June 13, 2024


Future Depends on What You Do

15 Self-Employment Tax Deductions in 2023

There are many valuable tax deductions for freelancers, contractors and other self-employed people who work for themselves. Here are 15 big self-employment tax deductions to remember ahead of tax day.

1. The home office deduction

If you work from your home or use part of it in your business, then self-employment tax deductions like this one could get you a break on the cost of keeping the lights on.

What you can deduct: A portion of your mortgage or rent; property taxes; the cost of utilities, repairs and maintenance; and similar expenses. Generally, this deduction is only available to the self-employed; employees typically cannot take the home office deduction.

How it works: Calculate the percentage of your home’s square footage that you use, in the IRS’ words, “exclusively and regularly” for business-related activities. That percentage of your mortgage or rent, for example, becomes deductible. So if your home office takes up 10% of your house’s square footage, 10% of those housing expenses for the year may be deductible. IRS Publication 587 outlines a lot of scenarios, but note that only expenses directly related to the part of your home you use for business — say, fixing a busted window in your home office — are usually fully deductible.

What else you can do: Choose the simplified option, which lets you deduct $5 per square foot of home used for business, up to 300 square feet — that’s about a 17-by-17-foot space. You won’t have to keep as many records, but you might end up with a lower deduction, so consider calculating it both ways before filing.

2. Health insurance (maybe)

If you bought medical insurance policies on your own for yourself or your family, you might qualify for a self-employment tax deduction on the premiums.

What you can deduct: Medical and dental insurance premiums for you, your spouse, your dependents and your children who are younger than 27 at the end of the tax year. Long-term care insurance premiums also count, though there are specific rules. IRS Publication 535 has the details.

How it works: It’s an adjustment to income rather than an itemized deduction, which means you don’t necessarily have to itemize to claim it. But you might be let down, because if you’re eligible to enroll in your spouse’s employer’s plan — even if you choose not to, maybe because it’s more expensive than your own — you can’t take the deduction.

What else you can do: Find out if you can deduct the premiums as a medical expense. This typically works only if you pay your premiums out of your own pocket, and your deduction is limited to expenses that exceed 7.5% of your adjusted gross income. So if your AGI is $100,000, your first $7,500 of medical expenses isn’t deductible.

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3. Continuing education

You have to stay smart to run a growing business, and there are self-employment tax deductions for that.

What you can deduct: The costs of “qualifying work-related education,” including things such as tuition, books, supplies, lab fees, transportation to and from classes and related expenses.

How it works: The expenses are deductible only if the education “maintains or improves skills needed in your present work.” In other words, if you’re taking classes to change careers or you’re working toward the minimum educational requirements for a trade or business, this probably won’t work for you. But you can qualify even if the education leads to a degree. Review IRS Publication 970 for the requirements.

What else you can do: Look at the American opportunity tax credit or the lifetime learning credit.

4. Your car

Driving to meet vendors, make pickups and woo clients can be hard on your car, but a few self-employment tax deductions might help you recoup some of that wear and tear.

What you can deduct: A little more than $1 for every two miles you put on your car for business purposes.

How it works: At the end of the year, tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate — 58.5 cents per mile for the first half of 2022 and 62.5 cents per mile for the remainder of the year — and deduct the total. Be sure to keep a mileage log; you’ll need it if you’re audited.

What else you can do: Deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business. If you’re leasing your car, check out IRS Publication 463 for rules about the number of lease payments you can deduct.

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5. Retirement savings

You might have more options than you think when it comes to retirement-related self-employment tax deductions. One popular choice is the solo 401(k).

What you can deduct: Contributions to a solo or one-participant 401(k) plan of up to $61,000 in 2022 (add an extra $6,500 if you’re 50 or older) or 100% of earned income, whichever is less.

How it works: Similar to a standard employer-sponsored 401(k). For traditional solo 401(k)s, your contributions are pretax, and distributions after age 59½ are taxed. You can contribute as both an employee (of yourself) and as the employer, with salary deferrals of up to $20,500 in 2022, plus a $6,500 catch-up contribution if you’re 50 or older. And you can add approximately 25% of net self-employment income, not exceeding $61,000 in 2022.

6. Self-employment taxes as self-employment tax deductions

Yes, you can deduct self-employment tax as a business expense. It’s actually one of the most common self-employment tax deductions. The self-employment tax rate is 15.3% of net earnings. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.

What you can deduct: You can deduct half of your self-employment tax on your income taxes.

How it works: So, for example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time $1,000 would be deductible on your Form 1040.

What else you can do: If you form an LLC (especially if it’s a partnership) or a C Corp, you may have a different tax-filing checklist.

7. Business insurance premiums

Protecting your business can also protect your tax bill.

What you can deduct: Premiums for business insurance, employee accident and employee health insurance.

How it works: There’s a dedicated area of Schedule C for deducting your insurance premiums. But make sure you’re deducting the right stuff. IRS Publication 535 has the details.

What else you can do: As we explain in the section about health insurance, you might be able to deduct some or all of your health insurance premiums if you’re self-employed.

8. Office supplies

The everyday things you use to run your business could score you some self-employment tax deductions.

What you can deduct: Pens, staples, paper, postage, and similar items that you use day-to-day to run your business.

How it works: In most cases, you deduct the cost of office supplies that you actually used during the tax year. However, if you have office supplies on hand that you don’t usually inventory or record the use of, those are typically deductible in the year you buy them, too.

What else you can do: For “bigger” stuff like computers or special equipment, the general rule is that you can deduct them in the year you buy them if their useful lives are a year or less. If their useful lives are longer than a year, the IRS may view those things as assets that depreciate over time. Even though this means not being able to deduct the full cost of the item all at once, you likely can deduct the depreciation on the item over its useful life.

9. Credit card and loan interest

Check your credit card statements for potential self-employment tax deductions.

What you can deduct: Interest accrued on purchases that were business expenses.

How it works: You can’t deduct credit card interest accrued from business expenses if the purchase was made on someone else’s credit card, for instance.

What else you can do: You don’t necessarily need to have a business credit card to deduct qualifying interest charges. If you use a personal card exclusively for business expenses, for example, you can generally still deduct the interest charges.

10. Phone and internet costs

Anyone from real estate agents and journalists to day care providers and jewelry makers could deduct part or all of their annual cell phone or internet bill.

What you can deduct: You can deduct your entire bill if you have a dedicated business cell phone or internet connection.

How it works: You must use your smartphone or internet service for business, and your employer — if you have one — must not reimburse you.

What else you can do: If you don’t have a dedicated line, you can deduct the percentage used for business.

11. Business travel and meals

Whether it’s for a flight across the country or an overnight on the other side of the state, expenses for travel and food can be self-employment tax deductions.

What you can deduct: Flights, hotels, taxis and food are deductible business expenses as long as they’re for actual, legitimate business purposes.

How it works: You can’t deduct travel expenses for your spouse, your kids, or other people unless that person is your employee. Before 2021, you could deduct 50% of the cost of a meal if the meal was business-related, was not “lavish or extravagant,” you or your employee were at the meal, one of your business contacts got the meal, and the cost of the meal didn’t include a charge for entertainment. IRS Publication 463 has all the details.

What else you can do: Instead of deducting the actual cost of each meal, which can require a lot of receipt hoarding, you can use a standard daily meal allowance. Under this method, you deduct a flat amount instead of recording every single meal expense (consider keeping your receipts anyway so that you can prove your deduction if you’re audited). The U.S. General Service Administration sets the standard meal allowance rate.

12. Start-up costs

You may be able to get self-employment tax deductions for the cost of going into business.

What you can deduct: Start-up costs generally include the costs to get your business up and running before it opens, such as grand opening advertising, salaries and wages for employees in training, travel to obtain suppliers or customers, or consulting fees.

How it works: You may be able to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs (the costs to set up a legal entity for your business, such as an LLC). However, not everyone gets this deduction. The $5,000 deduction is reduced by the amount your total start-up or organizational costs exceed $50,000.

What else you can do: Business start-up and organizational costs are generally capital expenditures, which means they’re treated like assets rather than expenses. In turn, you may be able to depreciate your start-up costs over time, and that depreciation is typically a deductible business expense. The rules are complicated; IRS Publication 535 has the details.

13. Advertising

Getting your name out there can score you some self-employment tax deductions.

What you can deduct: Advertising expenses directly related to your business. You can usually deduct advertising “to keep your name before the public if it relates to business you reasonably expect to gain in the future,” which gives the green light to advertising encouraging people to take part in a particular cause, such as donating blood.

How it works: There’s a line on Schedule C dedicated to reporting your advertising expenses.

14. Certain memberships

If you belong to a professional organization, you may be able to deduct the membership fee.

What you can deduct: Generally, you can’t deduct memberships to clubs (especially country clubs and travel-related clubs). However, the IRS carves out exceptions for memberships to boards of trade, business leagues, chambers of commerce, civic or public service organizations, professional organizations such as bar associations and medical associations, real estate boards and trade associations.

How it works: For the IRS, a big indication that a membership isn’t deductible is whether one of the organization’s main purposes is to provide you or your guests with entertainment or access to entertainment facilities.

15. The qualified business income deduction

One of the newest self-employment tax deductions out there, the qualified business income deduction (QBI) allows eligible self-employed and small-business owners to deduct a portion of their business income on their taxes.

What you can deduct: If your total taxable income — that is, not just your business income but other income as well — was at or below $170,050 for single filers or $340,100 for joint filers in 2022, you may qualify for the 20% deduction on your taxable business income.

How it works: The qualified business income deduction is for people who have “pass-through income” — that’s business income that you report on your personal tax return. Entities eligible for the qualified business income deduction include sole proprietorship
s, partnerships, S corporations and limited liability companies (LLCs).

What else you can do: If your income is above the limit, you might still be able to claim the pass-through deduction depending on the precise nature of your business (the deduction phases out for some businesses).