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Note: Much of the information in this article was gathered from the IRS website's "Tax Information for Businesses." Business owners should rely only on the advice of a qualified tax professional. Individual situations may vary greatly.
As a self-employed worker, you live and breathe your job.
And, along with over 16 million other self-employed U.S. workers (according to the Bureau of Labor Statistics), you take pride in the fact that you’ve decided to work for yourself.
Sure, you might be in work mode more than you'd like, but when tax season arrives, your sacrifices are rewarded with a series of federal tax deductions. These tax deductions range from health insurance to travel expenses and can significantly lower your tax bill.
Whether you’re starting a business, owning your own business, working as a freelancer, or working as an independent contractor, this is a list of some of the deductions you can claim if you are self-employed. Please take note, though, that tax laws can change, so review the latest updates on the IRS website when you file.
1. Home office expenses
If you use your home for work, you can deduct these expenses from your taxes.
Costs such as rent, mortgage, and property taxes are all considered federal tax write-offs. It's also possible to claim a deduction on general upkeep and maintenance. This includes utilities and repairs, but only for the portion of the house that is considered a home office.
There are two ways to claim this deduction. You can refer to the IRS website to calculate the percentage of your home's square footage used for business and report this amount. Or you can deduct five dollars per square foot of your home that you use for business purposes up to 300 square feet.
2. Health insurance premiums
You might be able to deduct your dental and health insurance premiums on your taxes as long as you meet certain requirements. According to the IRS, you might also be able to claim deductions for children under 27, even if they are not dependents.
To claim your self-employed health insurance deduction, you must be unable to enroll in a healthcare plan from an employer. For example, if your spouse is employed and you could be on their healthcare plan, then you’re not eligible to deduct your health insurance costs from your taxes.
You can deduct your health insurance costs if your business is generating a profit. If your business is claiming a loss, then it's not possible to claim this tax deduction.
Self-employed workers should document health insurance deductions on Form 1040 Schedule 1.
3. Education and professional development
Learning and growth are two critical parts of any business venture. Many of the costs associated with keeping your skills sharp and current can be written off as a tax deduction. This includes class, workshop, and tuition fees that self-employed workers spend to remain competitive. The IRS considers this deduction to include anything that "maintains or improves skills needed in your present work."
4. Travel expenses
Self-employed people often have to travel for work, including attending business-related trade fairs and conventions. The Internal Revenue Service allows you to deduct your travel expenses if you are self-employed. This includes your transportation and accommodation costs. Meals are also partially deductible, with the IRS allowing a 50% deduction of non-entertainment-related business meal and beverage expenses. You must actively engage in business activity for expenses to be considered part of a business trip. These expenses can be filed on Form 1040 Schedule C.
5. Vehicle expenses
If you use your car for work or have to drive regularly to and from meetings or work-related events, you can also claim a tax deduction. Maintenance, repairs, gasoline and insurance costs are all counted as vehicle expenses. The IRS outlines two methods for calculating your car expenses.
6. Advertising and marketing
A connected world coupled with the rise of social media has created an increased need for promotion. Advertising and marketing expenses for self-employed workers may also be tax-deductible. This includes the cost of printing fliers, posters and other items. You can also claim digital marketing costs (including the costs of paid social media marketing).
7. Phone and internet bills
Any costs incurred from using the phone and/or internet for your business can be claimed as a deduction. These costs are considered separate from the home office deduction. You may deduct only the percentage of time you spend online or use your phone for your business, anything used for personal use isn’t deductible. Also, the first local telephone line in your home isn’t deductible, but if you have an additional line or a specific phone that you use only for business, 100% of that cost can be deducted.
8. Retirement plans
Three types of retirement plans are considered tax-deductible for self-employed workers:
- An individual retirement plan, a 401(k), which can be set up if you are self-employed and don't have any employees. The maximum amount you can contribute in 2022 is $61,000 if you are under the age of 50; this amount may rise in subsequent years.
- Self-employed people who have employees can set up SIMPLE. The acronym stands for "savings incentive match plan for employees," and the plan allows employers to make contributions toward their employees’ retirement funds.
- If you have a Simplified Employee Pension (SEP) plan, you can contribute to a traditional individual retirement fund. Under this plan, an employer must contribute equally for all eligible employees; the contributions must also be the same percentage of compensation for every employee.
Preparing for tax season
As you prepare for tax season, remember that taxes (especially for those who are self-employed) can sometimes feel like a giant puzzle. If this sounds like you, consider hiring a BBB Accredited professional to do your taxes. They might even find additional deductions to lower your tax bill. Most importantly, be on the lookout for a certified tax pro, as they are best equipped to understand the rapidly changing landscape of self-employment taxes.
For more information
For more tax filing tips for your small business, visit the BBB Tax Tips & Resources Hub.
For more information to help your small business, check out the BBB business news feed and the BizHQ.
BBB Great West + Pacific contributed to this article.