When I began running my business in 2010, I wanted to keep my expenses down. I scrutinized every cost and refused to pay for many items because I wanted to be agile.
Soon, I discovered I was harming my startup by not investing in it, and I wasn’t capitalizing on tax deductions. With the help of an experienced accountant and research at the Internal Revenue Service (IRS), I began investing in my business and deducting items such as website design, internet and phone service, digital recording systems for my podcast, and many other costs.
For entrepreneurs, investing in your business is vital for it to grow. Keep meticulous records of your business expenses. You should evaluate every dollar you spend on your business to see whether a deduction is available. If you aren’t sure, go to the IRS website or ask an accountant about the specific rules.
Tax Deductions for Self-Employed Freelancers & Small-Business Owners
There are so many opportunities to take tax deductions if you’re self-employed, a freelancer, or a small-business owner. Here’s a list to consider for your business.
1. Home Office Deduction
Many entrepreneurs start working at home, and one of the most popular tax strategies is to deduct a percentage of your home used for business. The requirements from the IRS are it must be your principal place of business and that you use it regularly and exclusively for business purposes.
The simplified method allows you a deduction of $5 per square foot. The maximum deduction is $1,500 based on business use of 300 square feet. Check out IRS Simplified Option for Home Office Deduction to get more insight.
The simplified method requires less record keeping and calculation — you simply multiply the square footage of the business area of your home by $5. You also don’t have to factor in depreciation when the property is sold (more on this shortly).
The second strategy, called the regular method, is more complicated but sometimes results in a larger deduction. In the regular home office deduction method, you can claim depreciation on your home’s value.
If you decide to use the regular deduction method, you must complete an additional Form 8829, Expenses Business Use of Your Home.
Steps to determining the regular method:
- Calculate your business-use area. Measure it out, then divide that number by the total square footage of your home. For example, if the office is 150 square feet and the house is 2,000 square feet, your formula looks like this: 150/2000 = 0.075 (7.5%).
- Determine direct expenses that apply to the office, such as painting it or new flooring.
- Calculate expenses that apply to the entire home, including mortgage interest or rent, real estate taxes, home insurance, and utilities. Expenses that apply to unrelated parts of the home — such as lawn care or renovation of a room not in the office — are not deductible in this category.
- Multiply the total costs in steps 2 and 3 by the office square footage you calculated in step 1. Let’s say your total business expenses were $15,000. The deduction using the regular method would be: 15,000 x 0.075 = $1,125.
One downside of the regular method is it is complicated and requires an additional form when filing taxes. Plus, you must capture the depreciation when you sell the house. IRS Publication 587 explains this process in detail. But this method can result in a high deduction.
2. Office Supplies Deduction
The most appealing part of the office supplies deduction is you can deduct 100% of office supplies used. Items include staples, pens, printer ink, paper clips, and USB thumb drives. Also, if you have website maintenance, domain names, and monthly costs for apps like Grammarly or Dropbox, these would be considered in the office supplies category.
If you’re deducting office supplies from your tax return, you must be able to prove these are “ordinary and necessary” business expenses, according to the IRS. Keep your business supply costs separate from your other expenses and document your use. IRS publication 552 highlights the importance of establishing records and systems to track business expenses.
Deductible office supplies include:
- Internet hosting fees and website maintenance, domain names
- Monthly business apps like Dropbox or Grammarly
- Consumable office supplies like paper clips, printer ink, and staples
- Software you use for your business, such as QuickBooks
3. Phone & Internet Deduction
You can deduct expenses if you work from home and use your phone or internet for business. If you’ve got a separate phone line or internet service fully dedicated to business, you can deduct the entire cost. But it gets complicated if you have one phone or internet service plan for both personal and business use.
If you or your family use the home internet or your phone for personal reasons, you can only deduct the percentage you use for business. There is no formula from the IRS to determine what portion of the internet or phone you can deduct. But you must determine what percentage of time you use the phone and internet for business purposes.
Think about how many hours you’re awake per day and determine what percentage of each day you use the phone and internet for work. If you use it 40% of the time for business, you can deduct 40% of your phone or internet expenses for your taxes. If your phone bill is $100 per month, you can take a deduction of $40 per month.
4. Rent Deduction
You can deduct all the rent costs if you rent a space for your business and the space is only used for work. The rent must be the market value of a professional appraisal. If you’re paying above the market value, the IRS won’t allow you to deduct all the rent. You can only deduct the amount that is reasonable based on market value.
The IRS says unreasonable rent becomes a problem when a small business is renting from a relative. You can still deduct the rent paid to a relative as long as it is the same amount a business owner would pay a stranger for the same property. Renting to relatives is typical for startups.
One caveat is you can’t deduct rent expenses on any property you own — even partially.
5. Health Insurance Premiums Deduction
One of the challenges of being self-employed is paying steep premiums to purchase your health insurance. But the best part is you can deduct 100% of your health insurance premiums. This includes dental and long-term care.
But the deduction only applies to your federal, state, and local income taxes. It’s not part of your self-employment taxes.
You can’t take this deduction if you’re eligible to participate in a health insurance plan maintained by a traditional employer, such as through your spouse’s work. Similarly, you can’t take the deduction if you still have a job while you’re launching your business and your employer offers health insurance.
You may deduct up to the net income from your business. You don’t get a deduction if your business earns no money or incurs a loss.
You may also qualify for deductions of your actual medical expenses in addition to deducting the premiums. You can deduct large medical expenses that exceed 7.5% of your adjusted gross income. These expenses may include doctors, dentists, surgeons, and hospital care fees.
6. Retirement Plan Contributions Deduction
Although you don’t have employer-sponsored retirement plans when you work for yourself, there are still many retirement savings options for the self-employed.
Many retirement plans are tax-advantaged accounts you can consider, and each has contribution limits and requirements.
- Individual Retirement Account (IRA): You can deduct contributions from your taxable income: The maximum you can contribute in 2022 to an IRA is $6,000. If you’re 50 or older, you can add an extra $1,000 a tear as a catch-up.
- Simplified Employee Pension (SEP) IRA: This is an IRA, and you can contribute up to 25% of your self-employed income to a SEP IRA. The contribution limit is capped at $61,000 for 2022. You can contribute that amount and deduct it.
- Keogh Plan: A Keogh plan is a tax-deferred pension for high-earning self-employed individuals. You can set this up as a defined contribution plan and contribute up to 25% of your compensation or $61,000 in 2022: If you set it up as a defined contribution plan, you can contribute $245,000 in 2022. All contributions are pretax.
- Solo 401(k) Plan: You can set up a solo or one-participant 401(k) plan and contribute up to $61,000 in 2022 or 100% of earned income. It’s similar to an employer-sponsored 401(k) plan. The contributions are pretax and distributions taken after age 59 ½ are taxed.
7. Self-Employment Tax Deduction
One challenging aspect of being self-employed is paying a self-employment tax. The self-employment tax consists of Social Security and Medicare taxes for individuals who work for themselves.
You must figure out your self-employment tax using IRS Schedule SE Form 1040. The self-employment tax is 15.3% of net earnings. The rate is 12.4% for Social Security and 2.9% for Medicare tax. For 2022, the first $147,000 of your combined wages, tips, and net earnings is subject to any combination of the Social Security part of the self-employment tax.
You can deduct half of your self-employment tax on your income taxes. For instance, if your Schedule SE says you owe $2,000 in self-employment taxes for the year, you’ll pay it when it’s due. But at tax time, $1,000 is deducted from your Form 1040.
8. Vehicle Use Deduction
If you have a vehicle you only use for business purposes, then you can deduct the entire cost of ownership and operation.
But if you’re using it for personal and business purposes, you can only deduct the cost of its business use. The deduction is based on the portion of mileage used for business.
The IRS has two ways of determining car expenses: the actual expenses and the standard mileage rate. You must choose one method.
Using Actual Driving Expenses
If you are using actual expenses, you must keep detailed records of your costs. You can’t deduct the car’s costs using the standard mileage rate.
To determine your actual driving expenses, add up your vehicle expenses for the year including gas, oil, repairs, tires, insurance, and registration fees.
If you use the vehicle only for business travel, you can deduct these expenses. But if you use the same vehicle for business and personal travel, you need to determine what percentage of the vehicle expenses were for business, much like you calculate the square footage of a home office.
Determine how many business miles you drove in a year. Let’s say you drove 20,000 miles total but only 5,000 were business miles. So you’d divide the business miles by the total mileage: 5,000/20,000 = 0.25 (25%).
If your actual vehicle costs totalled $8,000, but you only used the vehicle for business 25% of the time, your deduction would be: $8,000 x 0.25 = $2,000.
Using Standard Mileage
The other option is to use the standard mileage deduction rate. The IRS sets the standard mileage rate for each calendar year. For 2022, it is $0.585 until June 30, 2022. Starting July 1, 2022, until the end of 2022, the new mileage rate is $0.625 per mile.
To use the standard mileage deduction, simply track the total business miles you drove for the year. Take your total number of business miles and multiply them by the standard mileage rate.
If you drove 2,000 business miles through June 30, 2022, you will deduct 2,000 x 0.585 = $1,170. If you drove 2,000 miles in the second half of the year, you’ll deduct 2,000 x 0.625 = $1,250. Combined, that gives you a $2,420 deduction for the year.
Regardless of which type of vehicle deduction you use, always track your mileage, noting where and when you travel for business. Remember, you can’t deduct other commuting miles as business miles. For example, you can’t deduct the miles you drive to and from work if you have a conventional job while starting your new business.
9. Credit Card & Interest Deduction
You can deduct the credit card interest you’ve paid when self-employed as a freelancer or a small-business owner. The IRS allows you to deduct credit card interest for expenses used for qualified business purposes.
This must be a credit card you are entirely liable for — meaning it’s in your name and you paid the expenses. When you want to deduct your interest, you can use your credit card statement at the end of the year, which lists the total interest you’ve paid.
The IRS doesn’t require you to use a business credit card, but it will simplify your accounting if you do. You must separate the business-related interest if you have personal expenses on your credit card.
For more details, check out IRS Topic 505, which includes other types of interest that could be deductible, including investment interest.
10. Business Travel Deduction
An excellent deduction is your business travel expenses. When you’re self-employed, you deduct travel expenses on Schedule C Form 1040 Profit or Loss Form.
The IRS is candid in stating that you can’t deduct extravagant travel expenses. That means you need to avoid costs like spa treatments and helicopter trips. Always keep records of your expenses.
Business travel expenses such as hotels and airfare are acceptable. You can use the business travel expenses when your business requires completing your business work out of town.
Deductible travel expenses include:
- Transportation costs, such as fares for travel by airplane, train, bus, rental car, Uber, or taxi
- Lodging, such as a hotel or motel
- Meals (see below)
- Tips you may pay at the hotel or for transportation
- Laundry or dry-cleaning
- Any other business-related expenses incurred while traveling, such as renting a computer or piece of equipment or purchasing Wi-Fi
11. Business Meals Deduction
In May 2022, the IRS announced enhanced deductions for business meals available for 2021 and 2022, allowing you to deduct 100% of the cost of food or beverages during a business meal at a restaurant. Typically, the limit is 50% of the meal.
To deduct 100% of the meal, the business owner or an employee must be present when food and beverages are provided. And the expense can’t be lavish.
But the IRS isn’t exactly clear on what is considered lavish. IRS publication 463 says that an expense isn’t lavish or extravagant if it is reasonable based on the facts. The agency says lavish expenses wouldn’t be allowed if they are more than a fixed dollar amount or because the meals take place at deluxe restaurants, hotels or resorts.
For example, if four people dine at the Ritz Carlton in downtown Chicago and run up a $50,000 tab, this could be disallowed because there are other reasonable restaurants nearby.
Another caveat to this rule is that grocery and convenience stores do not qualify as restaurants. The rule only impacts meals at restaurants.
12. Startup Costs Deduction
It’s intimidating to start a new business, but the IRS allows you to deduct many startup costs. You can deduct $5,000 in business startup costs and $5,000 in operational costs if your total startup costs are $50,000 or less. IRS Tax Tip 2021-166 shows how businesses can deduct startup costs.
Deductible startup costs include:
- Advertisements for your business’s opening
- Salaries and wages of staff
- Travel expenses related to the opening of your business
13. Advertising Deduction
In the first year of your business, the IRS lumps advertising in with startup costs. After that, you can deduct advertising costs separately.
Deductible advertising expenses include:
- Purchases of email lists for direct marketing
- Costs of promotional items such as pens, notepads, magnets, bookmarks, calendars, and business cards
- Printing costs for banners
- Temporary signs and vehicle signage
- Online advertising
14. Education Deduction
Many entrepreneurs qualify for education deductions each year. Education expenses include the costs of training, certifications, and classes to help you maintain or improve the skills needed in your business.
For example, if you’re a photographer and take a class on improving your wildlife photography, you’d be able to deduct those expenses.
In some businesses, you are required to receive continuing education credits. For instance, if you’re a financial advisor, you’re required to receive education credits each year, and you can deduct the associated costs.
One caveat is that education classes can’t be part of a program that will qualify you for a different trade; they must be related to maintaining or improving skills needed in your current business.
Deductible education expenses include:
- Tuition, books, and lab fees
- Transportation and travel costs to your school
- Research expenses
15. Professional Memberships Deduction
You can deduct fees paid for professional associations and memberships, which are classified as miscellaneous deductions. That means only the amount of dues or fees paid that exceed 2% of your adjusted gross income are listed as a tax deduction.
You can’t deduct membership fees to clubs organized for business, pleasure, recreation, or other social purposes. You can’t deduct costs from country clubs, golf clubs, and sporting clubs.
Deductible memberships may include:
- Chambers of commerce or boards of trade
- Business leagues
- Real estate boards
- Trade associations
- Civic or public service organizations
- Professional clubs such as bar associations and medical associations
16. Publications & Subscriptions Deduction
You can also deduct the cost of business publications and subscriptions, including paper and online subscriptions.
For example, if you’re a freelance writer, you could deduct a print subscription from The New York Times if it is necessary for your research. If you’re a sports writer and are required to stay abreast of hockey news, you could deduct a subscription to The Athletic or NHL.com. You could deduct a professional, medical, or trade journal if you’re a doctor.
17. Business Insurance Deduction
If your business has been up and running for a while, you might have purchased different types of business insurance policies. You could be paying for fire or car insurance if you’ve got a building or automobile that the business exclusively uses.
There are many types of business insurance to consider, such as property insurance, casualty insurance, and general liability insurance. You might consider liability insurance if you’re a freelance journalist worried about being sued. Other insurances that can be deductible include malpractice insurance and errors and omissions covers, a form of professional liability insurance.
The good news is you can deduct these premiums each year. You might have held off buying insurance because of the costs, but the tax deduction is a huge incentive.
18. Qualified Business Income Deduction
The qualified business income deduction allows those self-employed or who own a business to deduct up to 20% of qualified business income on their income taxes. For 2022, total taxable income must be below $170,050 for single filers and $340,100 for joint filers. If you’re over that limit, check with the IRS or your accountant because it’s complex, and you might still qualify for a partial tax deduction.
Unfortunately, not every self-employed individual qualifies for this deduction. Part of the reason is the IRS’ definition of qualified business income (QBI): “the net amount of qualified items of income, gain, deduction and loss from a qualified trade or business.”
In general, what this means is you can deduct up to 20% of your business’s net profit, but only after other deductions and adjustments, and it only applies to business income.
One important caveat is that qualified business income is calculated differently than traditional income. Only items in taxable income are counted. Many forms of income such as capital gains, interest income, W-2 income aren’t not counted as business income.
To be considered for this deduction, you must be using Schedule C. You can determine your QBI deduction by taking your net profit on Schedule C and subtracting contributions to retirement accounts, self-employed health insurance payments and half of the self-employment tax. Multiply that number by 20% for your QBI deduction.
A second way to determine this deduction is to take 20% of your overall adjusted gross income minus the itemized deductions and capital gains.
If you look at the last line on Schedule C, if there is a positive number, that is the first number to consider for the 20% deduction. The IRS also has a Q&A regarding qualified business income.
Indeed, it is scary to start your own business, but it can be rewarding and life-changing.
Break this list of common deductions into the categories that most impact your business. The U.S. tax code is notoriously complicated, but there are IRS bulletins that spell out deductions for self-employed individuals in an easy-to-understand manner.
It’s essential to invest in your business to grow it, and if you find yourself in a place where you’re not investing in your business, you may notice your growth is stagnant. You can also grow your business and reduce your tax expenses by capitalizing on these tax opportunities.
You should check out every expense that you make for your business and see if it could potentially be a deduction on your taxes. You might be pleasantly surprised, and you likely won’t turn back after you become a business owner.