“I don’t have anything to deduct. I’m just a freelance writer.”
In the early years of owning my business, I thought self employment tax deductions had to be tangible objects that I purchased, like office equipment and supplies. For a freelance writer, that’s paper, pens, and the occasional business lunch. It didn’t seem like there was much to deduct.
So I missed out—big time. Fortunately, in the years since, I’ve talked with accountants and done research. It turns out, most self employed people can deduct a lot on their taxes, from travel expenses to utility bills, to business insurance.
By making the most of self employment tax deductions, you can greatly reduce your taxable income and save money.
There’s a reason why you should hold onto every receipt and invoice possible - if you’re self-employed, a lot of expenses are considered tax deductible.
And that’s a good thing, considering self employed people (especially sole proprietors) tend to have a higher tax burden than other business entities, like LLCs.
Before we dive into the biggest self employment tax deductions you should take, here’s a quick rundown of the most common tax deductible expenses for self employed people like me:
Ready to take a closer look at self employment tax deductions? Let’s do it!
Do you work at home? Whether it’s a separate room in the basement, a full blown office, or the corner of the living room, you might be able to use it as a tax deduction.
Here’s how: First, designate a room (or an area of a room) to the regular and exclusive use of your business.
That’s not to say you can’t go offsite to work. If you’re a photographer, feel free to shoot on location. If you’re a consultant and regularly meet up with clients at coffee shops, that’s okay too. You just need to keep your principal workspace in your home.
Then calculate the square footage of your home that makes up your home office. Turn it into a percentage. Let’s say your home office makes up 5% of your home’s total square footage. That means you can deduct 5% from your home insurance, mortgage, property tax, and utility bills (don’t forget the Internet bill too).
You can also deduct 5% off any repairs that impact the integrity of your entire home, like a new roof or furnace. New paint job in your daughter’s bedroom? Unfortunately, that’s a no-go. You can only deduct expenses that involve your entire home, including your home office.
Beware: taking the home office deduction can get sticky and the IRS pays attention. As with any tax advice, check with an accountant and do research online first. You don’t want to get caught in an audit.
Good news! If you’re self employed, you may be able to claim part of your vehicle expenses as a tax deduction, like mileage when you use them for work.
This is where that newly sectioned off home office is going to come in handy. If you get up and walk from your bedroom to your home office, that 10 foot stretch qualifies as your daily commute. Any travel for business outside of your “commute” can rack up tax deductible mileage.
No home office? Don’t sweat it. Usually, the first trip of the day (from your home to your first client) is your “commute.” Then any trips from client-to-client there on out can give you deductible mileage. Don’t forget, the distance from your last client back home qualifies as your “commute” home and can’t give you mileage.
Remember to keep a detailed record of your mileage, receipts, and reason for travel. Many CPAs recommend using a designated calendar or journal. Here are a few apps that can help you stay organized for tax deduction purposes:
Once you tally up your mileage, you can start calculating your deduction using the Standard Mileage Rates outlined by the IRS here.
Other car expenses
You can also deduct other auto expenses on your tax return, like car repairs, gasoline, insurance, and tires. But to do this, you need to calculate the percentage you use your car for business versus personal use. Divide the number of miles you drive for business by the total miles driven.
Just like the home office tax deduction, this can get tricky. Work with an accountant if you have questions.
Do you dread visiting your downtown clients? I don’t blame you. Paying for parking in the city is rough. Fortunately, this is an expense you can 100% deduct on your taxes. Keep your receipt, scan it, or take a picture with your smartphone. The IRS will want to see all receipts in the event of a tax audit.
But if you pay to park at your workplace (or home office), you’ll have to eat the cost. This is relevant if you live or work in the city where parking spaces are limited and pricey.
You run an honest business and work from home, so what could happen?
The truth is, you never know. If a client visits your home office and gets hurt, you could be liable for those medical bills (and no, homeowners insurance won't cover a claim that happened as a result of your business). Likewise, a client could claim you were negligent in your work and decide to sue you, meaning you'd have to come up with the money for your legal bills.
That's where a self-employed business insurance policy could help. This policy can cover expenses resulting from common claims self employed people face, like property damage, third-party accidents, and more. It can also cover legal costs resulting from claims of negligence.
Good news: Business insurance is also considered tax deductible. Keep a record of your premium payments and remember to write it off when you deal with Uncle Sam.
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If you’re a city dweller and don’t own a vehicle, there are still tax deductions for you. Keep your receipts for any public transportation rides, like the subway, bus, train, and even Uber rides.
Again, your trips can’t be considered “commuting.” Only track your expenses if they’re related to work and outside of that daily commute.
Like with business insurance, your health insurance premiums can be claimed under self employment tax deductions. Remember to keep track of your premium payments, as well as any other medical expenses you accrued over the course of 2020.
Keep in mind that this tax deduction only applies if you had to buy your own health insurance policy as a self employed individual. If, for example, you joined your spouse's health insurance plan through their work, you cannot claim your health insurance premiums as a self employed tax deduction.
If you made a business trip in 2020, then it's likely you're able to claim those expenses on your taxes. Most of the costs related to business trips are considered self employed deductions, with some exceptions. Think airfare, business calls, lodging, and even tips for the hotel concierge.
Here’s the key: This has to be a trip that’s used exclusively for business outside of your “tax home.” That's the jurisdiction/city where conduct business. Keep a detailed record of your trip expenses, as well as your trip’s purpose. You’ll need to prove it was planned and executed for business only.
Additionally, you'll need to provide evidence that the expenses accrued on your business trip were necessary. For example, if you stayed at a hotel located a couple towns away from your hometown for a conference, the IRS likely won't consider that to be a necessary expense.
Here's a quick rundown of the signs that the IRS considers your business trip to be "necessary":
But what if you want to see the sites? No problem. I don’t think the IRS wants you to stay shut up in your hotel room. Go, do, and see! Just don’t deduct expenses related to entertainment and sightseeing. That's why it may be a good idea to pay for your entertainment on a separate debit or credit card, so you can keep your business expenses separate from your personal expenses.
Save some money and budget for a day out after a job well done!
Most people think it’s easy to deduct a phone bill. Not so fast. Here’s the scoop.
Your first landline in your home is always a personal expense. But if you add a second line for business, you can deduct that expense 100%. That’s all good and dandy if you’re a boomer clinging to your landline. But if you’re like me, your cell phone is your lifeline.
Fortunately, you can use your cell phone for both personal and business use. Just calculate the approximate time you spend on your personal device for work. It might be hard to do this, and it’s important to be accurate. But if you can, feel free to deduct a percentage off your phone bill.
For a lot of people, it comes out to about 50%.
If you’re ever confused about taking self employment tax deductions, contact a local accountant. I’ve found my accountant to be incredibly helpful. She points me in the right direction, explains deductions, and helps me navigate deadlines. Paying her for ongoing support gives me peace of mind - and it’s even tax deductible, too.
If you can't afford an accountant or a tax preparation expert, consider researching tax prep software that's used by other self employed individuals. There's plenty of software out there that can help guide self employed people and freelancers through their tax deductions; it just takes a little more time and effort. One example is this self-employment tax calculator from Bonsai. Please note that we did not create this tool and it was made by Bonsai. If you have any questions, we recommend consulting with an accountant or tax professional.
Bottom line: Be cautious with your tax deductions. If you're in doubt as to whether something is tax deductible or not, it's best to err on the side of caution. After all, you've got a business to run - and you don't need to be interrupted by a tax audit!
This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer
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