You’ve likely been managing your own personal finances for years, so it might be tempting to just apply the same principles you use for your personal finances to your business. But there are important differences to consider.
Self-employment tax deductions
Tax deductions for self-employer workers can take lots off your taxable income, which leads to lower estimated tax payments. Learn more in our guide about self-employment taxes.
Once discovering there’s a self-employment tax, you have probably sought out self-employment tax deductions. Because, yes, we all have to pay taxes, but who says we can’t try to save where we can?
Although you might have thought that you escaped the IRS biting a chunk out of your earnings as a self-employed person, you thought wrong. While that might be a beautiful pipe dream, self-employment tax deductions aren’t. Tax deductions for self-employed people can take lots off your taxable income, which leads to lower estimated tax payments.
Stay tuned to discover how to hack the system—legally, of course!
Quick overview: what’s a self-employment tax?
The current self-employment tax is comprised of 12.4% tax for Social Security and 2.9% for Medicare. As a traditional employee, you usually split half of the tax with your employer. But, as your own boss, you get to split that tax with… yourself—you pay the full 15.3%.
Why does it exist?
The Self-Employed Contribution Act was enacted in 1954 to guarantee that everyone, even self-employed people, would contribute to Medicare and Social Security funds. It’s not instant gratification in the slightest, but this cash reserve will prove useful down the line.
Do you qualify as self-employed?
Before we get started and waste your time, let’s make sure you’re considered self-employed by the IRS:
- You work for yourself part-time or in any other sense
- You are a partner in a business partnership
- You are an independent contractor, gig worker, or freelancer
- You are a sole proprietor
10 tax deductions tactics to try
Now this is the juicy part. Since we’re all about saving, let’s stop wasting time and dive into the essential itemized deductions you should know about.
Note: Calculating some of the simple deductions listed below can often be made with specific IRS formulas or worksheets. However, for standard deductions, it requires thorough and accurate record-keeping. Particularly for self-employed workers, it’s crucial to keep personal and professional expenses separate.
Right off the bat, you can deduct half of the 15.3% tax you pay as a self-employed worker. Put down that pitchfork and cancel your flight to Washington D.C. because you can actually write off half of the tax you pay from your net income as a business expense. And, you only cough up cash for 92.35% of your net income, rather than your gross business earnings.
2. Work from Home
There are more advantages to working from home than only needing to wear professional attire from the waist up for video conferences. Work from home tax deductions eligibility requires you to use a part of your home exclusively as a workspace.
In addition to the physical space, the following expenses can be factored in, according to the business percentage of deductible:
- Property taxes
- Home maintenance
- Homeowners insurance
- Mortgage interest (only applicable for homeowners, not renters)
- Home depreciation (only applicable for homeowners, not renters)
Conversely, if you don’t own your workspace but rather rent one out, you can deduct:
- Space rental cost
- Equipment rental expenses
- Lease-cancellation fees
4. Phone and Internet
With or without the utilization of the work from home deduction, you could count costs to run your business, including:
- Business Phone
Like the previous deduction, you can’t write everything off. For example, you can’t include your personal mobile usage, but you could declare your separate business cell device. Simply deduct the percentage you use the internet for work-related matters from your bill.
5. Business Expenses
There are a lot of miscellaneous details that go into operating a business. While they seem smaller, these work-related expenses can make a significant impact on your income. Be sure to deduct anything you can:
Advertisements – Did you pay to get your name out there? From websites to billboards, you can write many marketing expenses off.
Repairs – Cell phone, laptop, or any equipment used for business need to be fixed? It doesn’t have to be all out of pocket.
Start-up Costs – This can include anything from paying for your domain, consultant costs, market research, legal fees, or hiring a website designer. Take a load off to stay afloat.
Subscriptions or Membership Fees – Are you part of a professional association or need access to trade-specific journals to stay up to date? They can count too.
Just keep receipts of anything you want deducted off your tax return—it’s that easy.
There are specifications, as always, for what may be written off. Firstly, to be considered business travel, the trip must:
- Be located away from home, often at least beyond the city your business is in
- Have a duration longer than a typical workday
- Necessitate you to take a break or sleep before returning
- Be planned for business-oriented activities
- Involve the execution of professional endeavors (e.g., developing client relationships, learning skills relevant for work, seeking new clientele)
Don’t go on a swiping spree at all of New York’s Michelin-starred establishments yet. While business travel expenses may be entirely deductible, business meals are capped at 50%. While you won’t get away with footing the bill for a luxurious getaway, you can be a bit more comfortable.
These are some possible deductibles:
- Transportation to and back from the locale (e.g., airfare, train fare)
- Transportation while at the destination (e.g., taxis, metro tickets, bus fare)
- Meals (Reminder: 50% off food consumed while conducting business, so cancel the 64 oz steak)
Travel expenses aren’t entirely limited to jet setting expeditions. If you use your car to conduct business—as a ridesharing service driver or to meet with clients—you can claim deductions for the use of a vehicle for work-related tasks.
8. Retirement Savings
Deducting your self-employed retirement plan, like a solo 401(k), SIMPLE IRA, and SEP-IRA, will cut down on your tax liability and also help you save up tax-deferred investment earnings for the future. With a SEP-IRA, self-employed workers are allowed to pay, then write off a maximum of 25% of profits. The 2019 rate will enable you to deduct up to $56,000.
Although the IRS modifies the maximums each year, and the type of plan determines contribution limits, retirement savings deductions can be quite beneficial for those that make enough.
It’s a tough market out there. If you need to learn new or maintain existing skills to succeed in your business, deduct the costs. However, it must be relevant to your current industry. As an accountant, you won’t be able to include the Groupon courses to jumpstart your DJing career.
10. Insurance Premiums
If you pay for your own health insurance while self-employed, you can write off premiums under certain conditions. Moreover, you may deduct health insurance premiums that you paid for your spouse’s, children (under 27), and dependents’ coverage.
You may also include these types of insurance:
Must-have: business insurance
Speaking of business insurance, coverage for freelancers, independent contractors, and small businesses is crucial. Luckily, with Thimble, acquiring insurance has never been more affordable. If you earn self-employed income, you know the value of saving money while not sacrificing your standards.
While self-employed tax deductions can be challenging to navigate (hence, you know, this article), working with Thimble is anything but.
Thimble is small business insurance sold by the hour, day, or month; it works when you do to keep more money in your pocket and provide A+-rated liability coverage to your business only when you’re actually on the clock.
Deduct, deduct, go(ose!)
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.