Tax Deductions for the Self-Employed: a Guide


Posted 3 years ago in Small Business Tips
by Brad Hanks

One of the greatest things about being self-employed is the freedom to do your own thing. You are the boss; you make the decisions; you reap the rewards. However, you also pay 100% of self-employment taxes, which would have been split 50/50 with your employer if you held a regular job.

Fortunately, though, there are also a lot of things you can take as deductible business expenses if you are self-employed, so it tends to balance out. Just make sure you are taking every single deduction that you are entitled to, so your Adjusted Gross Income (AGI, meaning your total income before taking any tax exemptions or credits) is as low as legally possible.

Here are some of the types of expenses—business or personal—that you can deduct from your income:

  1. Retirement plan(s) – Even though you do not have the opportunity to participate in an employer’s 401(k) plan, there are several ways you can set aside money tax-free for your own retirement. You should look into a traditional IRA, a solo 401(k), a SEP (Simplified Employee Pension) plan, and/or a SIMPLE (Savings Incentive Match Plan for Employees) IRA. Every dollar that you put into one of these plans comes off your taxable income, and you can put a very large amount into some of these plans.
  2. Purchase/depreciation of computer and other office equipment – Depending on the price of the things you purchase, you may be able to write them off completely in the year that you put them into service with your company, or you may have to depreciate the cost over the item’s useful life.
  3. Health insurance premiums – When you have a job with a regular employer, you can usually pay for your health premiums with “pre-tax” dollars. Deducting any health insurance premiums paid is the equivalent for the self-employed.
  4. Interest on loans and credit cards – If you pay interest on a loan or a business credit card for which you carry a balance, that interest is deductible as a business expense. Just make sure not to mix any personal purchases in with the business expenses to keep it clean and audit-proof.
  5. Vehicle – If you use your personal vehicle for business purposes, you can deduct a standard mileage charge that is currently 57.5 cents per mile. Be sure to keep extremely detailed and accurate records of these expenses in case you ever need them. If you have a vehicle that you use exclusively for business, you can depreciate it over its useful life, which will possibly provide a much greater deduction. However, be sure to keep all personal and business trips separate, or you risk the IRS disallowing your deduction.
  6. Travel and entertainment expenses – If you travel for your business, you can deduct 100% of the costs of airfare, hotels, rental cars, taxis, etc. Meals are deductible when you are traveling or entertaining a client at the rate of 50% of the total expense. Be sure your expenses are “reasonable” and be completely rigid in your separation of business and pleasure travel. The IRS has increased scrutiny of such deductions, so keep excellent records and be able to defend any “questionable” expenses that you plan to deduct.
  7. Communication and internet expenses – If you have a cell phone for business use, you can deduct the entire cost. It is definitely best to have both a personal and a business cell phone, if you plan to deduct the expense, or you run into documenting issues. Likewise if you have an office and a business-only internet line. And, of course, website hosting and anyone you pay to work on your website for you are deductible as business expenses.
  8. Home-based expenses – When you have a home office, there are certain IRS rules that must be met to make your mortgage/insurance/taxes/utilities partly deductible. You must have a space that you use regularly and exclusively for your business, and you must not have an office anywhere else. The deduction used to be based on the percentage of your home dedicated to this space, but has recently become simplified to calculate based on the square footage multiplied by a standard $5 per square foot with a max of 300 square feet.
  9. Child care expenses – When you put your child into daycare in order to be free to conduct your business, your child care expenses are deductible, not as a business expense, but on your personal income taxes. The limit for 2015 is $3,000 for one child and $6,000 for two or more children.
  10. Educational expenses – If you go to seminars, take web-based classes, pay professional dues or subscribe to business publications, you can deduct all of those expenses. The content of the deduction should be related to your current business and should be designed to increase your business knowledge for the benefit of your current business; you cannot deduct learning expenses for entering a new industry or career.

The tax code can be extremely complicated and difficult to understand, and the IRS does tend to target self-employed and small business owners at a greater rate than ordinary job-holding individuals. This is because there is far more room for “fudging” numbers when you are self-employed than there are when you receive a paycheck.

The legal advice site, nolo.com, offers these two rules for the self-employed:

  1. Claim all of your income.
  2. Don’t claim expenses you didn’t actually pay for.

If you follow that advice, you may still be audited, but at least you will not have to worry that you will get in trouble for under-reporting income or over-stating expenses.

To those two rules, I add a third: Keep amazingly accurate records. One way to do this is to use an accounting app designed for small businesses. A smartphone-based app ensures that you always have the ability to note and detail your expenses, no matter where you are.


About Brad

Brad Hanks is in charge of Growth at ZipBooks.

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