Top 6 Tax Deductions for the Self-Employed

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The majority of entrepreneurs aren't aware of the tax deductions that are available to them! Are you aware of them! You could help your business a lot!

For most people, taxes are fairly straightforward. You work for someone else; they give you a W-2 at the end of the year, and you use that form to figure out how much you owe the IRS.

For the self-employed, taxes are a little more involved. Thankfully, the tax code is quite kind to the self-employed. It may be complicated, but there are a lot of deductions you can claim as a self-employed person. You should take advantage of every deduction available as every dollar you save from the IRS is a dollar you can use to improve your business.

Indeed – it’s easy to leave money on the table if you don’t know what you’re doing. There are many deductions for the self-employed that most people aren’t aware of.

Allow us to spread awareness. Here are a few deductions you should know about, along with a few other tax prep suggestions for the self-employed:

1. The Self-Employment Tax Deduction

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Everyone working person in the United States must pay 15.3% of their income to two safety net programs: 12.4% for social security and 2.9% for Medicare.

Regular employees see these taxes cut in half, as their employers are forced to split this expense with their employees. So, employees only have 7.65% of their income taken out for social security and Medicare.

The self-employed don’t have an employer to help pay the other half and have to pay the entire 15.3% themselves.

But the IRS recognises that this puts the self-employed at a disadvantage, and they’ve made it so that you can lessen your social security and Medicare tax burden by writing off everything after the first 7.65% of these taxes as a business expense.

Also, employers take into account how much in taxes they’ll have to cover for their employees, and they lower salaries accordingly.

2. Deducting Retirement Plan Contributions

Two elderly people using laptop

It’s never too early to save for retirement because there comes a certain point in every person’s life when they simply can’t or don’t want to work anymore. You’ll want a sizable nest egg saved up to cover your living expenses once you’ve retired.

As a self-employed person, you can’t take advantage of a 401(k) – that is one benefit that regular employees have over you.

But, you can still use another retirement fund, such as a SEP IRA. You can put up to 25% of your net earnings into a SEP IRA, and 100% of that amount is deductible.

3. Deducting Auto Expenses

Piggy bank on car

One of the most beneficial deductions for the self-employed is auto expenses. Self-employed people spend a lot of time driving around to meet up with clients and the costs associated with all that driving can add up.

There are 2 ways to deduct auto expenses for business purposes: you can use the standard rate or the actual rate.

Using the standard rate, you’ll calculate your deduction using mileage. The IRS changes the amount it compensates for mileage annually – for 2016, it’s 54 cents per mile, down from 57.5 cents per mile in 2015.

And remember, this deduction only applies to miles you drove for business. Picking up some groceries for yourself, driving over to a bar to meet some friends – these are trips you do not want to claim as a business expense on your taxes, lest you want to run the risk of having to explain to an auditor how they were “business-related” excursions.

With the actual rate, you add up all your car-related expenses including gas, insurance payments, registration fees, repairs, oil changes, etc., and out of this total, you claim the percentage of how much of your driving over the year that was business-related.

For example, let’s say 15% of your driving last year was business related, and you had $4,000 in auto expenses. In that case, you can deduct $600 from your taxable income.

4. Deducting Internet and Phone Expenses

Woman on phone working in home office

“Self-employed” usually means you work from home, and working from home means that you likely have to use the internet and your phone frequently.

Those internet and phone bills are another expense you can deduct from your taxable income.

But again, it’s only deductible if it’s business-related. So if only 10% of your calls and texts are business-related, you can deduct 10% of your phone bill and no more.

Of course, if you have a separate line that you only use for business, as many self-employed people do, you can deduct 100% of that bill.

5. Deducting Home Office Expenses

Young professional photographer working from home office under stairs

You can deduct expenses associated with your home office if you have one. If you’re thinking of setting up a home office, we recommend you use an entire room rather than just one corner of a room that’s used for something else – this makes it’s much easier to calculate your deduction.

Your rent/mortgage, rental/home insurance, and utilities are all deductible if you have a home office. Just take the percentage of how many square feet your home office takes up out of your entire house and apply it to the total of the expenses we mentioned and you’ll have the amount you’re allowed to deduct.

This deduction is abused more than most, and as such the IRS has a history of auditing those who claim it at a much higher rate than those who don’t. So, be warned and make sure you have all the documentation you need to back up what you’re claiming.

6. Deducting Travel Expenses

Again, you want to dot your I’s and cross your T’s here. Not every trip out of town can be considered deductible-worthy, and making a mistake could result in you getting audited. Most trips probably aren’t business-related (no, you can’t go a week-long vacation, spend a few minutes one night handing out business cards, and claim the whole week’s expenses as a business trip). But, if you are leaving home for a specific business-related reason, then you can deduct travel expenses including plane tickets, car rentals, lodging, and meals.

Don’t indulge yourself too much. Flying first-class and dining at five-star restaurants is going to attract the wrong kind of attention from the IRS. But, you don’t have to rely on run-down motels and gas station hot dogs either. Just be reasonable.

There are many benefits that come with being your own boss, including the freedom to make your decisions and a strong sense of self-worth. Self-employment and freelancing are on the rise. Stay encouraged if you are considering freelancing!

You will want to take full advantage of the tax deductions available to the self-employed. The IRS has a habit of looking especially closely at the self-employed, and if you want to claim any of the deductions listed in this article, you need to have as much documentation of your income and expenses as possible in case you’re ever audited.

Finally, you don’t have to go it alone with keeping track of tax law changes or tax codes. You can always hire an accountant to help you with these matters. That will allow you to focus on your business – and the satisfaction and personal reward you were looking for in self-employment.

How many of these tax deductions have you taken advantage of? Let us know in the comments section...