What are tax deductions for self employed workers?
According to the IRS, a tax deduction is a business expense that must be both “ordinary and necessary.”
An ordinary expense is considered common for your industry; it’s a cost that you must spend to run your business. Similarly, necessary expenses are helpful and appropriate costs for your business.
Say, for example, you’re a caterer. What you pay for travel expenses, cooking equipment and your kitchen rental could all be deducted.
Check the IRS for details on what is and isn’t a business expense. From there, you can get information about actual products and services that are deductible, the maximum tax refund you can get and the rules for taking the deduction.
There are two types of tax deductions available to self-employed business owners: itemized deductions and the standard deduction. Of course, you’ll want to take the one that reduces your tax liability the most.
- Itemized deductions are what they sound like. You track your expenses and tally up what’s deductible.
- The standard deduction is a pre-set amount taken from your taxable income.
When you are self-employed, you can take the standard deduction and still deduct business expenses on your Schedule C.
14 self-employment tax deductions that could benefit your small business
To give you an idea, here are the most common self-employment tax deductions you can write off:
1. Retirement plan deduction
Many people see this as the best tax deduction. You get the double benefit of tax savings plus money saved for retirement.
There is some complicated math here, but basically, you can deduct however much you paid into your retirement savings, aka your 401(k) or individual retirement account (IRA). Beyond a 401(k), other options are available, so it’s worth checking with the IRS.
If you have a Simplified Employee Pension (SEP, SEP-IRAs) set up for yourself or your employees, you can also deduct contributions, but there are limits.
2. Self-employment taxes deduction
When you’re self-employed, you pay extra taxes to be your own boss — that’s no fun. This is because you’re paying both the employer and employee sides of Social Security tax and Medicare taxes — that’s a tax rate of 15.3% of net earnings.
The good news is that the IRS considers the employer portion of the self-employment tax as a business expense, so you can deduct half of it.
3. Home office expenses deduction
You can deduct your home office or workspace if used for business purposes. You can calculate your deduction using either the regular (based on the actual expense method) or the simplified method (based on square feet).
While the simplified method is quicker, the regular method is more accurate and may include expenses for mortgage interest, insurance, utilities, repairs and depreciation.
While your home office needs to meet certain criteria, any workspace you use exclusively and regularly for your business — regardless of renting or owning — can be deducted.
4. Internet and phone bills deduction
Regardless of if you qualify to claim a home office deduction, you can write off the business portion of your internet and phone bills (smartphone and landlines). So, if you have an e-commerce shop, you can deduct the internet costs for running that shop.
With smartphones, you can expense this one twice over. First, you get a tax break on purchasing your mobile device. Second, you can deduct your cell phone plan, or more accurately, the portion of the phone plan you use for business calls.
However, the IRS doesn’t allow you to “deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home.” But you can deduct business-related long-distance calls on that line. If you have a separate second line for your business, you may deduct that.
5. Office supplies deduction
Whether you work in a home office or a commercial space, you can deduct all sorts of supplies used in running your business. This includes paper, ink and even your computers for an office space.
Office supplies aren’t limited to computers and printers. Tax deductions for construction contractors could include things like your standard work tools and materials like paint and glue. Or, if you’re a hairstylist, it could include the cost of renting a chair at a salon and styling products.
Don’t forget that software and apps, bought outright or a subscription service, are considered office expenses and may also be written off. You can deduct the full cost on your income tax return if you use them solely for business purposes.
6. Consulting and professional services deduction
Generally, the fees charged by accountants and attorneys directly related to operating your business are deductible as business expenses. There are certain instances where their fees are not deductible — for example, fees to acquire business assets — but you can write it off as long as it’s an ordinary and necessary expense.
So, come tax time, you could hire a tax professional to help you prepare your Schedule C (Form 1040) and deduct the expense! This includes tax software such as Turbotax (and any other tax preparation fees), but these can only be deducted if you itemize your deductions, and they need to total more than 2% of your adjusted gross income (AGI).
7. Travel deduction
Do you meet clients out of state or go to industry conferences? If so, you can deduct travel-related expenses such as airfare, hotel costs, transportation and meals, so keep those receipts organized.
To qualify for this deduction, you need to show that the travel is truly business travel and that you’re engaging in business activities. The IRS scrutinizes lavish expenses (remember, ordinary and necessary), so it’s in your interest to keep it reasonable.
8. Meal deduction
Taxpayers can deduct meals, so long as it has a business twist, say with a prospective client or potential partner. Meals are also a tax-deductible business expense when traveling for business or attending a conference.
9. Vehicle use deduction
If you’re going from job to job or making deliveries, your car can start to feel like an office. Good news: vehicle expenses and business miles can be a big deduction for entrepreneurs. Your self-employed status means you can write off all car expenses. This can include purchasing your car, gas, insurance, licensing, parking and even your car’s depreciating value.
The 2023 IRS self-employed and business standard mileage rate for vehicles is 65.5 cents per mile.
The rules for calculating the rate are updated every tax year. Be sure to do your research and make sure you’re taking the current rate.
10. Health insurance premium deduction
You often pay for your own health insurance when you’re a small business owner. If you’re not eligible to participate in your spouse’s employer and are paying for it out of pocket, you can deduct the premiums.
This includes medical, dental and vision premiums. You can also write off medical-related expenses such as glasses, nonprescription medications, and acupuncture treatments. These deductions are also applicable if you cover your spouse, dependents and children younger than 27 (even if they’re not listed as dependents on your tax form).
11. Business insurance premium deduction
If insurance is a necessary cost for your business, then it’s deductible. For example, since contractors insurance is considered a standard and accepted expense for most contractors, it counts as a tax write off.
You can deduct premiums for many different kinds of business insurance, including general liability insurance, commercial auto insurance, commercial property insurance and more.
12. Rent expense deduction
You can deduct commercial property expenses if you rent an office or other commercial space specifically for your business. However, you cannot own the property in any way; if you have equity or a title to the property, the rent is not deductible.
Renting isn’t limited to property; you can also deduct equipment rentals necessary for business use. For example, if you are a landscaper and rent lawnmowers, this counts as a write-off.
13. Education deduction
Suppose you take a continuing education course to brush up on your professional skills or attend training to maintain skills and licenses. In that case, these are tax-deductible for self-employed individuals. For instance, a lawyer can deduct the cost of attending Continuing Legal Education (CLE) classes required by their state’s bar association to maintain their law license.
However, if you’re taking classes to prepare yourself for a new line of work, it’s not deductible.
Educational expenses are not limited to classroom learning. You can also potentially deduct expenses related to webinars, virtual conferences, registration fees, business-related books and subscriptions to professional publications.
14. Marketing and advertising expense deduction
If you’re spending money to advertise your business, you’re in for some good news. You can write off pretty much any expense related to promoting your business, from local ads down to business cards and even branded giveaways. Digital advertising such as Facebook, Google or LinkedIn ads, and website design and maintenance all count.
What doesn’t count is the amounts paid to influence legislation, aka lobbying. No deductions there.
How many self employed tax deductions can you take?
Again, self-employment tax deductions are a complex matter. You will need to review all forms and paperwork properly to make sure you’re doing it right.
When itemizing your tax returns, you can only deduct the amount that is a work-related actual expense. Different items you deduct have different limits.
There is also a minimum (i.e., floor) amount after which you can deduct. That is, you can only make deductions on amounts that exceed this floor. Your adjusted gross income (AGI) also influences what you can deduct and how much.
To figure your self-employment tax deductions out properly, the IRS can be helpful. Or, of course, consult with a certified public accountant (CPA).
How can self-employment tax deductions help boost your business?
Getting all that tax money back is great. Now the question is, what are you going to do with it? Sure, you can splurge on a new big-screen TV. However, an even better idea is to reinvest it in your business.
Need some ideas? You can:
Besides helping boost your business, many of these expenses will, in turn, be tax-deductible.
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