If you are a freelancer or an entrepreneur, you should be aware of the tax deductions for self-employed workers. It helps you to save time and money at the time of tax payment.
How do tax deductions work for the self-employed?
According to the IRS, if you are self-employed, it means that you are doing a business. In that case, you can deduct the most important and reasonable business expenses on your tax return. There are many expenses that you can write off at the time of tax. We are discussing these tax deductions below.
The 20 Best Self-employment Tax Deductions are:
We are sharing the top 20 self-employment tax deductions for your business:
- Advertisement expenses
- Qualified business income (QBI) deduction
- Business insurance
- Startup costs of business
- Vehicle expenses
- Fees and commissions
- Contract labor
- Employee benefits
- Home office expenses
- Interest payments
- Legal and professional services
- Office expenses
- Rent or lease payments
- Repairs and maintenance
- Retirement plan costs
- Taxes and licenses
- Travel, meals, and entertainment
You must take advice from your accountant to decide which deductions apply to you, and if there is any missing, you can add it too. You can claim the self-employed expenses through ‘Form 1040 Schedule C.’
You can completely deduct the advertising costs. These may include the expenses of:
- Business logos
- Business cards
- Printing flyers
- Running Google Adwords
- Facebook ads
- Trade show promotions
You can also deduct the costs of fees paid to PR agencies and freelance copywriters.
Qualified Business Income(QBI) Deduction:
It is a new tax deduction that allows the eligible self-employed and small business owners to deduct up to 20% of their qualified income on their taxes.
The tax deductions are also applicable to business insurance. It includes:
- General liability
- Workers compensation insurance
Start-up Costs Of Business:
A tax deduction is also applicable to the initial costs of starting a new business. It includes:
- Market research
- Business advertising
- Business launch
- Hiring business consultant
There is a limit up to which you can deduct the startup costs of a business.
If your vehicle is for business use only, then you can completely deduct its costs. If you are using it for both business and personal needs, then you can calculate the deductions as:
- Keep the record of actual car expenses, including gas, maintenance, insurance, and depreciation. You can deduct the percentage depending on the number of business miles you drive.
- The other way is to deduct according to the standard rate for each business mile for the year. The rate may vary every year; for 2020, it was 55.7 cents per mile.
Regardless of the method you choose, you should keep track of business and personal miles separately. For this purpose, you can use your car’s glove compartment or use apps like MileIQ or Triplog.
If you are using five or more vehicles for your business, you can use the actual expense method to calculate the deductions. On the other hand, if you want to choose a simpler way, you can go for ‘Standard Mileage Rate.’
Try both ways to estimate which method is more profitable and allows a higher deduction. Business parking fees and toll payments are also deductible.
Fees and Commissions:
The commissions you pay to non-employees for sales and marketing purposes are also deductible. It includes the payments of:
- Sales representatives
- Marketing channels (Amazon, eBay)
You will have to file ‘Form 1099-MISC’ if the amount of commission exceeds $600.
If you are hiring staff on contract, including graphic designer, web developer, or content writer, you have to pay their fees. Their fees are fully tax-deductible. If the contractor’s payment is $600 or more in a year, you have to file ‘Form 1099-MISC.’
If you expect your business assets to last longer than a year, you should depreciate their cost over their useful life rather than depreciate them in a year when you buy them. In that case, depreciation is fully deductible. These assets may include:
Assets that you can not depreciate are:
- Stock in trade
Usually, freelancers do not have employees, but in some cases, they do hire them. The benefits you provide to your employees are fully deductible. These benefits include health insurance and other personal benefits for the employees.
You can not deduct the cost of your health insurance as a business expense. For that, you can claim on ‘Form 1040.’
Home Office Expenses:
You can claim the home office deduction if you are using any part of your home for business. You can choose any one of the following methods for deduction:
- Standard Method:
You can use Form 8829 to enlist the expenses of your home office; it includes the rent, mortgage interest payments, utilities, homeowners insurance premiums, and property taxes.
- Simplified Method:
Calculate the square footage of your home office (up to 300 square feet) and multiply it by $5.
You can choose any one of the following methods to calculate the deduction of your home office. You can also compare the two ways to evaluate which one is best for you to lower your tax charges.
There are two categories of deductible interest payments. These are:
- Mortgage Interest:
It includes your primary business property (excluding your primary home). If you have a mortgage on a property, you can write-off the interest on that mortgage.
- Other Interests:
It includes business credit cards, lines of credit, or interest on equipment loans.
Legal and Professional Services:
The fees you pay to your legal advisors, attorneys, consultants, accountants, and online bookkeeping services are deductible. If you are utilizing these services to settle your personal affairs, you won’t deduct the fees. If you are utilizing them for business matters, then the deduction is applicable.
All the office related expenses are deductible. These expenses include:
Do not apply the same deductions in a home office because it has its separate category.
Rent or Lease Payments:
If you rent anything for your business, such as a car, office space, machinery, or any other physical equipment, the deduction is applicable on those expenses. There is a rule for deduction of a car expense that you lease for 30 or more days. You can further search it as, ‘Leasing a Car’ section in chapter 4 of Pub. 463.
Repairs and Maintenance:
Your office may need maintenance over a period of time. You can deduct the costs of repair and maintenance of your office property.
It may include the fixing of your printer, photocopier or computer. Expenses of changing the broken furniture or recarpeting the office space are also deductible.
The things which you should not include in the deduction are:
- The value of your labor.
- Car maintenance and repair, because it already comes under the category of ‘Car and Truck Expenses.’
- The costs of restoring or replacing a business property.
- Improvements that prolong property’s useful life. It comes under the category of ‘Depreciation and Section 179.’
Retirement Plan Costs:
If you are offering an employer-sponsored retirement plan to your employees, you can deduct the plan’s establishment and maintenance costs. You can not deduct the costs of your personal retirement accounts (SEP and IRA). For that, you need Form 1040.
The cost of supplies and material you are consuming to produce inventory is also deductible, but only those you are utilizing in that tax year. It does not apply to the total supplies you purchased. You can deduct the other incidental office supplies, including pens, paper clips, post-its, etc.
You can also include the materials like professional instruments, books, and equipment under this category only if they are useful for a single year. If their useful life exceeds one year, you should report them under the category of ‘Depreciation and Section 179.’
Taxes and Licenses:
The costs of all business licenses, certifications, and regulatory fees are deductible. This category includes the incorporation fees and small business licenses for your state.
Here we will categorize the deductible and non-deductible business taxes:
- State and local sales taxes (for sellable goods and services)
- Property taxes on business assets (including real estate)
- Federal highway use tax
- Payroll taxes, such as the employer portion of Social Security and Medicare tax
- Federal income taxes, including your self-employment tax
- Taxes on personal property (including your home)
- Sales taxes (need to collect from buyers of your goods and services for remittance to state or local governments)
Travel, Meals and Entertainment:
If you are traveling for business purposes, the costs of travel, lodging, and local transportation are deductible. It is applicable in the case if the trip is:
- Relevant to business
- Distant from your tax home
- shorter than a year
If your family is traveling with you, not for any business purpose, their expenses are not deductible.
You can deduct 50% of all meals with business clients in case of a self-employed meal deduction. On the other hand, if you are traveling for business purposes, you should deduct the cost of business meals by choosing any one of the following methods:
- Deduct the actual cost of your meals (50% deduction)
- Standard meal allowance (specified by General Services Administration)
All the office utilities, including electricity, water supply, and the internet, are tax-deductible. Home office utilities come under different categories so do not include them here.
You can write-off the expenses of your cellphone if you are using it for your business only. If you are using the same cellphone for both personal and business needs, you should write-off only the expenses linked with business.
The expenses which do not fit in any other category come under this one. The deduction sit includes are:
- Costs for acquiring or claiming trademarks and trade names
- Bad debt (for businesses that keep their books on an accrual basis)
- Bank fees, including maintenance and overdraft fees
- Dues and subscriptions
- Education and training expenses
- Business gifts (up to $25 per person)
Browse our blog for more useful resources for your small business.
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