Standard Tax Deductions for the Self Employed

If you’re self-employed, such as freelancers or independent contractors, you should know what deductions you qualify for to reduce your self-employment tax. Here are the most common you will not want to miss:

Credit Card Interest

If you made business purchases on your credit card, you might be able to deduct credit card interest on your federal tax return. The IRS considers qualified business purchases as “ordinary and necessary” for the operation of the business. It is recommended that you designate a credit card for business purposes only, which will clarify what interest is deductible. 

Home Office Deduction

If a company employs you, you’re no longer able to take the home office deduction. But if you’re self-employed and use part of your home for business, you may still qualify—even if you’re a renter. 

There are two options available to claim at tax time—the simplified option and the traditional method.

1. The simplified option: You can use the simplified option to determine your tax deduction quickly. Multiply your office’s total square feet by $5 (up to 300 square feet). If your home office is 300 square feet, then you are entitled to take a deduction of $1,500 on your tax return.
2. The traditional method:  With this option, your tax deduction is based on the percentage of your home that your home office occupies. First, divide your home office square footage by your home’s overall square footage. Then, multiply the percentage you get by the sum of your home’s total allowable expenses to get the permissible deduction. If your home office was 300 square feet and your home was 1,500 square feet, you would deduct 20% of your allowable expenses (300/1,500 = 0.2).

Whichever method you choose, your home office must meet two requirements.

1. You to use it regularly and exclusively, which means that the office is used only for business purposes.
2. It is your principal place of business, which means that you use your office to have meetings and complete work.

Training and Education Expenses

If you paid for work-related education expenses during the year, you might be able to take a deduction on your tax return. Your payment must be for education that maintains or improves your skills in your current line of work. 

Self-Employed Health Insurance Premiums

If you’re self-employed, health insurance can be costly—but you can deduct it from your taxes. Amounts include health care insurance premiums you paid for yourself, your spouse, dependents, and any children under 27 on your health plan, regardless of whether you claim them on your return.

You have to report a net profit to use this deduction. If you didn’t, you could instead claim your premiums as an itemized deduction on your Form 1040 federal tax return, Schedule A. 

Business Mileage

If you use your car for work, whether it’s driving to meetings or making deliveries, you can deduct your mileage on your tax return. However, if you use your car for personal and professional trips, you can only deduct business mileage. Like with the home office deduction, you’ve got two options for claiming mileage on your taxes.

1. The standard mileage rate is a specific rate you can multiply against the business miles you drove during the year. For 2021, the standard mileage rate is 56 cents per mile. For instance, if you drove 10,000 business miles, you could deduct $5,600. To claim the standard mileage rate, you must meet the following conditions:

• You must own or lease the car
• You must operate five or fewer vehicles at one time
• You must not have claimed depreciation on your cars
• Note: If you choose the standard method for a vehicle you lease, you will need to use it throughout its lease.

     2. The actual expense method allows you to deduct the actual business costs to operate the car. If you use the vehicle for business and personal needs, you will have to determine which portion is for business.

Whichever method you choose, it’s best to track your business mileage by keeping a log recording the dates and types of trips, odometer reading, and any business expenses, like gas, oil, licenses, registration fees, repairs, tires, insurance, lease payments, and depreciation.

Also, you should calculate the deduction amounts under both methods and choose the most significant deduction. If you’re using an online tax software program, it’ll request you enter both your actual vehicle expenses and mileage for the year, and it’ll then calculate the best deduction for you.

Phone Services

What you pay for cell phone services for your business is deductible. Let’s say your annual cell phone bill is $2,000, and you use 30% for business; you’d be entitled to a tax deduction of $600. You should choose a recordkeeping system to determine your business usage.

Start-up Expenses

In general, you must deduct business start-up expenses over a period of time, up to 15 years. However, business start-up and organizational costs paid after Oct. 22, 2004, are immediately deductible up to $5,000 total. Costs associated with creating, acquiring, or investigating a business are included in start-up costs. Organization costs include what it takes to set up a corporation or a partnership. Some examples include legal fees paid to a lawyer to incorporate your business.

Retirement Savings

You can deduct contributions you make to a qualified plan, such as a 401(k) plan or SEP IRA. Amounts may include contributions you made for an employee or your retirement. The deduction limit for your contribution to a qualified plan depends on the kind of plan.