Tax Deductions for the Self-Employed

Being self-employed can be intimidating, but it doesn’t have to be. Self-employed individuals have certain tax breaks and credits that are available to them. These deductions alleviate some of the burden placed on these taxpayers. To take full advantage of these deductions, self-employed taxpayers need to research what is available to them. This article provides an overview of the common self-employed deductions available and how to take advantage of them.

Defining Self-Employed

Self-employed individuals include freelancers, independent contractors, and small-business owners. Even if an individual works with a specific company doing freelance or contracted work, they are typically self-employed (“Who Is Self Employed?”).

Common Self-Employment Tax Deductions

While not a comprehensive list, the following self-employment deductions are common:

• Qualified Business Deduction (QBI)—This deduction allows qualifying individuals to deduct up to 20% of their income on their tax return. Individuals who qualify include owners of sole proprietorships, partnerships, S corporations, and some trusts and estates (“Qualified Business Income Deduction”).

• Self-Employment Tax Deduction (or Social Security Deduction)—In a normal business, an employer splits the Medicare and Social Security taxes due for each employee, with each party paying about 7.65% (15.3% total: 12.4% Social Security and 2.9% Medicare). Since self-employed individuals have no employer to split this tax with, the IRS allows self-employed individuals to deduct the employer portion from their adjusted gross income. This can ease the financial burden as a lower income requires fewer taxes to be taken out (“Self-Employment Tax”).

• Home Office Deductions—The home office deduction allows the costs of a workspace to be deducted as “home office expenses.” If an individual uses a portion of their home or apartment regularly for work, then they likely qualify for this deduction. This can include writing off part of the utility bills, insurance costs, and rent or home depreciation (“Most Overlooked Tax Breaks”).

There are two ways to calculate a Home Office Deduction: the standard or the simplified method. With the standard method, the taxpayer keeps detailed records of every office expense. For the simplified method, the IRS determines the rate of the deduction based on the square footage of the space. The maximum they allow for, however, is 300 square feet (“15 Tax Deductions”).

• Business Vehicle Use—Using a personal car for business purposes qualifies for this deduction. It is important to keep detailed records of each business trip, including the date, mileage, and purpose. Personal trips do not count. The IRS provides a standard mileage rate for calculating this deduction. Alternatively, the deduction can be calculated using actual expenses.

• Health Insurance—If a taxpayer pays their own health insurance premiums, they can deduct their premiums. However, they do not qualify for this deduction if they are being covered under a spouse’s plan.

• Individual Retirement Plans (IRAs)—If a self-employed individual contributes to their own retirement fund, they can qualify for this deduction. This allows them to decrease tax bills now and build up a tax-deferred retirement fund. There are a few options for building up an individual retirement plan including Simplified Employee Pension-individual retirement accounts (SEP-IRAs), Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and solo 401(k)s.

• Educational Expenses—If a self-employed individual is also pursuing an education in something related to their business, they can qualify for education deductions. However, this only includes education related to maintaining or approving business-related skills.

Taking Advantage of these Benefits

Individuals should do more research to see which deductions they qualify for in their specific situation. However, one simple thing that anyone can start doing today is tracking and organizing their business-related expenses. For example, if there is a business trip coming up, track all of the expenses. The same thing can be done with purchasing home office supplies, paying bills, and taking care of other business-related costs. Keeping track of expenses is the first step.

With an organized list of expenses, individuals can then determine which deductions to claim on their tax return for the year. This list of expenses also prepares them to file their taxes accurately.  As described above, some deductions the IRS has simplified and does not require detailed expenses. The IRS website can provide additional helpful information on deduction qualifications and processes.

Seeking Professional Assistance

Self-employed individuals can also seek the assistance of qualified tax professionals in taking full advantage of these deductions. Nimbl specialists have been trained to meet the varying financial needs of business owners. These professionals can help relieve the stress of figuring out which deductions a self-employed individual qualifies for and how to properly claim those deductions.

To contact a Nimbl representative, visit trustnimbl.com.