Disclaimer: This resource is for informational purposes only and should not be construed as financial or tax advice (or a substitute for obtaining such advice), or for the purpose of avoiding U.S. Federal, State, or Local tax payments and penalties
Self-employment offers a great deal of flexibility and control over your income, but it also comes with a certain level of responsibility, including the responsibility to accurately calculate and report your taxable income. This responsibility can be expensive in both time and money to calculate the tax you owe and pay the full amount for social security and Medicare. In contrast, employed workers have part of these obligations met by their employers.
With these challenges, it’s important as a self-employed individual to take advantage of your eligible tax deductions and make sure you don’t pay more taxes than you owe. By claiming eligible deductions, self-employed individuals can save thousands of dollars per year.
Here are some of the common tax deductions available to self-employed individuals.
Common tax write-offs for self-employed individuals
Self-Employment Tax Deduction
As a self-employed individual, you are required to pay self-employment tax, which is equivalent to the Social Security and Medicare taxes paid by employees and their employers. The good news is that you can deduct half of your self-employment tax from your taxable income.
We run through an example tax bill calculation, including the self-employment deduction and other deductions in our Self-Employment Tax Guide (See “How much should I expect to pay in self-employment taxes?”).
If you use your vehicle for business purposes, you may be eligible to deduct a portion of your vehicle expenses, such as gas, maintenance, insurance, and depreciation. To take advantage of this deduction, you must keep accurate records of your business-related vehicle expenses.
The IRS allows two methods to calculate vehicle expenses: the standard mileage rate method and the actual expenses method. The standard mileage rate method allows you to deduct a set amount per mile driven for business purposes, while the actual expenses method requires you to calculate the actual expenses incurred for the business use of your vehicle, including gas, maintenance, insurance, and depreciation.
If you use Level’s Financial Toolbox, you can calculate your estimated tax bill using the actual expenses method versus the standard mileage rate and compare them to see which is better for you.
Phone and Internet
If you use a dedicated phone to manage your business, your phone bill and internet costs for this line are deductible expenses.
If you use your personal phone for business, you can deduct a percentage of these expenses.
Business Supplies and Equipment
You may be able to deduct the cost of business supplies and equipment, including office supplies and tools to complete your work. To be eligible for this deduction, the items must be used exclusively for business purposes and must have a useful life of more than one year.
If the cost of the equipment or supplies is more than $2,500, you may be able to use the Section 179 deduction, which allows you to deduct the full cost of the equipment or supplies in the year it was purchased instead of depreciating it over several years.
Professional Memberships and Licenses
You may be able to deduct the cost of professional memberships, licenses, and certifications required for your business. This includes fees paid to professional organizations, such as trade associations and chambers of commerce, as well as fees paid for professional licenses and certifications.
Advertising and Marketing
You may be investing in marketing to find new customers, such as running ads or buying leads. Since these expenses are directly associated with the revenue-generating operations, they are tax deductible.
Home Office Deduction
If you use a portion of your home for business purposes, you may be eligible for the home office deduction. This deduction allows you to deduct a portion of your rent, mortgage interest, utilities, insurance, and other related expenses. To be eligible for the home office deduction, the space must be used exclusively for business purposes and must be your principal place of business.
The Internal Revenue Service (IRS) has two methods to calculate the home office deduction, the simplified method and the regular method. The simplified method allows you to deduct a flat rate of $5 per square foot of your home office, with a maximum deduction of $1,500. The regular method requires you to calculate the actual expenses incurred for the business use of your home, including the portion of rent or mortgage interest, utilities, insurance, and depreciation.
If you use Level’s Financial Toolbox, you can calculate your estimated tax bill using the simplified method versus the regular method and compare them to see which is better for you.
Health Insurance Premiums
As a self-employed individual, you may be eligible to deduct the cost of your health insurance premiums. This includes both the cost of individual health insurance coverage and the cost of family coverage.
This deduction is taken on Form 1040, and the amount of the deduction is limited to the amount of your self-employment income. In addition, you cannot take this deduction if you are eligible to participate in a health insurance plan offered by your spouse's employer.
Retirement Plan Contributions
Self-employed individuals can contribute to a self-employment retirement plan and deduct the contribution from their taxable income. Some of the common retirement plans for self-employed individuals include Simplified Employee Pension (SEP) plans, Savings Incentive Match Plan for Employees (SIMPLE) plans, and individual 401(k) plans.
Contributing to a retirement plan reduces your taxable income and helps you save for your future and ensure a secure retirement. The contribution limits for these plans vary, and it is important to consult a financial advisor or tax professional to determine the best plan for your situation.
Education and Training
If you attend business-related courses, workshops, or conferences, you may be eligible to deduct the cost of your education and training expenses. This includes the cost of tuition, books and supplies, research reports, as well as travel and other related expenses. To be eligible for this deduction, the education or training must be related to your business and must maintain or improve your skills in your trade or business.
Depending on the nature of your work, you might want to take out a business insurance policy against fire, accidents on business premises and many others. This, too, can be deducted from your taxable income to reduce the amount you owe in taxes.
The bottom line
As a self-employed worker, keeping accurate records of your business-related expenses and income throughout the year is important. This will not only help you prepare your tax return accurately, but it will also help you ensure you don’t pay more than you owe. Taking advantage of the tax deductions available to you can help you increase your net profit margin and keep more money in your pocket to grow and expand your business.
Level’s Financial Toolbox includes a full suite of features to help you track all your business expenses. You can also calculate your estimated taxes ahead of tax season and plan ahead of taxes. Come tax season,Toolbox can generate a filled Schedule C report to make self-employment tax filing a breeze.
Create a Level account today to simplify tax season and minimize your self-employment taxes.