Top-10 Deductions Every Self
Employed Individual Should Know

“Self-employed individuals often cheat themselves by considering an expense personal when it’s really a business expense. In the corporate world, it’s clear who is a business associate and who is not. For the self-employed, that line is very wiggly. Just because someone is a friend or family member doesn’t mean he or she isn’t a business associate”. – BusinessWeek financial writer June Walker.

Self-employed individuals are often so focused on running their businesses that they may overlook potential tax deductions that could save them money.

Here is the list of the most overlooked deductions for self-employed individuals.

1. Home office expenses

A valuable tax benefit for those who use a portion of their home for business purposes. You may be able to deduct expenses such as rent, mortgage interest, property taxes, utilities, and insurance. You must meet specific requirements to be eligible for a home office deduction. The business space, whether the office, studio, or workshop, needs to meet two basic rules: (1) a principal place of business and (2) regular and exclusive use.

There are two ways to calculate the home office deduction: the flat rate method or the Flat Rate “Safe Harbor” Deduction and the actual method. The flat rate method allows you to deduct $5/square foot of the portion of your home used for business, up to 300 square feet. That means that the maximum annual flat rate deduction is $1,500.

This method is straightforward and requires minimal record-keeping, making it a popular choice for many taxpayers. On the other hand, the actual method involves calculating expenses related to the home office, such as mortgage interest, property taxes, utilities, and maintenance. To use this method, you must determine the percentage of your home used for business and allocate expenses accordingly. While this method can result in a larger deduction, it requires detailed record-keeping and documentation, which may be burdensome for some taxpayers.

2. Health insurance premiums

Self-employed individuals may be eligible for a health insurance deduction that can reduce their taxable income on their federal tax return. This deduction allows them to deduct 100% of the medical, dental, and long-term care insurance premiums for themselves, their spouse, and dependents. It is important to note that the health insurance deduction is not a business expense but a deduction on your 1040 return. Additionally, The deduction cannot exceed the earned income from the business associated with the health insurance plan. You can’t deduct more than you make.

3. Retirement contributions

Self-employed individuals have several options when it comes to retirement contributions and can take advantage of deductions that reduce their taxable income. By contributing to retirement plans designed for self-employed individuals or small business owners, they can save for the future while lowering their current tax burden.

Some standard retirement plans for self-employed individuals are Individual Retirement Account (IRA), Simplified Employee Pension (SEP) IRA, and Solo 401(k) Plan (One-Participant 401(k). It’s important to note that the contributions to these retirement plans are generally deductible up to the annual contribution limits. The amount you can contribute and deduct is often based on your net earnings from self-employment, which takes into account the deduction for half of your self-employment tax and the deduction for contributions to your retirement plan.

Contributions and deductions for retirement plans are usually accounted for on IRS Form 1040 or its variants and supplemental forms. Given the complexity and potential for making a misstep, self-employed individuals should consult with a financial advisor or tax professional to choose the best retirement plan and understand the intricacies of the tax deductions available to them.

4. Travel and vehicle expenses

Self-employed individuals can deduct business travel such as airfare, transit fares, lodging costs (hotels, motels, Airbnb), car rental fees, taxi or ride-sharing service, car rental fees, meals and entertainment (subject to limitations and percentage deductibility, depending on the jurisdiction), travel insurance, as well as vehicle expenses for business use, such as mileage, gas, repairs and maintenance, tires, insurance, registration fees, licenses, depreciation (if you own the vehicle), lease payments (if you lease the vehicle), tolls and parking fees.

These expenses often need to be strictly for business and not personal. You’ll need to allocate the cost appropriately for mixed-use expenses (personal and business).

5. Professional services and education

Costs associated with hiring outside services, such as accountants or consultants, and continuing education related to your business may be deductible.

Some examples of professional fees or education expenses that can be deducted for self-employed individuals include:

• continuing education expenses related to their profession or trade;
• professional association membership fees;
• professional license and certification fees, seminars, workshops, and conferences related to their industry;
• education materials such as books, journals, and online courses directly related to their profession; professional development and training courses;
• costs for professional mentoring or coaching;
• employee training and education expenses directly related to the business.

6. Business supplies and equipment

Expenses for office supplies, equipment, and software used for your business can be deducted.

7. Marketing and advertising expenses

Costs associated with marketing and advertising your business, such as website expenses, promotional materials, and advertising space, can be deducted.

8. Business insurance

Premiums paid for business insurance, such as liability or property insurance, are deductible.

9. Legal and professional fees

Fees paid to lawyers, consultants, and other professionals for services related to your business can be deducted.

10. Depreciation on business assets

If you have purchased business property, such as equipment or machinery, you may be able to deduct a portion of the cost through depreciation.

In conclusion, self-employed individuals should be aware of the many deductions available to them. Keeping detailed records of all business expenses is essential to take advantage of these deductions and reduce their taxable income. Self-employed individuals can maximize their tax savings by utilizing these often overlooked deductions.

When managing your taxes, it is crucial to seek the guidance of a tax professional and consult the Internal Revenue Service (IRS) code to ensure you have the most current information.

Tax laws are complex and change frequently, potentially impacting how you should handle your finances. A tax professional can provide personalized advice tailored to your situation while referencing the IRS code as an authoritative source for federal tax regulations. This two-pronged approach helps safeguard against errors and optimizes your tax strategy within the bounds of the law.