There are many valuable tax deductions for freelancers, contractors and other self-employed people who work for themselves. Here are five big self-employment tax deductions to remember.
Note: As part of the government’s ongoing response to COVID-19, recent legislation provides unemployment benefits, emergency funds, retirement account withdrawals, and loans and relief for the self-employed, including “gig workers.” Read more about what’s available here. You can also read our guide to COVID-19, which has answers about stimulus checks, debt relief, changing travel policies and managing your finances.
1. Part of your house
If you work from your home or use part of it in your business, a few self-employment tax deductions could get you a break on the cost of keeping the lights on.
What you can deduct: A portion of your mortgage or rent; property taxes; the cost of utilities, repairs and maintenance; and similar expenses. Generally, this deduction is only available to the self-employed; employees typically cannot take the home office deduction.
How it works: Calculate the percentage of your home’s square footage that you use, in the IRS’ words, “exclusively and regularly” for business-related activities. That percentage of your mortgage or rent, for example, becomes deductible. So if your home office takes up 10% of your house’s square footage, 10% of those housing expenses for the year are deductible. IRS Publication 587 outlines a lot of scenarios, but note that only expenses directly related to the part of your home you use for business — say, fixing a busted window in your home office — are usually fully deductible.
What else you can do: Choose the simplified option, which lets you deduct $5 per square foot of home used for business, up to 300 square feet — that’s about a 17-by-17-foot space. You won’t have to keep as many records, but you might end up with a lower deduction, so consider calculating it both ways before filing.
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2. Your health insurance (maybe)
If you bought policies on your own for yourself or your family, you might qualify for a self-employment tax deduction on the premiums.
What you can deduct: Medical and dental insurance premiums for you, your spouse, your dependents and your children who are younger than 27 at the end of the tax year. Long-term care insurance premiums also count, though there are specific rules. IRS Publication 535 has the details.
How it works: It’s an adjustment to income rather than an itemized deduction, which means you don’t necessarily have to itemize to claim it. But you might be let down, because if you’re eligible to enroll in your spouse’s employer’s plan — even if you choose not to, maybe because it’s more expensive than your own — you can’t take the deduction.
What else you can do: Find out if you can deduct the premiums as a medical expense. This typically works only if you pay your premiums out of your own pocket, and your deduction is limited to expenses that exceed 7.5% of your adjusted gross income. So if your AGI is $100,000, your first $7,500 of medical expenses isn’t deductible.
3. Your education
You have to stay smart to run a growing business, and there are self-employment tax deductions for that.
What you can deduct: The costs of “qualifying work-related education,” including things such as tuition, books, supplies, lab fees, transportation to and from classes and related expenses.
How it works: The expenses are deductible only if the education “maintains or improves skills needed in your present work.” In other words, if you’re taking classes to change careers or you’re working toward the minimum educational requirements for a trade or business, this probably won’t work for you. But you can qualify even if the education leads to a degree. Review IRS Publication 970 for the requirements.
What else you can do: Look at the American Opportunity Tax Credit or the Lifetime Learning Credit.
4. Your car
Driving to meet vendors, make pickups and woo clients can be hard on your car, but a few self-employment tax deductions might help you recoup some of that wear and tear.
What you can deduct: A little more than $1 for every two miles you put on your car for business purposes.
How it works: At the end of the year, tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate — 58 cents per mile in 2019 and 57.5 cents per mile in 2020 — and deduct the total. Be sure to keep a mileage log; you’ll need it if you’re audited.
What else you can do: Deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business. If you’re leasing your car, check out IRS Publication 463 for rules about the amount of lease payments you can deduct.
See what else you can do for your business
- Learn about coronavirus relief options for small businesses and the self-employed.
- Compare online loan options for funding and eventually growing your small business.
5. Your retirement savings
You might have more options than you think when it comes to retirement-related self-employment tax deductions. One popular choice is the solo 401(k).
What you can deduct: Contributions to a solo or one-participant 401(k) plan of up to $56,000 in 2019 ($62,000 if you’re 50 or older) or 100% of earned income, whichever is less. In 2020, the limit is $57,000 ($64,500 if you’re 50 or older) or 100% of earned income, whichever is less.
How it works: Similar to a standard, employer-sponsored 401(k). For traditional solo 401(k)s, your contributions are pretax, and distributions after age 59½ are taxed. You can contribute as both an employee (of yourself) and as the employer, with salary deferrals of up to $19,000 in 2019, plus a $6,000 catch-up contribution if you’re 50 or older (those limits rise to $19,500 and $6,500 in 2020). And you can add approximately 25% of net self-employment income, not exceeding that $56,000 limit in 2019 or $57,000 in 2020.
What else you can do: IRAs are also an option.