Filing your taxes as a W-2 employee can be overwhelming. But, when you’re self-employed, the labyrinth of paperwork and potential tax deductions creates a tax situation that’s enough to give even the most laid-back freelancer heartburn.
Whether you’re filing your business taxes as a self-employed worker for the first time or the 20th, there are certain best practices that can save you thousands of dollars a year.
Here, we’ll walk you through the most common—and not so common—tax deductions for the self-employed, and guide you through the paperwork to help you file your taxes accurately.
What is a tax deduction?
If you’re filing your self-employed taxes for the first time, you’re likely wondering what exactly a tax deduction is. Essentially, a tax deduction is an amount of money the Internal Revenue Service allows you to subtract from your total income in order to reduce your taxable income. In some cases, taking enough tax deductions can place you in a lower income tax bracket, substantially reducing the amount of taxes you pay for the year.
There are two primary types of deductions available under United States tax law: the standard deduction and itemized deductions.
Most people will decide to take the standard tax deduction route. This is a flat amount the IRS lets you deduct from your tax bill, no questions asked. The amount of the standard deduction varies based on your filing status.
For the 2019 tax year, the tax code stipulates that single taxpayers and married taxpayers filing separately can claim a $12,200 standard deduction amount. Those married filing jointly can claim a $24,400 standard deduction, and taxpayers filing as “head of household”— that is, single individuals with dependents—can claim a standard deduction of $18,350.
Receiving a tax deduction of anywhere from $12,200 to $24,400 might seem attractive. However, many taxpayers reduce their tax bill by a greater amount by choosing to itemize deductions.
You can itemize deductions on Schedule A of Form 1040. The schedule allows you to deduct medical taxes, taxes paid, home mortgage interest and charitable gifts. If your total itemized deductions are greater than the standard deduction, use the itemized deduction amount.
Finally, self-employed individuals deduct business expenses on Schedule C of Form 1040. These expenses include advertising, utilities and other business costs. Your income less all expenses equals net profit, and the Schedule C profit, is added to other sources of income on Form 1040, the personal tax return.
You’re allowed to deduct the business portion of the expense you’re claiming. If you use your car for both business and personal purposes, only the business expenses are deductible.
Why does it have to be so complicated?
While there might be a few reasons to envy the self-employed lifestyle, the increased tax preparation burden isn’t one of them. Self-employed professionals face unique challenges when tax season comes around because they don’t have taxes withheld from their paychecks.
Traditional full-time employees file their taxes with a simple W-2, which includes tax withholdings. Self-employed workers use a different system.
Most freelancers file quarterly tax payments for federal and state income taxes. Self-employed workers also pay the employer and the worker portion of Medicare and Social Security, then deduct a portion of the cost as a business expense.
In light of this greater financial and tax-reporting burden, self-employed people need to take advantage of all possible tax deductions to stay profitable.
While tax rules for freelancers can be complex, self-employed professionals can generally deduct expenses that fall into three categories:
- Things you use exclusively in operating your business. A landscaper uses sod and mulch to provide landscaping services.
- Things you use in the course of doing business. If you use your personal vehicle to drive to client meetings, you can deduct mileage as a business expense.
- Things you use exclusively for your business in the space where your business operates. If you rent office space, the utility costs you incur are a business deduction.
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
Here is a list of common business expenses for many self-employed individuals.
|Type||Deductible Expenses||Non-Deductible Expenses|
|Advertising||Materials used to market your business (e.g., flyers, signage, ads, branded promo items, events or trade shows) and the cost of developing those materials (e.g. agency or designer costs).||Office holiday parties, gifts to customers that don’t include your brand name and logo.|
|Business Insurance||Insurance coverage intended to protect your business (e.g., fire, theft, flood, property, malpractice, errors and omissions, general liability, and workers’ compensation).||N/A|
|Car Expenses||The business portion of your actual car expenses (e.g., gas, insurance, registration, repairs and maintenance), or public transit expenses (e.g. buses) if you use local transportation.||Actual expenses if you use the standard mileage rate.|
|Depreciation and Section 179||Depreciation expense on business assets (e.g., computers, office equipment, tools and furniture, cars). Note: The IRS requires you to use Form 4562 to claim these deductions.||Car depreciation if using the standard mileage rate to compute your vehicle expenses.|
|Home Office Deduction||Expenses related to a home office (e.g., business portion of rent, utilities, repairs, insurance and home mortgage interest). You’ll need to fill out a Form 8829.||Actual expenses if you use the simplified method to compute home office expenses.|
|Meals||Meals that you had with a client and during which you engaged in business discussions, or meals incurred while traveling on an out-of-town business trip. 50% of business meals is deductible.||Meals for yourself (e.g. on lunch breaks).|
|Office Expenses||Office expenses (e.g., cleaning services for your office and general office maintenance) that don’t have a separate category.||N/A|
|Supplies||Any supplies that you use and replace (e.g., cleaning supplies if you clean homes, office supplies like pens or printer ink, and hot/cold bags if you make deliveries).||N/A|
|Travel||Travel costs related to business trips (e.g., lodging, airfare, rental cars and local transportation). The travel must be overnight, away from your residence and primarily for business.||Personal costs while traveling (e.g. dinner with a friend).|
|Other Expenses||Any other business expenses that are ordinary and necessary (e.g., education to improve skills for your job, banking fees, association dues, business gifts and industry magazines).||N/A|
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.
|Commissions and Fees||Commissions/fees paid to nonemployees to generate revenue (e.g., agent fees).|
|Contract Labor||Any payments made to independent contractors (e.g., a contracted web developer).|
|Depletion||If you’re in the business of mining natural resources (e.g., oil wells, natural gas and logging), you can deduct the cost to find and sell natural resources.|
|Employee Benefit Programs||Costs related to benefits you provide your employees (e.g., health or life insurance, education assistance, or accident or liability insurance).|
|Employee Wages||Wages paid to employees (e.g., salaries, commissions and bonuses).|
|Interest (mortgage)||Interest paid on a mortgage for property used for business, other than your primary home. You may receive a Form 1098 from the lender if you pay mortgage interest during the year.|
|Interest (car, other)||Other types of interest (e.g., credit cards, business lines of credit and interest on car payments). You can only deduct the portion related to business.|
|Legal and Professional Services||Professional fees related to your business (e.g., attorneys, tax preparation fees, accountants and other professionals).|
|Pension Plans||Contributions you make to your employees’ retirement plans (e.g., 401(k), Keogh plans and profit-sharing plans).|
|Rent or Lease (vehicles, equipment)||Rent or lease payments on business property not owned by you (e.g., machines, equipment and vehicles).|
|Rent or Lease (other business property)||Rent or lease payments on items that aren’t vehicles or equipment (e.g., office or land rent), including any government taxes on those items.|
|Repairs and Maintenance||Repairs and maintenance costs for business machines, equipment, or offices (e.g., repainting your office, fixing your computer or laptop, and replacing worn parts on equipment).|
|Taxes and Licenses||Various business taxes (e.g., the business share of FICA tax if you have employees) or licenses (e.g., state or local licenses, or licenses required for your business type).|
|Utilities||Utilities related to your office (e.g., electric, gas, garbage and water).|
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.
For more tax-time tips, check out our guide to taxes for the self-employed. To find expenses that may qualify for a personal deduction, see our article on Schedule A deductions. Finally, to see a list of common expenses for your profession, see our guides below: