About 16 million of America's 150 million workers are self-employed, according to Pew Research. Self-employment can translate to more independence and greater choice when it comes to your work hours and location. But it can also come with a more complicated—and more expensive—tax bill.
If you work for yourself, you can claim a variety of deductions to lower your taxes. Here are 15 tax deductions that freelancers, contractors and other self-employed taxpayers can use to save money on their tax bills.
1. Self-Employment Tax
Half of any self-employment tax you pay is deductible from your taxable income. What's self-employment tax? Because you don't have an employer who covers your Social Security and Medicare taxes for you, you'll have to pay this on your own through a 15.3% self-employment tax that breaks down this way:
- 12.4% of your net business income goes to Social Security
- 2.9% goes to Medicare
Only your first $142,800 of income is taxed for Social Security; all of your self-employment income is taxed for Medicare. Anyone who makes $400 or more from self-employment in a year must pay self-employment tax.
To learn more, see IRS Schedule SE: Self-Employment Tax.
2. Qualified Business Income
Self-employed taxpayers may be eligible to deduct up to 20% of their net business income using the qualified business income deduction (QBID). QBID applies to income from partnerships, limited liability corporations (LLCs), S corporations and sole proprietorships operating in the United States.
Qualified business income includes the deductible part of self-employment tax, health insurance premiums and deductions for contributions to qualified retirement plans. It does not include investment gains and dividends, interest income, foreign income or wages. Keep the following in mind when determining whether you qualify for the QBID:
- Your total taxable income must be less than $164,900 for a single filer or $329,800 for joint filers to qualify for the full deduction (based on 2021 numbers). After that, the deduction begins phasing out.
- Limitations apply to certain service businesses, including attorneys, accountants, performing artists, actuaries and health care practices. However, these limitations only come into play when your income exceeds the thresholds shown above. See IRS FAQs for details.
- Taxpayers whose income exceeds the thresholds must also comply with limitations on deducting any W-2 wages they've paid.
3. Home Office Expenses
Employees working remotely can't deduct their home office expenses, but self-employed people can. This deduction applies only to space used regularly and exclusively for business that is also your principal place of business. You can't claim the sofa as your headquarters if you also use it as a place to watch TV with your family. Similarly, if you maintain a regular office and use your den as a home office occasionally, the deduction doesn't apply.
- Deductible expenses include mortgage interest or rent, utilities, insurance, depreciation, real estate taxes, maintenance and repairs.
- Direct expenses (for instance, painting your office space) are 100% deductible.
- Indirect expenses are deductible based on the percentage of your home that is dedicated to business use. For example, if your home is 2,000 square feet and your office is 200 square feet, 10% of your home's indirect allowable expenses can be deducted. Be aware: Expenses associated with the parts of your home that are not used for business—landscaping, for example—are not deductible.
You may also choose a simplified option that allows you to deduct a straight $5 per square foot of dedicated business space as a home office expense. This option caps out at 300 square feet or $1,500.
To learn more, see IRS Topic 509: Business Use of Home.
Of course, if you rent a dedicated space for your business, you can deduct the cost of rent—and save yourself the trouble of calculating a home office deduction. The IRS has rules for claiming a deduction for rent, however, including that you cannot own the property you're renting and you can't deduct rent you've paid in advance for future years.
5. Health Insurance Premiums
You may be able to deduct medical, dental and qualified long-term care insurance premiums you've paid for you and your family. Self-employed people can deduct health insurance premiums as a business expense with two important caveats:
- You and your spouse cannot be eligible to participate in an employer-sponsored health plan.
- You must show a net business profit for the year.
To learn more, see IRS Tax Guide for Small Business.
6. Retirement Account Contributions
Contributions to certain retirement accounts may be deductible if you're self-employed, including contributions you make for your employees.
- If you open a SEP-IRA, you can contribute as much as 25% of your net earnings from self-employment, up to $61,000 for 2022.
- Start a Savings Incentive Match Plan for Employees (SIMPLE IRA) and you may be able to put all your net earnings into the plan, up to $14,000 in 2022 with a catch-up contribution of $3,000 if you're 50 or older.
7. Computer Purchase
You may be able to deduct the full cost of a computer you purchased for your business in a single year if the computer is used for more than 50% in your business, was placed in service during the current tax year, wasn't used by you previously and was not acquired from a relative.
Alternatively, you can make multiyear deductions for depreciation on computer equipment and other tangible property you own, such as buildings, machinery, furniture and equipment, as well as patents, copyrights and computer software.
To learn more, see IRS Publication 946: How to Depreciate Property.
8. Telephone and Internet Costs
If you use your cellphone for business, you may deduct a percentage of your cellphone bill on your taxes. You cannot deduct the cost of a home landline, although you can deduct the cost of individual long-distance business calls or the cost of a dedicated second line for business.
Similarly, you can deduct a percentage of the cost of your home internet service, plus 100% of the cost of any web hosting for your business's website or other strictly business-related internet expense.
For a limited time, businesses may deduct 100% of the cost of food and beverages paid to restaurants as long as the business owner or an employee of the business is present when food or beverages are provided. When the Taxpayer Certainty and Disaster Relief Act of 2020 expires at the end of 2022, meals will once again be deductible at 50%.
Deduct the cost of airfare, taxis, lodging, non-entertainment meals, dry cleaning and tips for any business travel you do. The IRS offers specific guidelines for qualified business travel, and warns against deducting expenses that are "lavish, extravagant or for personal purposes." Keep detailed records, including receipts, credit card statements and notes on your travels and any meetings you take.
To learn more, see IRS Publication 463: Travel, Gift and Car Expenses.
11. Vehicle Expenses
The standard mileage deduction in 2022 is 56 cents per mile. You can track your mileage by keeping a log of your business-related trips, including where you went, miles traveled and your reason for traveling. Multiply your business miles by 0.56 to get your mileage deduction.
You also have the option of deducting a percentage of your total car expenses for the year instead. Track your overall miles driven and divide it into your total business miles to get your percentage of business use. If, for example, you used your car for business 20% of the time, you could deduct 20% of your lease payments, depreciation, car registration, insurance, gas, repairs and maintenance.
12. Interest on Business Loans or Credit Cards
Interest on loans or credit cards you've used to cover business expenses is deductible. Only the portion of interest that applies to business expenses qualifies, however. If 40% of the balance on your credit card was used for personal expenses, you may only deduct the 60% of your total interest that relates to business expenses.
13. Professional Memberships
Memberships in business organizations may be deductible, but they must be business-related. Joining a country club won't qualify for a deduction, but signing up with your local chamber of commerce or a professional organization related to your industry would.
Training and education may be deductible if it maintains or improves required business skills, or if it's required by law or regulation. Examples include continuing education needed to maintain a license or classes to update your technical skills. Education that trains you for a new trade or business isn't eligible.
15. Office Supplies and Other Expenses
The list of qualifying deductions is long—too long to list here comprehensively. Overall, most expenses you incur as a normal part of running your business are potentially deductible. Be sure to keep receipts in case you're audited. If in doubt, consult a tax pro for advice.
Here's a quick list of typically deductible expenses:
- Office supplies
- Business insurance
- Outside services (accounting, marketing and payroll services, for instance)
- Software subscriptions
- Postage and shipping
- Research and experimental costs
- Bad business debts
- Business licenses
- Charitable contributions
Get Help Finding All Your Deductions
You don't have to find all of your available deductions on your own. If you're self-employed and have a more complex tax return as a result, consider working with a tax professional. Not only may you find additional deductions you weren't aware of, but you can also deduct the cost of preparing the business portion of your tax return as a business expense.