Taxes can be confusing, especially for self-employed professionals. Here are a dozen common questions about self-employed tax deductions to help you get a grip on your finances.
1. I’m Newly Self-Employed. What Can I Deduct?
According to the IRS, those who are self-employed can deduct “ordinary and necessary” expenses. An ordinary expense is something that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your job. To deduct, the expense must meet both standards.
For a comprehensive list of all deductions, see our complete list of expenses and tax deductions for the self-employed.
2. Are Auto Expenses Deductible?
Auto expenses are tax-deductible for “ordinary and necessary” business use. Keep track of mileage and expenses (e.g. maintenance, repairs, etc.), and categorize them based on business or personal use.
If you use your car for both personal and business purposes, determine the ratio. For example, if 40% of your mileage for the year is business-related, you can deduct this, as well as 40% of maintenance costs.
Check out our guides to 1099 taxes for Lyft and Uber drivers.
3. I Work Out of My House. Can I Deduct Things Like Internet and Phone Bills?
To the extent you use the internet for your business, yes, you can deduct these expenses up to the percentage that is business-related. The same is true for your phone. Your business use is deductible; the personal use is not.
4. What About Utilities?
This gets a bit trickier. If you work from home, part of your utility bills are deductible. The amount you can deduct, however, is calculated based on the percentage of your home that is used for business. The business use of your home is deductible, and aptly known as the home office deduction. See item 10 for more information.
5. What Marketing and Advertising Expenses Are Deductible?
Any legitimate marketing you do is a deductible business expense. This includes everything from pay-per-click advertising and website promotion, to video production and business cards.
6. If I Do Some Business While on a Family Trip, Is the Trip Deductible?
Wouldn’t this be nice? But, no. Given the answers above, it should not surprise you to learn only the portion of the trip that is business-related is deductible, and only for you, not your family. Keep this mind during your next holiday outing.
7. What Are Some Other Common Self-Employed Business Deductions?
You can deduct office supplies, legal and accounting expenses, the cost of hiring freelancers and contractors, computers and other equipment, professional licenses, association dues, periodical subscriptions, rent, cost of repairs and upgrades, and so on. Any money you spend to run your business is generally deductible.
8. What About Meals and Entertainment?
You can deduct 50% of business-related meals and entertainment expenses. These can be meals you have as part of business travel or those you pay for as part of a business meeting.
9. Are There Special Rules for Health Insurance?
In short, yes. Because of the nuances of health insurance, this is a case where you may need to speak with a tax specialist. The general rule is those who are self-employed can deduct the cost of their health insurance premiums, as well as those of their family.
10. What Is the Home Office Deduction?
If you run your business out of your home, you can deduct associated business costs for things like mortgage interest, insurance, home repairs and depreciation.
But before you claim it, you must decide whether to do so using the simplified method or the regular method. The simplified method bases your deduction on a flat rate per square foot. An example of the regular method, which is more involved, is as follows: If you have a 1,000 square-foot home where you use a 150 square-foot room for business, 15% of your utility bills would be deductible.
Depending on your situation, one method may yield a bigger deduction than the other. Read about the differences here to decide which is right for you.
11. Won’t I Get Audited If I Take the Home Office Deduction?
The deduction does not increase your odds of an audit, but you should always be sure to calculate the deduction correctly. The IRS says you can claim the home office deduction if:
- You use that part of the home regularly and exclusively for the business, and
- Your home office is either the principal location of your business or a location where you regularly meet with customers or clients.
Meeting these two conditions will help you avoid any audit-worthy behavior.
12. Do I Need to Keep Receipts to Claim Deductions?
Documentation is always helpful. Keeping receipts isn’t a requirement, though it can help if you’re audited. You can also try accounting software like QuickBooks Self-Employed, which helps track expenses and automatically classifies them as deductions.
Did you know that some of your personal out-of-pocket expenses may also be deductible? Or that someone once tried to deduct carrier pigeons as a business expense—and won? Find out more as part of our guide to self-employment deductions.