10 Tax Deductions for the Self-Employed

Self-employed people report business income on their personal tax returns. Tax deductions are one of the best ways to reduce your tax bill.

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When you’re self-employed, you’re the boss. The chief. The big fish. That also means you’re the one stuck with the tax bill.

Each year, you’re responsible for reporting and paying tax on your business income based on your individual tax rate. Don’t miss the following tax deductions come tax season.

10 valuable tax deductions for the self-employed:

  • Ordinary and necessary business expenses
  • Qualified business income (QBI) deduction
  • Self-employment tax
  • Health insurance premiums
  • Education
  • Home office
  • Travel and meals
  • Use of personal vehicle
  • Startup costs
  • Depreciation

1. Ordinary and necessary business expenses

If there’s a phrase tax attorneys and accountants love to throw around, it’s “ordinary and necessary.” To the extent that you can justify a business expense to the IRS, it’s deductible.

Keep a business expenses list with receipts during the year. You’ll be grateful for your organization come tax time.

The most common expenses that fall under this category are rent, business insurance, advertising, employee payroll, office supplies, and the cost of goods sold. Check out our guide to business expenses for a more exhaustive list.

There are restrictions on business tax write-offs for meals, vehicles, and depreciation. We explore the business expenses with limitations below.

2. Qualified business income deduction

The qualified business income deduction is a blanket deduction that reduces your tax bill. Owners of pass-through entities — anything but a C corporation — can get a 20% deduction on eligible earnings just for existing.

Like most tax deductions, the QBI deduction comes with a slew of limitations. The biggest bummer is that the QBI deduction doesn’t affect the 15.3% Self-Employment Contributions Act (SECA) tax, which comprises Medicare and Social Security taxes.

The QBI deduction goes on line 10 of personal tax return Form 1040.

3. Self-employment tax

If you’re self-employed, you’re probably keenly aware that you pay a good chunk of your earnings in self-employment taxes. You’re responsible for paying SECA, which is equal to the employer and employee portions of Federal Insurance Contributions Act (FICA) taxes.

You can deduct what would be the employer’s half of Medicare and Social Security taxes. Say you owe $15,000 in self-employment taxes from last year’s earnings. Your self-employment tax deduction would be $7,500 ($15,000 SECA tax liability x 50% deduction).

It’s one of few above-the-line tax deductions, reducing your adjusted gross income (AGI). AGI is the basis for many tax calculations, so you usually want your AGI low.

You calculate the self-employment tax deduction on Form 1040 Schedule SE.

4. Health insurance premiums

Self-employed people who can’t get subsidized health insurance through a spouse can deduct premiums. The deduction applies to your premiums and those of your spouse and dependents.

Like the self-employment tax deduction, the self-employment health insurance deduction is above the line and reduces your AGI. Translation: The deduction knocks down the income amount that determines your eligibility for certain deductions and credits. Take the deduction on Form 1040 Schedule 1, line 16.

5. Education

The IRS rewards lifelong students. The costs associated with brushing up on skills needed in your business count as a small business tax deduction. Sole proprietors deduct tuition, supplies, and travel between a workplace and school on Form 1040 Schedule C. There isn’t a dedicated line for this deduction, so it goes on line 27a, other expenses.

You can’t deduct the cost of classes to help you move into a new field. For example, a flower arranger could deduct the cost of a flower arranging seminar but not those for a knitting class.

6. Home office deduction

Perhaps better than having a daily commute of less than 30 seconds, you can score a deduction for running a home-based business.

You qualify for the home office deduction when you have a dedicated area of your home that’s not used for any purpose other than your business. It must also be the primary place you work, so you’re not eligible for a home office deduction when you work in an office four out of five days a week.

You can either deduct $5 for every square foot of your home office — up to 300 square feet — or the actual costs of your home office. Check our guide to the home office deduction before filing IRS Form 8829 to claim the deduction.

7. Travel and meals

The IRS restricts the deduction of travel and meals. When you prepare your company’s financial statements, you should report the total amount spent on travel and meals. That’s not the case for your taxes.

You can only deduct 50% of your total meal expenses, including the cost of office snacks and business meals with clients.

Travel expenses — hotel, airfare, train, etc. — are only deductible when you travel away from your tax base, which is where your business is located. Unlike meals, you can deduct 100% of eligible travel expenses.

IRS Topic No. 511 points out that your tax base and home might be in two different areas. If your business’s office is located a flight away from where your family lives, your tax base is your business’s location, not your family’s.

Sole proprietors report travel and meal expenses on self-employed business tax return Form 1040 Schedule C.

8. Use of personal vehicle

You can deduct the business use of your personal car in one of two ways. The most straightforward is applying the IRS mileage rate — $0.575 in 2020 — to every mile driven for business purposes.

Say you own a construction business, and you use your personal car to visit clients’ homes. When you make a 14-mile round trip to a client’s home, you can deduct $8.05 on your taxes (14 miles x $0.575 IRS mileage rate).

Either set up a spreadsheet or use software to track your business mileage. It might benefit you to take pictures of your car’s odometer before and after each business trip.

Your second option is deducting a portion of the total amount you spent operating your car during the year. To deduct actual costs, you need to determine what percentage of miles driven were for business and multiply it by the total cost of insurance, registration, gas, oil, and the like.

9. Startup and organizational expenses

Before your business even opens its doors, you’re already spending money. Between market research and registering your business, you’re likely racking up thousands of dollars in expenses. You can deduct some of these costs in the first year of operations.

The IRS calculates startup and organizational costs separately. Looking for office space or conducting market research count as startup costs. Organizational costs include business registration and legal fees.

You can deduct up to $5,000 for startup costs and another $5,000 for organizational costs. The deductible amount goes down when the category’s total expenses exceed $50,000. The remainder of your startup and organizational costs are expensed over the first 15 years of your business’s operations in a process called amortization.

Although I’m telling you about these deductions, you might be better off skipping them. The startup and organizational cost deductions don’t make sense for businesses that don’t plan to be profitable in their first year. To maximize your tax savings, you should elect to amortize all of your startup and organizational expenses over 15 years.

Like education expenses, sole proprietors deduct startup and organizational expenses in the “other expenses” section of Form 1040 Schedule C.

10. Depreciation

When your business purchases fixed assets such as buildings, machinery, or furniture, you usually don’t expense the entire amount in the year of purchase. Instead, you slowly expense the asset in a process called depreciation.

The IRS employs its proprietary modified accelerated cost recovery system (MACRS) to determine each fixed asset's annual depreciable amount. Your tax software can help you with the calculation.

If you’d prefer to deduct the entire cost of your fixed asset purchase, you also have that option. In fact, you have two options: the Section 179 deduction and bonus depreciation.

You can immediately deduct up to $1.04 million in eligible fixed asset purchases with the Section 179 deduction. That should cover the cost of your new computers.

Bonus depreciation is a similar tax deduction that allows you to deduct the entire cost of eligible assets, yet there’s no dollar amount limit. Refer to the respective guides for each deduction’s restrictions.

You report depreciation on Form 4562.

Don’t forget about tax credits

Tax deductions aren’t the only way to reduce your small business tax liability. Scan our list of the top small business tax credits to score some dollar-for-dollar reductions to your tax bill.

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