There are many self-employed tax deductions available for freelancers, independent contractors, and small business owners. If you’re not taking advantage of these deductions, you may be leaving thousands of dollars on the table each year!
Here are the top 10 tax deductions for freelancers and self-employed workers.
Note: Most of the deductions on this list are itemized deductions. Read our post To Itemize or Not to Itemize? for more information.
1. 20% Qualified Business Income (QBI) Deduction
At a glance: Qualifying freelancers and small business owners can automatically deduct 20% of qualified business income from their taxable income.
How it works: One of the best self-employed tax deductions available is the 20% pass-through provision enacted in 2018. This provision allows sole proprietorships and other types of companies with pass-through income to deduct 20% off their yearly earnings automatically.
You might be running a qualifying business without even realizing it, allowing you to use this super-charged tax deduction. Sole proprietorship is the default category for businesses-of-one that aren’t formally registered.
Keep in mind: To use the QBI deduction, your total income (not just income from self-employment) must not exceed $164,900 for individual filers or $329,800 for joint filers.
Freelancer tax tip
Running a side hustle? You can only deduct expenses for a business, not a hobby, and the IRS recently tightened its rules in this regard. Your business should generate income (i.e. you can’t continually write off more in expenses than your business generates in revenue).
Although it’s not necessary to formally register your business, it does help establish that your expenses are legitimate. At the very least, we highly recommend using a dedicated business bank account and keeping it completely separate from your personal bank account.
Learn about the benefits of registering your business as an LLC.
2. Home office deduction
At a glance: Yes! You can deduct home office expenses, including rent and associated utilities, from your taxable income.
How it works: Your home office must be a dedicated area (a bedroom with a desk doesn’t count). The deduction is based on the percentage of your home or apartment that the dedicated office space takes up.
If your office space takes up 10% of your home, for example, then you can deduct 10% of your rent or mortgage, internet bill, and other utility costs.
Keep in mind: Since the home office deduction for freelancers is often misused, it’s one of the top triggers for a tax audit. Be sure to save records documenting the square footage of your home, the square footage of your home office, and all costs that you’re deducting. See our blog post How Long to Keep Tax Records (and What to Keep) for more information.
With an accountant’s help, you may be able to subtract home insurance costs, repairs, and even depreciation costs from your taxable bottom line. Our trusted tax attorneys at Gordon Law Group can help with this!
3. Write off your self-employment taxes
At a glance: Another great self-employed tax deduction comes from writing off half of your self-employment taxes, which are 15.3% of net earnings.
How it works: Normally, employment taxes (those that cover Social Security and Medicare) are split between an employer and employee. If you’re self-employed, you’re responsible for the entire cost—but you can deduct the employer portion from your business income.
Keep in mind: You may not be able to use this deduction if you have an LLC or C-Corp.
4. Vehicle deductions
At a glance: Do you use a vehicle for your job? Whether you’re driving to client meetings, vetting a new vendor out of town, or traveling for a freelance article, you can deduct business-related mileage from your gross business income.
How it works: The standard IRS deduction rate is 56 cents per mile of use. You can also write off any tolls, parking costs, or garage rentals associated with business travel. In some cases, car payments, insurance, and maintenance costs can be deducted as well.
Keep in mind: This is another deduction that’s often scrutinized by the IRS, so be sure to keep a mileage log to prove how many miles you drove for business purposes. These days, there are many affordable devices or even mobile apps that can track your mileage automatically.
5. Deduct business travel expenses
At a glance: Do you have to travel for conferences, trade shows, or sales calls? As long as you can prove they’re for legitimate business purposes, feel free to write off those travel expenses!
How it works: Expenses like airfare, rental cars, hotels, and taxis can be deducted if you’re traveling for work. However, if your spouse or kids are tagging along, their travel expenses don’t count unless they’re also your employees.
Keep in mind: Unusually high travel deductions may cause the IRS to take a closer look at your tax returns. Be sure to save your receipts and any documents that prove the travel was business-related.
6. Deduct business meals
At a glance: This is a very common, and powerful, tax deduction for self-employed workers. If you’re wining and dining a client or traveling for work, you can deduct a portion of meal expenses.
How it works: The meal must either be part of your business travel expenses, or you must be dining with a business contact. Ordering take out for yourself doesn’t count.
Keep in mind: The IRS offers a standard daily meal deduction. It may be simpler to use this rather than saving every single receipt.
7. Write off the costs of continuing education
At a glance: It takes a lot of work to stay at the top of your game! Subscribing to industry publications and taking classes to hone your skills are great deductions available to freelancers and business owners.
How it works: As long as an expense is “ordinary and necessary” in your line of work, it can be used as a self-employed tax deduction from your business income. Online courses, business workshops, industry-specific magazine subscriptions, and certifications all fall into this category.
If you’re a guru who sells online courses, purchasing competitors’ courses for research purposes could also be deductible.
Keep in mind: These expenses must be related to your existing business. For example, if you own a bakery but decide to take a class on selling real estate, that deduction wouldn’t hold up to an IRS auditor’s scrutiny.
Keep organized records
Do you find yourself scrambling to track down receipts in March? Then you’re probably missing out on potential tax deductions. Good bookkeeping makes it easy to write off expenses come tax time. Gordon Law Group offers a full range of bookkeeping services as well as tax preparation!
8. Medical expense deductions
At a glance: Self-employed workers can deduct medical and dental costs, including insurance premiums.
How it works: Your insurance premiums and other medical costs can be deducted from your taxable income. However, the deduction is capped at 7.5% of your adjusted gross income.
Keep in mind: If you have access to health insurance through an employer, or through your spouse’s employer, you won’t qualify for this deduction.
9. Contribute tax-deferred retirement savings
At a glance: Self-employed individuals and freelancers can contribute to a retirement account, such as a 401(k). You won’t need to pay income tax on those retirement funds until you withdraw them.
How it works: When you’re self-employed, you can contribute to a traditional tax-deferred retirement plan, like a 401(k), as both an employee and employer. In total, you can contribute up to $19,500 per year (plus an additional $6,500 if you’re at least 50 years old).
There are many retirement plans available for freelancers and self-employed business owners. Other plan types may have different contribution limits.
Keep in mind: While this strategy can defer some of your income taxes, it won’t lower your self-employment taxes. For certain business structures, the employer portion of your contributions can be deducted as a business expense. Our experienced tax attorneys can help you navigate these options.
10. Hire your kids
At a glance: Putting your children to work is a great way to maximize self-employed tax deductions and keep your business earnings in the family, not in Uncle Sam’s pockets. When you hire your child, their income is tax-free up to the amount of the standard deduction (which is currently over $12,000).
How it works: To use this self-employed tax deduction, your child must be a real employee doing legitimate work. It could be as simple as cleaning the store or office, stocking shelves, stuffing envelopes, or passing out coupons. Older children may be able answer phones, work the front desk, or run your social media accounts.
How old does the child need to be? Let’s just say that “hiring” your toddler won’t hold up to IRS scrutiny. But you can employ children under 10 as long as the work is reasonable.
Your child’s compensation must be reasonable (i.e. the same amount you would pay a stranger). Paying them $50 an hour to sweep the floors is a big red flag. You also can’t count payment for personal services, like doing chores at home.
Keep in mind: You still need to fill out the standard paperwork when hiring your children, including a W-4, an Employment Eligibility Verification form, and an annual W-2.
There we have it, the top 10 self-employed tax deductions! If you’re looking for personalized help to maximize your tax savings, give our experienced tax attorneys a call. We offer tax preparation and planning for businesses of all sizes!