Filing your taxes as a W-2 employee can be overwhelming. But when you’re self-employed, the labyrinth of paperwork and potential tax deductions creates a tax situation that’s enough to give even the most laid-back freelancer heartburn.
Whether you’re filing your business taxes as a self-employed worker for the first time or the 20th, there are certain best practices that can save you thousands of dollars a year. Here, we’ll walk you through the most common — and not so common — tax deductions for the self-employed, and guide you through the paperwork to help you file your taxes accurately.
What is a tax deduction?
If you’re filing your self-employed taxes for the first time, you’re likely wondering what exactly a tax deduction is. Essentially, a tax deduction is an amount of money the Internal Revenue Service allows you to subtract from your Adjusted Gross Income (AGI) in order to reduce your taxable income. In some cases, taking enough tax deductions can place you in a lower income tax bracket, substantially reducing the amount of taxes you pay annually.
There are two primary types of deductions available under United States tax law: the standard deduction and itemized deductions.
Most people will decide to take the standard tax deduction route. This is a flat amount the IRS lets you deduct from your tax bill, no questions asked. The amount of the standard deduction varies based on your filing status.
For the 2018 tax year, the tax code stipulates that single taxpayers and married taxpayers filing separately can claim a $12,000 standard deduction amount for the 2018 tax year. Those married filing jointly can claim a $24,000 standard deduction, and taxpayers filing as “head of household” — that is, single individuals with dependents — can claim a standard deduction of $18,000.
While receiving a tax deduction of anywhere from $12,000 to $24,000 might seem like a lot, by choosing to itemize deductions rather than take the standard deduction, freelancers and other self-employed professionals can often reduce their tax bill by a greater amount.
Itemized deductions include a range of expenses that would otherwise not be deductible. For self-employed individuals, these are expenses that are seen as “ordinary and necessary” for conducting business. These can range from advertising to utilities and everything in between. Remember, however, that you can only deduct the business-use portion of the expense you’re claiming.
Why does it have to be so complicated?
While there might be a few reasons to envy the self-employed lifestyle, the increased tax preparation burden isn’t one of them. Self-employed professionals face unique challenges when tax season comes around because they don’t have taxes withheld from their paychecks like more traditional full time employees who file their taxes with a simple W-2.
Not only must some freelancers file quarterly tax payments or risk IRS penalties and fees, but they are also required to pay the portion of Medicare and Social Security typically covered by an employer, as well as the portion that would be withheld from an employee’s paycheck. The total Medicare and Social Security taxes paid by self-employed persons are called self-employment taxes. In light of this greater financial burden, self-employed people need to take advantage of all possible tax deductions to stay profitable.
In order to offset the cost of doing business on their own terms, self-employed professionals often depend heavily on tax deductions to reduce their tax burden. When you itemize your deductions, the amount of those deductions is subtracted from your adjusted gross income, resulting in your taxable income. When you’re able to lower your taxable income, you also generally decrease your tax bill. While using self-employed tax deductions certainly isn’t one-size-fits-all, there are some general guidelines you can follow to help you get started.
While tax rules for freelancers can be complex, self-employed professionals can generally write off expenses that fall into three categories:
- Things you use exclusively in operating your business.
- Things you use in the course of doing business.
- Things you use exclusively for your business in the space where your business operates.
Common deductions for the self-employed
This list is relevant for many self-employed professionals. This may include rideshare drivers, such as Uber or Lyft drivers, who claim large mileage deductions, or writers who might take the home office deduction. These business deductions can also apply to designers, housekeepers, photographers, construction workers, consultants, or any other professionals who work for themselves. Here are some of the most common deductions.
Travel and hotel
If you travel to visit clients or attend trade shows, you may be able to deduct these expenses. Business travel expenses can include transportation and accommodation costs, and the IRS allows a 50% deduction for business meal expenses. It’s important to note that you shouldn’t attempt to write off any expenses associated with sightseeing and leisure travel, which can trigger an audit.
Many freelancers work out of their homes in the early days, especially when their businesses are first getting off the ground. As a result, the IRS allows self-employed persons to deduct the portion of their mortgage (including property taxes) or their rent that goes to a home office.
To qualify for this write-off, you must have a specific area in your home designated for working, and you must refrain from using it for other purposes. When claiming this deduction, you can calculate the deduction’s value using either the regular or simplified home office deduction option.
While business owners with offices outside their homes can deduct 100% of their utilities, freelancers who work inside the home can still write off a portion of this cost as part of the home office expense. The percentage of your utility costs that are tax-deductible is proportional to the percentage of your home occupied by your office.
Along with gas and electricity, freelancers can deduct the costs of heating, air conditioning, and phone service. Be aware, however, that you cannot deduct the cost of utilities if you claim the simplified home office deduction.
As a freelancer, it’s important that you find ways to stand out from your competitors in the industry. To keep ahead of the pack, many freelancers attend classes and educational seminars.
The cost of these expenses can add up, so the IRS allows freelancers to deduct expenses related to professional development on their tax returns. Additionally, self-employed persons can write off their dues for professional organizations and membership fees.
Advertising and marketing
In our increasingly connected society, self-employed people have to engage in marketing and advertising if they hope to stay competitive. The IRS permits freelancers to write off the cost of flyers, web advertisements, business cards, and print ads among other marketing expenses.
With a majority of consumers using the internet to research purchases, creating a mobile-friendly, responsive website is crucial for a freelancer’s success. Luckily, self-employed persons can deduct costs related to their business websites, including domain fees, web design, web building, and maintenance.
These days, most freelancers spend their days staring at computer screens. From sophisticated video editing programs to more basic options like Microsoft Office and Adobe Acrobat, software can be expensive. Hence, this is a useful deduction for small business owners and freelancers.
Mileage and gas
Do you regularly drive to meet clients or suppliers? If so, you should take advantage of the tax deductions available for costs related to vehicle mileage or normal vehicle wear and tear. You can choose between two types of vehicle-related deductions: the standard mileage option or the actual expense option.
The standard mileage option allows you to make a deduction based on how many miles you’ve used for business purposes. The actual expense option allows you to figure out how much it costs you to maintain and operate your car expressly for business use.
If your freelance business is successful, you may be thinking about incorporating in the near future. The IRS permits new businesses to deduct expenditures associated with incorporation, including state fees and legal costs during the business’ first year of operation.
Self-employment health insurance deduction
Most full-time employees receive their health insurance through their employer. However, many self-employed professionals must pay for their own healthcare out of pocket, and those monthly premiums can add up to a hefty chunk of change every month.
Luckily, self-employed individuals who meet certain criteria may be entitled to a special tax deduction that allows them to deduct 100% of any health insurance premiums paid to an insurance company — including dental expenses, vision, and long- and short-term care — for themselves, their spouses, and any dependent family members.
If you meet the following requirements, you can deduct up to the full cost of your health insurance plan:
- Your business is claiming a profit. If your business claims a loss for the tax year, you can’t claim this deduction.
- You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in one and chose not to, you cannot claim this deduction.
- You are only attempting to claim premiums paid for the months when you were not eligible for an employer’s health plan.
It’s important to note that this is not, strictly speaking, a business deduction. Instead, it is categorized by the IRS as a special personal deduction for the self-employed. As such, it applies only to your federal taxes, state taxes, and local income taxes, and not to your self-employment taxes.
How do those deductions translate into paperwork?
Some of the self-employment tax deductions above may not apply to your profession, but you might be surprised by the number that do. When you’re ready to file, you’ll list the majority of your deductions in Part II of your Schedule C (Form 1040). If you have less than $5,000 in claims, you may be able to use Schedule C-EZ.
Whichever you choose, both are due April 15th, along with your annual tax return. If April 15th falls on a weekend or holiday, it’s observed the following Monday.
Common Schedule C tax deductions
Here is a list of common business expenses that are ordinary and necessary for many self-employed individuals. Note that all of the lines specified in the chart below refer to the different line items found in the Schedule C tax form with two noted exceptions.
|Type||Deductible Expenses||Non-Deductible Expenses|
|Advertising (Line 8)||Any materials for marketing your business (e.g. flyers, signage, ads, branded promo items, events, or trade shows) and the cost of developing those (e.g. agency or designer costs).||Office holiday parties, gifts that aren’t branded (use “Other Expenses”).|
|Business Insurance (Line 15)||Insurance coverage intended to protect your business (e.g. fire, theft, flood, property, malpractice, errors and omissions, general liability, workers’ compensation).||Health insurance, auto insurance (use “Car Expenses” or Add Mileage), disability insurance.|
|Car Expenses (Line 9)||The business portion of your actual car expenses (e.g. gas, insurance, registration, repairs and maintenance), or public transit expenses (e.g. buses) if you use local transportation.||Expenses (other than Parking/Tolls) if you use the standard mileage rate (use Add Mileage).|
|Depreciation and Section 179 (Line 13)||Depreciation expense on business assets (e.g. computers, office equipment, tools, furniture, cars). Note: The IRS requires you to use Form 4562 to claim these deductions.||Car depreciation if using the standard mileage rate (use Add Mileage).|
|Home Office Deduction (Line 30)||Expenses related to a home office (e.g. business portion of rent, utilities, repairs, insurance, home mortgage interest). You’ll need to fill out a Form 8829, unless you use the simplified method.||Expenses if you use the simplified method (it includes all home office expenses).|
|Meals (Line 24b)||Meals that you had with a client and during which you engaged in business discussions, or meals incurred while traveling on an out-of-town business trip. Fifty percent of business meals is deductible.||Meals for yourself (e.g. on lunch breaks), dues for athletic clubs.|
|Office Expenses (Line 18)||Office expenses (e.g. cleaning services for your office, general office maintenance) that don’t have a separate category.||Home office costs (use “Home Office”), rent (use “Rent”), utilities (use “Utilities”).|
|Supplies (Line 22)||Any supplies that you use and replace (e.g. cleaning supplies if you clean homes, office supplies like pens or printer ink, hot/cold bags if you do delivery).||Office decorations and some other office expenses (use “Office Expenses”).|
|Travel (Line 24a)||Travel costs related to business trips (e.g. lodging, airfare, rental cars, local transportation). The travel must be overnight, away from your residence and primarily for business.||Personal costs while traveling (e.g. dinner with a friend), meals while traveling (use “Meals”).|
|Other Expenses (Line 27a)||Any other business expenses that are ordinary and necessary (e.g. education to improve skills for your job, banking fees, association dues, business gifts, industry magazines).||Expenses with their own separate categories, expenses that aren’t ordinary and necessary.|
Less common Schedule C tax deductions
You might also encounter some of these business expenses in your line of work, but they’re generally less common.
|Type||Deductible Expenses||Non-Deductible Expenses|
|Commissions and Fees (Line 10)||Commissions/fees paid to nonemployees to generate revenue (e.g. agent fees). Many companies (e.g. Uber, Airbnb) remove their cut before paying you, so don’t include those.||City license fees (use “Taxes/Licenses”), commissions paid to employees (use “Wages”).|
|Contract Labor (Line 11)||Any payments made to independent contractors (e.g. a contracted web developer).||Wages paid to employees (use “Wages”), lawyer/professional fees (use “Legal Services”).|
|Depletion (Line 12)||If you’re in the business of mining natural resources (e.g. oil wells, natural gas, logging), you can write off the use of those resources. (We suggest getting an accountant if this applies to you.)||Gas for driving (use “Car Expenses” or Add Mileage), home/office utilities (use “Utilities”).|
|Employee Benefit Programs (Line 14)||Costs related to benefits you provide your employees (e.g. health or life insurance, education assistance, accident or liability insurance).||Your own health/retirement benefits (deductible on Form 1040 Line 28 and 29).|
|Employee Wages (Line 26)||Wages paid to employees (e.g. salaries, commissions, bonuses).||Employee benefits (use “Employee Benefits”), payments to yourself.|
|Interest (mortgage) (Line 16a)||Interest paid on a mortgage for property used for business, other than your primary home. You may receive a Form 1098 from the lender if you pay mortgage interest during the year.||Interest on primary home (use “Home Office Deduction” and Form 8829 if used in business).|
|Interest (car, other) (Line 16b)||Other types of interest (e.g. credit cards, business lines of credit, interest on car payments). You can only write off the portion related to business, not the portion related to personal use.||Interest on personal loans, home office mortgage interest (use “Home Office Deduction”).|
|Legal and Professional Services (Line 17)||Professional fees related to your business (e.g. attorneys, tax preparation fees, accountants, other professionals).||Services provided by your employees (use “Employee Wages”).|
|Pension Plans (Line 19)||Contributions you make to your employees’ retirement plans (e.g. 401(k), Keogh plans, profit-sharing plans).||Contributions made to your own plan (use Form 1040 Line 28).|
|Rent or Lease (vehicles, equipment) (Line 20a)||Rent or lease payments on business property not owned by you (e.g. machines, equipment, vehicles).||Car lease payments if you use the standard mileage rate (use Add Mileage).|
|Rent or Lease (other business property) (Line 20b)||Rent or lease payments on items that aren’t vehicles or equipment (e.g. office or land rent), including any government taxes on those items.||Rent for home office (use “Home Office”), rent for trade show booths (use “Advertising”).|
|Repairs and Maintenance (Line 21)||Repairs or maintenance on business machines, equipment, or offices (e.g. repainting your office, fixing your computer or laptop, replacing worn parts on equipment).||Car-related repairs (use “Car Expenses”), significant improvements (use “Depreciation”).|
|Taxes and Licenses (Line 23)||Various business taxes (e.g. your share of FICA if you have employees) or licenses (e.g. state or local licenses, or licenses required for your business type).||Self-employment tax or income tax (see section below).|
|Utilities (Line 25)||Utilities related to your office (e.g. electric, gas, garbage, water).||Utilities for your house (use “Home Office”).|
Additional deductions on other tax forms
Most of the deductions listed above will be found on your Schedule C tax form. However, there are a couple other deductions of note that you can find on Schedule 1 of Form 1040. Here’s an explanation of those deductions.
Health insurance deduction (line 29 of Schedule 1 of Form 1040)
As mentioned above, deducting the cost of your self-employed health insurance is one of the biggest deductions you can take as a non-traditional employee. However, because it qualifies as a personal, rather than a business deduction, you take it directly from your Form 1040.
That said, if you itemize your deductions and don’t claim 100% of your health insurance costs on the 1040, you can include what remains, as well as any other medical expenses, on a Schedule A form.
Self-Employed Contributions Act (SECA) tax deduction (line 27 on Schedule 1 of Form 1040)
If you’re a traditional employee, your Federal Insurance Contributions Act tax burden, known as FICA, is split between you and your employer. If you’re self-employed, you’re responsible for paying the whole share of those Social Security and Medicare contributions, collectively known as SECA.
But do not fear. You too can be taxed just like your traditionally employed peers by claiming a SECA deduction on Line 27 of Form 1040. You will calculate this amount as part of Schedule SE.
Keep the paperwork in perspective
Filing taxes as a freelancer for the first time can be stressful. That stress can include not knowing what to do with your self-employed tax forms. However, by taking advantage of all possible deductions and understanding what’s expected of you, you can minimize your tax burden and give your business the chance it needs to grow.
While it may seem like a frustrating and time-consuming process, tracking your business expenses and claiming them as deductions can save you a good amount of money when it comes time to file taxes.