Self-employed tax deductions: A cheat sheet to tax deductible business expenses
7 min read
November 22, 2023 • Block Advisors
Let’s face it — tax time can be stressful. This is especially true for those subject to additional small-business tax concerns or those looking to take self-employed tax deductions. In fact, self-employed individuals and small-business owners sometimes take an extra gasp of air when it comes time to file.
But there is a silver lining . . . this type of taxpayer may be entitled to commonly overlooked self-employed tax deductions and tax deductible business expenses. Each tax benefit and business expense can potentially lead to substantial savings.
We’re here to help with a cheat sheet of the most common self-employed tax deductions you may not know you can claim.
And if you already know you don’t want to tackle figuring out self-employed tax deductions alone, get help with your small-business taxes from the team at Block Advisors.
12 Self-Employed Tax Deductions
1 – Retirement savings
Who said you had to be employed by a third party to take advantage of retirement savings plans? Retirement savings plans – like a Solo 401(k) or SEP IRA – have a sizable benefit for a self-employed person. When you tuck money away in your piggy bank for retirement funds, you are also doing yourself a favor by reducing your overall taxable income.
Here are the tax benefits of each type of fund:
- Solo 401(k): A Solo 401(k) has the same tax benefit as a traditional 401(k), which is this: Contributions are not taxed in the year they are contributed and the account balance grows on a tax-deferred basis. But, like a 401(k), you are taxed when you withdraw funds from the account. As an alternative, some 401(k) plan documents allow a designated Roth option, allowing you to save after-tax dollars. However, this must be designated by the sole proprietor in the plan. Contributions to a Roth IRA aren’t deductible. Additionally, distributions from the Roth account won’t be taxed when you withdraw your funds later down the line when your tax bracket could be be higher.
- Simplified Employee Pension (SEP) IRA: SEP-IRAs have tax-deferred growth potential until withdrawal and there are no mandatory contributions or annual tax filings. Be aware that contributions must be in accordance with the allocation formula adopted in the SEP plan document (likely Form 5305-SEP). Also, as of 2023 employees can now elect Roth treatment for these contributions.
Don’t forget – your own retirement savings contributions are deductible as an adjustment to income and thus reduce your AGI. Contributions for your employees are deductible as business expenses.
2 – Home office deductions
Home office write-offs are complex, but beneficial as they are another way to deduct from your total taxable income. Many small-business owners are leery of the home office deduction due to confusion, but it can be a valuable deduction. Get help navigating IRS Form 8829 to claim this deduction.
While there are rules to operating a home business, if you do qualify, you can calculate home office deductions in two ways: the regular deduction method or safe harbor method. The regular method involves tallying overall home expenses and allocating a portion to your office as a business expense, while the safe harbor method is an easier approach using the following formula: multiplying the allowable square footage of your office by a rate of $5. (The maximum safe harbor tax deduction is $1,500.)
Either way, the home office must meet strict regular and exclusive use tests in order to deduct expenses.
3 – Car expenses
If you drive your car for business use, you can deduct the vehicle expenses for business use of your car on your tax return. You can deduct actual expenses incurred while driving or use the standard IRS mileage rate.
To easily track your car mileage, consider an app-based mileage tracker. You can stay compliant with the Internal Revenue Service and say good-bye to pen and paper tracking.
Keep in mind that commuting expenses such as driving between your home and office are not deductible.
4 – Travel expenses
Business travel expenses offer additional tax deduction opportunities. When a trip is primarily for business purposes — or helpful and appropriate for the success of your business — you can deduct at least a portion of the trip’s cost. Things like meals, airfare, hotels, conferences, and even dry cleaning may be written off as long as they are deemed necessary to your business trip. You can’t deduct expenses that are lavish or extravagant.
5 – Healthcare expenses
The increased tax complexity also means new tax benefits in the form of tax-deductible expenses which could include health insurance premiums. There are two rules to note for health coverage:
- If you are a small-business owner, you may be able to claim a self-employed healthcare deduction for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents.
- You may also qualify to claim a tax credit for up to 50% of the health premiums (a better tax break than a deduction) for SHOP Marketplace coverage.
For self-employed individuals filing a Schedule C, C-EZ, or F, a policy can be either in the name of the business or in the name of the individual.
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6 – Taxes
Believe it or not, your own business taxes offer some self-employed business tax deductions. In fact, you may deduct certain federal, state, local, and foreign taxes directly related to your business as an expense.
7 – Employee and contract worker wages
As a small-business owner, your income from the business is not generally a deductible business expense, but payroll for your employees (W-2 employees) or contract labor (1099-NEC contractors) is.
If you know you will be paying a contractor at least $600, send them a 1099-NEC form and track your payments to them!
8 – Rent on business property
The cost of renting a business office space – like a storefront or office – is a business use and a deductible business expense.
9 – Advertising costs
A big part of growing a small business is publicizing it. Thankfully, ordinary advertising costs are deductible. Business cards, online advertising costs, billboards, mailers, signs, giveaway items (subject to certain limits), your business website, postcards, magazine advertisements, and marketing agency fees are some of the examples of acceptable business purpose deductions.
10 – Professional fees
As a small-business owner, it’s common that you’ll need professional legal, tax, and even business coaching services. These are all considered a tax-deductible expense for small businesses.
11 – Professional supplies
Generally, the cost of materials and supplies used in the course of a trade or business may be deducted as a business expense in the tax year they are used, according to the IRS. Items acceptable for a self-employment tax deduction include things like cleaning supplies, paper, and even supplies used to produce or ship products. This is another important area to show documentation to the IRS if you are audited. Make sure to document everything and keep the documentation with your income tax records.
12 – Insurance coverage
Many small-business owners hedge risk by having business insurance. Think umbrella policies, business liability insurance, malpractice coverage, any insurance related to your trade, business, or profession. These types of insurance are deductible.
Note that life insurance for the business owner is not a deductible expense.
Pro tip on self-employed expense deductions
Not all self-employed expenses qualify as a tax deduction (for example, entertainment expenses). There are some specific IRS rules you need to follow when it comes to tax deductible expenses: they must be ordinary and necessary.
- An ordinary expense category is one that is common and accepted in your trade or business.
- A necessary expense category is one that is helpful and appropriate for your trade or business. An allowable expense does not have to be indispensable to be considered necessary.
So, determine what deductions you qualify for and take advantage of them on your upcoming income tax return. Here’s our small-business tax prep checklist to help you get organized. Remember: you are not alone in this!
Final thoughts on self-employed expense deductions
While small-business owners are educated on many areas of the business, taxes and bookkeeping may not be one of them.
Luckily, help is at your fingertips! Whether you’re looking for self-employed tax deductions, help with filing Form 4562, bookkeeping, payroll, or just need general small-business tax help, we have a tax professional here for you.
Rely on our team of small-business certified tax pros to keep your business on track so you can get back to what you love.
Find a Block Advisors tax pro near you today!