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Tax Deductions for Self-Employed Workers

Tax Deductions for Self-Employed Workers | Maximize Your Tax Refund

Freelancers and entrepreneurs should be aware of all the tax deductions available to self-employed workers, so you can save time and money during tax season. If you’re self-employed, there are a range of expenses related to your home and business that are tax deductible, outlined in the guide below.

These topics will introduce you to important tax deductions for self-employed workers:

Top 10 Tax Deductions for Self-Employed Workers

1. Self-Employment Tax

As a self-employed person, you have to pay more for Medicare and Social Security taxes, because you don’t have an employer splitting the cost with you. If you’re self-employed, you are obligated to pay 15.3 percent of your earnings toward the self-employment tax, which covers Medicare and Social Security. Luckily, the IRS allows freelancers and entrepreneurs to deduct the amount equivalent to what an employer would cover if they were an employee, which is half of the self-employment tax contributions. The IRS has more information about self-employment tax deductions on its website.

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2. Health Insurance Premiums

Self-employed workers need to purchase their own health insurance coverage, which can be a big expense. Also, Finding suitable health insurance for freelancers or self-employed is crucial for protecting both your health and finances. But if you’re self-employed and have a net profit for the year, you can also claim the amount you paid toward your health insurance premiums on your income tax return as an adjustment to income. This deduction is particularly beneficial for those seeking health insurance for freelancers, as it covers your own health insurance premiums as well as any coverage you purchased for spouses and dependents.

3. Home Office Expenses

Many self-employed people work from a home office. If you do so, you may be able to claim home office expenses on your tax return. There are two methods to calculate the deduction: the simple method or the regular method. Under the simple method, you can deduct $5 for every square foot of your home used in your business (up to 300 square feet). 

The regular method allows you to deduct expenses based on the percentage of your home that your home office takes up. Deductible expenses can include rent, mortgage interest, utilities, repairs and home or renter’s insurance. If, for example, you repair the floors in your entire home, you can only write off the portion of that expense that applies to the repair work done in your home office. To qualify for a home office deduction, the IRS details the basic requirements that you must meet

4. Internet and Phone Bills

If you’re self-employed, there’s a good chance you rely on the internet and phone to conduct your business. If you do, then you can deduct the annual cost of your internet and phone bills. If you work from home and use your personal internet and phone services for business, you need to calculate what percentage of the time those services are used solely for business purposes. If, for example, you calculate that 40 percent of your internet use and 25 percent of your phone use is dedicated to business, you can deduct 40 percent of your annual internet costs and 25 percent of your annual phone bills on your taxes.

The exception here is that you cannot deduct any of the expenses of your first home landline. If, however, you have a second landline used exclusively for business, you can deduct the cost as a business expense.

5. Car Expenses

If you’re self-employed you also have the opportunity to claim car expenses that relate to your work. You need to determine how much of your car usage is for business purposes and how much is for personal use. If you use your car for business 25 percent of the time, then you can write off 25 percent of any repairs and maintenance costs for your vehicle. Or, if you buy a new car, you can write off 25 percent of the total cost. 

Using the IRS standard mileage rate, you can also expense your mileage for business purposes. For the 2024 tax year, the standard mileage rate for business travel was 67 cents per mile, up 1.5 cents from the previous year. So, you’ll need to multiply your business mileage by 67 to determine how much you can write off as a business expense.

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6. Business Travel

If you travel for business, you can deduct your travel costs on your income tax return. For travel to qualify as a deductible expense, it has to meet the following standards:

  • Travel must be necessary for your business.
  • You must have traveled away from your area of business for longer than the length of a standard business day.
  • The trip must require you to sleep or rest along the journey.

If your trip qualifies, you can expense 100 percent of the cost of flights, hotels, car rentals, dry cleaning, and tips. You can expense the cost of meals while traveling too. You can also take advantage of enhanced mileage rates when using a personally-owned car for business travel. For 2024, the standard mileage rate for business travel is 67 cents per mile.

7. Business Meals

For 2021 and 2022 only, you should be able to expense the full cost of business-related food and beverages purchased from a restaurant. Otherwise, the limit is typically 50 percent of the cost of the meal.

It’s worth noting that food bought at grocery stores or convenience stores would not qualify. ­

If you take clients out for meals, you can expense the meals at 50 percent of the total cost, as long as you discuss business as part of the meal. You’ll need to keep records of the following information to claim the expense:

  • The date and location of the meal
  • The name of the client you met with
  • The total amount paid for the meal

Be sure to save all your meal receipts so you can track all the relevant information for your tax return. You might want to jot down a few notes on the back of your receipt so you remember all the necessary details of the meal.

8. Retirement Savings Plans

Self-employed workers can’t rely on employer-funded retirement savings plans, so as a self-employed person, you can deduct contributions to your retirement plan on your income tax filings. If you have a Simplified Employee Pension (SEP) or an Individual Retirement Account (IRA), you can deduct the cost of the contributions, up to the limit set by the IRS. Refer to the IRS retirement plan contribution limits for more information.

9. Interest on Loans and Bank Fees

If you take out a loan to start or grow your business, you can write off the interest on the loan on your tax return. You can also deduct interest that accumulates on your business credit card and any business banking fees.

10. Business Insurance and Licenses

The cost of any business insurance or professional licenses you need to run your business can be deducted for tax purposes. You just have to ensure the insurance or licenses you deduct apply solely to your business.

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Tax Deductions for Sole Proprietorships

Sole proprietorships can deduct many of their regular business expenses when filing income tax. The tax deductions that apply to sole proprietorships include:

  • Home office expenses
  • Business-related travel and mileage
  • Health insurance
  • Startup costs
  • Depreciation
  • Interest on loans and banking fees

Tax Deductions for Independent Contractors

The most common tax deductions for independent contractors include:

  • Home office expenses
  • Rent or lease payments
  • Business-related travel, meals and entertainment
  • Commissions and fees
  • Advertising and promotion
  • Business Insurance
  • Business licenses
  • Contract labor
  • Supplies
  • Education

More Useful Resources

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