Running a business can be expensive, especially when taxes decrease your bottom line. Luckily, there are numerous tax write offs that self-employed professionals can claim to save thousands of dollars. Use IRS Form 1040 to deduct home office, insurance, travel, internet, phone, and other qualifying expenses that you incur operating your business.
Here is a list of 16 tax write offs for self-employment tax deductions that you should consider claiming:
1. Qualified Business Income Tax Deduction
This deduction is for “pass-through” entities, including qualified self-employed taxpayers whose business income “passes through” to their personal tax return and is subject to individual income tax rates. If you qualify, you’re allowed to deduct up to 20% of eligible income (subject to IRS rules) from your taxable income amount, effectively lowering your taxes..
The following taxpayers qualify for the full or partial tax write-off:
- Single taxpayers with taxable income that is below $157,500 can claim the full deduction.
- Those married and filing jointly who have taxable income that is less than $315,000 can claim the full deduction.
- Single taxpayers with income exceeding $157,500 but less than $207,500 qualify for a limited deduction.
- Joint taxpayers who have income exceeding $315,000 but less than $415,000 are qualified for a limited deduction.
- Single taxpayers with income exceeding $207,500 and who are not engaged in a Special Service or Trade Business (SSTB) are qualified for a limited deduction.
- Joint taxpayers with income that exceeds $415,000 and who are not engaged in a Special Service or Trade Business (SSTB) are qualified for a limited deduction.
A SSTB refers to trades or businesses in the fields of accounting, actuarial science, athletics, consulting, health, law, performing arts, financial services, and brokerage services. This includes anything that qualifies as investing, managing investments, and trading or dealing in securities, commodities, or partnership interests.
To start claiming the QBI deduction, visit the IRS website and download Form 8995, Qualified Business Income Deduction Simplified Computation, if you have taxable income (before the QBI deduction) at or below the threshold amount to file your QBI deduction. Form 8995-A, Qualified Business Income Deduction, is for taxpayers with taxable income exceeding the threshold amount. Please note that at the time of publishing this article, the IRS site only provides a draft of the form; you will need to wait until the official form is published before filing.
2. Self Employment Tax Deduction
The self-employment tax (SE tax) consists of the Social Security and Medicare tax that self-employed workers pay. Similar to the 15.3% FICA tax that employers pay (half is usually deducted from an employee’s paycheck and the other half is paid by the business), a self-employed professional with no employees is responsible for paying the entire tax. Because of this, they are permitted to deduct half of the Social Security and Medicare taxes due from their taxable income, which equates to 7.65% (15.3% x 50%).
The self-employment tax is paid as a percentage of net earnings. You’ll pay 12.4% for Social Security and 2.9% for Medicare taxes (12.4% +2.9% = 15.3%). Use Form 1040 Schedule SE to claim this deduction.
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3. Home Office or Workspace Deduction
More often than not, self-employed professionals use a portion of their home to run their business. This means that bills for utilities, security, or repairs incurred during the normal course of business operations should be recognized as business expenses. You can write these off regardless of the type of home you have or whether you’re a homeowner or a tenant.
According to the IRS website, you have to meet one of the following requirements to qualify for the home office deduction:
- Use the home exclusively and regularly as the principal place of business
- Use the home exclusively and regularly to meet or deal with patients, clients, or customers in the normal course of your trade or business
- Use a separate structure like a studio, workshop, or garage that isn’t attached to the home to operate your trade or business; must also use regularly and exclusively
- Use the space on a regular basis for certain storage use
- Use the residence as a day care facility
While there is no requirement to physically mark the space you use with a permanent partition, using an area for both business and personal reasons may disqualify you from claiming the deduction if you aren’t able to properly quantify your usage. The deduction you’re allowed to take is an estimate or a simplified amount instead of an actual calculation of expenses. Additionally, the allowable home office deduction can’t reduce your taxable income below $0.
4. Depreciation Expense Deduction
Property that can operate for more than a year is subject to depreciation (expensing the cost over the property’s useful life) versus being expensed outright. Depreciation is necessary to properly recognize the remaining value of the property every year. Self-employed professionals can claim tax write-offs for depreciation on machinery, standard office equipment, and even vehicles.
In order to qualify for a deduction, depreciated property should be:
- Used exclusively by the business
- Purchased with the intent to produce long-term income
- Tangible and measurable
The useful life of properties is important in computing depreciation. Computers, office equipment, and light vehicles are usually depreciated over a period of five years. Office furniture and miscellaneous assets are depreciated for seven years. Generally, intangible assets such as goodwill and copyrights, as well as inventory are not qualified for depreciation.
You can expense and deduct equipment costs in equal increments over the years it’s estimated to be in service. For instance, if you purchase a delivery truck for $10,000 and estimate its useful life to be five years, you can deduct $2,000 each year ($10,000/5= $2,000). You might also take advantage of the new depreciation rules and write off the equipment purchase in one year.
Here are some guidelines you should be aware of before writing off your property and equipment:
- Section 179 of the IRS code indicates that taxpayers can charge the partial value of equipment in the tax year it was placed in service.
- The dollar limit (cap) for this deduction for 2019 is at $1,020,000, which is still subject to the business limit.
- The business limit restricts the deduction only up to the taxable income you’ve earned for the year.
- There is also a special depreciation allowance similar to section 179 that allows taxpayers to charge 100% of equipment purchase in the tax year it was purchased.
In order for properties to qualify under IRS section code 179, the property must be tangible, acquired by purchase, and for business use. Taxpayers who want to take advantage of this type of deduction can do so by filling out part one of IRS Form 4562.
5. Internet and Phone Expense
Not all taxpayers qualify for home office deductions, but they can still file for deductions on expenses related to telecommunications. This refers to business phone, fax, and internet use. Unlike other utilities, this expense item is easier to classify because all details are itemized. However, you will have to carefully review phone bills before including them as a self-employed deduction.
The general rule for telephone expense deductions are:
- Basic local telephone service charge, including taxes, for the first telephone landline into your home is a nondeductible personal expense.
- Charges for business long-distance phone calls on the personal telephone are deductible expenses.
- The costs of a second line in the home that’s used exclusively for business are deductible expenses.
- Internet bills of a home-based business can be considered as a tax write off once you determine the percentage used for business versus personal use.
Filing for this deduction will require a religious documentation of phone bills. This is especially true for business calls that are made using personal phones.
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6. Health Insurance Premiums
Self-employed professionals pay for their own health insurance, which can be quite costly. However, there’s a special tax deduction you can claim to lower this expense. Those who qualify can deduct the full amount of their health insurance premiums for themselves, their spouse, and their dependents.
Here are some important things to note when claiming health insurance deductions:
- The taxpayer must not be eligible to enroll in an employer’s health plan, business must register a profit for the tax year, and the owner cannot be qualified to enroll in a spouse’s health plan.
- The business must earn a profit for the tax year.
- Health insurance deductions include dental, vision, and both long-term and short-term care.
- Although the general rule is to claim the full premium paid, this is limited by the amount of income your business earns during the tax year.
It’s important to note that a taxpayer who is eligible for an employer’s health plan or that of their spouse but elects not to take it is not qualified to claim a self-employed health insurance deduction. Only claims that cover premiums paid for the months when the taxpayer is not eligible for an employer’s health plan is qualified for deduction.
Health insurance deductions are considered special tax write-offs that apply only to federal, state, and local income taxes. You should report the amount directly in Form 1040, line 49 as a personal deduction.
7. Business Insurance
Business insurance refers to any insurance policy that a self-employed professional would purchase to protect the business. This depends on factors like the business nature and location. The most common business insurance protects companies from casualty, liability, and professional negligence, and the costs are deductible
The following are some of the types of insurance with premiums that can be filed for deduction:
- Property insurance, casualty insurance, and general liability insurance
- Malpractice insurance that covers personal liability for professional negligence resulting in injury or damage
- Liability insurance
- Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause
- Credit insurance that covers losses from a business; bad debts
Contributions to a state unemployment insurance fund are deductible if they are considered taxes under state law. For self-employed professionals with employees, deductible insurance can include group hospitalization and medical insurance for employees, workers’ compensation insurance set by state law, and employee life insurance that does not list the owner as a direct or indirect beneficiary.
8. Vehicle Use and Mileage
Self-employed professionals can deduct the amount spent on transportation (including parking fees and tolls) during the course of conducting their business. This covers visiting clients, getting to and from business meetings, transitioning from one workplace to another, and moving from one’s home to a temporary workplace. In all these cases, you will need to measure the cost associated with the distance based on where your tax home (regular place of business) is.
Here are some facts you should know before claiming vehicle use or mileage deductions:
- For 2019, the standard mileage rate is 58 cents a mile
- For personally owned vehicles to qualify, the taxpayer must use it in the first year the vehicle is available for use to the business
- For rented vehicles to qualify, the taxpayer must choose to use it for the entire lease period (including renewals)
A self-employed professional cannot claim a vehicle use or mileage tax deduction if they already claimed a section 179 deduction, a special depreciation allowance, or the actual rent amount for leasing a vehicle used for business. Business related parking fees and tolls will still be computed based on actual cost.
For vehicles that are used both for personal and business travels, divide the expenses between business and personal use based on the miles driven for each purpose to get the percentage. This figure will be used to calculate the deductible amount against maintenance expenses for the year. Try using mileage tracking Smartphone apps like Sherpashare and MileIQ.
9. Retirement Plan Contributions
Retirement plan contributions are also available for tax deductions to a certain degree. This will depend on the type of retirement plan you have and your retirement savings goal. The Solo 401(k) and Simplified Employee Pension Individual Retirement Account (SEP IRA) are the best choices for self-employed taxpayers who want to maximize their retirement savings.
The Solo 401(k) is for business owners with no employees (except for a spouse). The contribution allows you to deposit up to $56,000 for 2019, with an additional $6,000 catch-up contribution for policy owners age 50 or older. You are eligible to claim a deduction for the cost of the plan and its maintenance fees, which effectively reduces your income tax obligation.
The SEP IRA allows for much higher contribution payments compared to the Simple IRA and is applicable to self-employed professionals with few or no employees. Policy holders can contribute as much as either 25% of compensation or up to $56,000 in 2019, whichever is less. Contributions are tax-deductible—up to 25% of net self-employment income.
Other retirement plan options that provide tax deductions for self-employed professionals are:
- Savings Incentive Match Plan for Employees (SIMPLE) IRA: For self-employed professionals with less than 100 employees; employee contributions (matched by the employer and fully deductible) are capped at $12,500 ($15,500 for ages 50 or over).
- Defined Benefit Plan: This is for high-income, self-employed professionals. Contributions are capped (and deductible) at 100% of the average compensation for the highest three consecutive calendar years or $225,000 for 2019, whichever is lower.
You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Schedule 1 (Form 1040). You also can deduct trustees’ fees if contributions to the plan does not cover them.
Retirement Savings Contributions Credit
Self-employed professionals who are enrolled in and make contributions to their own retirement plan may qualify for the retirement savings contribution credit. The amount of the credit is 50%, 20%, or 10% of your retirement plan, depending on your adjusted gross income. The maximum contribution eligible for the credit is $2,000. Use Form 8880, Credit for Qualified Retirement Savings Contributions to file for this credit.
10. Continuing Education and Seminars
Self-employed professionals can deduct qualifying work-related education expenses directly from their self-employment income. This reduces the amount of income subject to both income tax and self-employment tax. The deduction is reported on the same form used to report business income and expenses. Other costs related to work-related education such as auto expenses, travel, or meals can be treated as business expenses.
In order to qualify, the education expense should meet the following criteria:
- The education maintains or improves skills needed in your present work.
- The education leads to a degree.
- The education is not for the purpose of meeting the minimum educational requirements of your present trade or business.
- The education is not part of a program of study that will qualify you for a new trade or business.
There are also work-related education tax credits that you can claim. The American Opportunity Credit for example, can provide as much as a $2,500 credit per student, per year. The Lifetime Learning Credit provides as much as $2,000 credit per student annually.
11. Travel Expense Deductions
Travel expenses are the ordinary and necessary expenses of traveling away from home for your business. You’re traveling away from home if your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work, and you need to get sleep or rest to meet the demands of your work while away. Your tax home is the entire city or general area where your main place of business or work is located.
Here are the guidelines you must consider when deducting travel expenses:
- Business activities must require the self-employed to be away from the general area of their tax home.
- The length of time away from the tax home is substantially longer than an ordinary day’s work.
- There is a defined, specific business purpose identified before the travel such as finding new customers, meeting with clients, or learning new skills directly related to your business.
- The travel requires the taxpayer to get sleep or rest to engage in the business activity while away.
- Expenses must be ordinary, necessary, and reasonable.
The tax home is assigned as the entire general area or vicinity of one’s primary place of business. This is regardless of the location of your personal or family’s home.
According to the IRS website, the following travel expenses are considered deductible:
- Travel by airplane, train, bus or car between your home and your business destination. (If you’re provided with a ticket or you’re riding free as a result of a frequent traveler or similar program, your cost is $0.)
- Fares for taxis or other types of transportation between the airport or train station and your hotel, the hotel and the work location, and from one customer to another, or from one place of business to another.
- Shipping of baggage, and sample or display material between your regular and temporary work locations.
- Using your car while at your business destination. You can deduct actual expenses or the standard mileage rate as well as business-related tolls and parking fees. If you rent a car, you can deduct only the business-use portion for the expenses.
- Meals and lodging.
- Dry cleaning and laundry.
- Business calls while on your business trip. (This includes business communications by fax machine or other communication devices.)
- Tips you pay for services related to any of these expenses.
- Other similar ordinary and necessary expenses related to your business travel. (These can include transportation to and from a business meal, public stenographer’s fees, computer rental fees, and operating and maintaining a house trailer.)
Travel expenses for business are 100% deductible, except for meals, which are limited to 50%. However, if the purpose of the travel is combined with non-business activities, you’ll have to compute the proper allocation. Self-employed professionals can list their travel expenses deductions on Form 1040, Schedule C, Profit or Loss From Business (Sole Proprietorship) (PDF) or Form 1040, Schedule C-EZ, Net Profit From Business (Sole Proprietorship) (PDF).
Other guidelines you should consider when claiming travel expense deduction are:
- Foreign travel solely for business is fully deductible even if time is partly used for personal affairs as long as the travel was originally for business purposes, the travel is less than a week, and the personal time spent is less than 25% of the entire activity.
- The expenses for attending conventions within the United States, including travel, lodging, and meals can be fully deductible if you can prove that attending the convention benefits their business.
- Conventions held on cruise ships are also deductible if cruise ship is a registered U.S. vessel and the ports of call are all within the United States.
For conventions held on cruise ships, you’ll have to produce two written statements, one that you’ll sign and the other signed by an officer of the organization sponsoring the convention ( be sure to include a detailed schedule of activities). The maximum deduction allowed for this is $2,000 annually.
12. Meals Expense
Meals are tax-deductible business expenses when they are incurred either in the course of traveling for business or meeting a client. To qualify as a deduction, meals should not be lavish or extravagant under the circumstances and should be business related. Taxes and tips paid on meals are also deductible, but the lunch you eat alone in your office is not.
Be sure to gather your meal receipts for the tax year and sort them between non-traveling related business meals and meal expenses incurred while travelling. As you add your total eligible meal expenses, keep in mind that you can only deduct 50% of the meal’s actual cost if the receipts are complete. You can file the deduction in the business tax return, and it will show in the expenses section.
13. Rental Expense Deductions
Rental expense deductions are allowed if a taxpayer pays rent for the space being used to run the business. This rule is the same even when the self-employed professional is running the business out of the home as long as it is under a lease contract. The only difference is regarding how much of the total rent can be recognized as a deduction.
Here are some guidelines to follow:
- The amount of a rented office space can be deducted in full.
- If a self-employed professional has both a home office and a rented office space, only one rent expense can be filed for deduction.
- For a taxpayer running the business out of a rented home, the deduction is only for a portion of the rent computed based on how much space the business utilizes.
Fees for canceling a business lease can also be applied as a deduction. Potential rental expense deductions include charges for postage and copy machines used to run normal business operations.
14. Startup Costs
If you incur startup costs during the first year, you can write off a portion at tax time. You can deduct the remaining amount in equal installments, through amortization, over a period of 180 months, beginning with the month in which the business was opened. The first year deduction is capped at $5,000.
Here are some startup costs you can deduct:
- Investigation expenses that relate to business conditions generally, and those relating to a specific business, such as market or product research to determine the feasibility of starting a certain type of business
- The costs of checking out the various factors involved in site selection
- The costs of creating a business include advertising, wages and salaries, professional and consultant fees
The IRS will disqualify the deduction if it determines that the business began in a year before you made the election to amortize startup costs. Therefore, we recommend you claim deductions for the first 60 months (out of the 180 total allowed) as early as possible.
When filing start up cost deductions, show the amount on Part VI of Form 4562, Depreciation and Amortization in the first year. Afterward, you can carry over your amortization amount to Schedule C as an “other” expense.
15. Business Interest Expense
Interest on loans that directly relate to the business are deductible expenses. Even if you use personal property to secure the loan, you can deduct interest as long as you are using the proceeds to operate your business.
To qualify for this deduction, self-employed taxpayers must ensure that there is a true debtor-creditor relationship, meaning the lender intends to be paid and they (the borrower) are legally liable for the debt in question. If the business debt is shared among partners, you should only factor in your portion of the business debt when computing interest to write off.
Credit card interest is not tax deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is deductible. Sole proprietors and single-member LLCs will need to show these expenses in the “Expenses” section of Schedule C on Line 16.
16. Business Supplies and Services
Business supplies and services are expenses you incur to run your business and can include small items like print paper or more substantial purchases like advertising fees. They may be partially or fully deductible depending on write-off limitations within the tax code and whether or not you only use them for business.
Some of the more common deductible expenses for business supplies and services include:
- Website maintenance: Self-employed persons can deduct costs related to their business websites, including domain fees, web design, web building, and maintenance.
- Publication, dues, and subscriptions: The cost of specialized magazines, journals, and books directly related to your business is tax deductible.
- Membership in professional or industry associations: Any membership dues paid to associations or professional organizations that directly relates to one’s business is fully deductible.
- Office supplies: As long as office supplies are used for the sole purpose of running a business, this is fully deductible.
- Advertising and marketing: Any advertising and promotional costs such as cost of flyers, web advertisements, and business cards are fully deductible.
- Professional services for your business: Bookkeeping, legal fees, inspection fees, and even tax preparation costs that are attributed can be deducted.
- Utilities expense: The percentage of your utility costs that are tax-deductible is proportional to the percentage of your home occupied by your office.
Maintaining records of these expenses is important when filing for deductions. Scan them into the computer and upload to your accounting software as often as possible. Although the IRS only requires for receipts on expenses that exceed $75, this practice will correct errors and help you respond effectively to any questions from the IRS.
Keeping track of business expenses you can deduct at tax time can be a challenge, but the potential savings is worth it. The tax code can change often though, so it’s important that you check for updates regularly—some deductions may be eliminated or reduced, and new ones may be added. As a best practice, save all financial records stemming from any expenses you incur that may be eligible for write-off, including internet bills, mileage, and meals.
Did we miss out on any other tax write offs for self-employed? Share them with us in the comments.