inventory them or keep track of their usage.
13. Club and Membership Dues
In general, you cannot deduct club and membership dues that you paid for social, recreational, or business purposes. However, as long as their only objective isn't to conduct entertainment activities for members and guests, you can deduct dues paid to the following organization:
✔️ Boards of trade
✔️ Business leagues
✔️ Civic or public service organization
✔️ Professional organizations such as bar associations or medical associations
✔️ Real estate boards
✔️ Trade associations
Whether one of the organization's primary goals is to offer you or your visitor's entertainment or access to entertainment facilities is a key sign that membership isn't deductible in the eyes of the IRS. Charitable donations may be deductible on your personal income tax return.
14. The Qualified Business Income Deduction
The qualifying business income deduction (QBI), one of the newest self-employment tax deductions available, enables qualified self-employed individuals and small-company owners to deduct a percentage of their business revenue from their taxable income. You may be eligible for the 20% deduction on your taxable business income in 2021 if your total taxable income, which includes both your business income and other income, is at or below $164,900 for single filers and $329,800 for joint filers. These limitations are $340,100 for joint filers and $170,050 for single taxpayers in 2022. People who have "pass-through income," or business revenue that is reported on their personal tax return, are eligible for the qualifying business income deduction. Partnerships, S corporations, limited liability companies (LLC), and sole proprietorships are among the legal entities that qualify for the qualifying business income deduction (LLCs).
Note: Depending on the specifics of your business, you could still be able to claim the pass-through deduction if your income exceeds the cap (the deduction phases out for some businesses).
15. Phone and Internet Costs
Note: The guidelines for your home phone services, however, are different. Even if you have an office at home, the first phone line in your house is not deductible. However, if you pay for business long distance or have a second phone line set aside for business usage, you may be able to deduct the amounts spent.
Utilize Tax Breaks To Grow Your Business
It's great to get all of your tax money back. What will you do with it now is the question?
Need inspiration? Here are a few ideas:
✔️ Expand your company through outsourcing
✔️ Increase your customer base by finding new ways to market your business
✔️ Spend the cash on new tools
✔️ Attend trade shows or networking gatherings
Most small business tax deductions are more intricate than this quick summary depicts—it is, after all, the United States Tax Code—but you now have a fair understanding of the fundamentals.
There are many more deductions than those listed here, but these are the most important. Deductible expenses include office supplies, credit card processing fees, tax preparation fees, and repairs and upkeep of business property and equipment. Other company expenses, on the other hand, can be depreciated or amortized, which means you can deduct a tiny portion of the cost each year over a period of time.
Want to Learn About More Tax Breaks?
Vincere Tax is here to answer any questions you may have. Shoot us an email here or drop a question below. We would love to hear from you!