Top ten common deductions for freelancers
10 Self-Employment Tax Deductions in 2022
The best way to save money is by utilizing all the benefits offered. Your home, car insurance policies, and retirement savings could also get you a tax break!
There are many ways to reduce your self-employment taxes, and here is the most important list for freelancers, contractors, and other self-employed people. Here are 10 big self-employment tax deductions to remember.
#1 The home office deduction
If you work from home or use part of it in your business, then self-employment tax deductions like this one could get you a break on the cost.
What you can deduct: A portion of your mortgage or rent; property taxes; the cost of utilities, repairs, and maintenance; and similar expenses. This deduction is only available to the self-employed; employees cannot take the home office deduction.
How it works: Calculate the percentage of your home’s square footage that you use (in the IRS’s words) “exclusively and regularly” for business-related activities. That percentage of your rent or mortgage becomes deductible. So, if your home office takes up 15% of your house’s square footage, 15% of those housing expenses for the year may be deductible. IRS Publication 587 outlines most of the scenarios, but note that only expenses directly related to the part of your home you use for business are usually fully deductible.
#2 Health insurance
If you bought medical insurance policies on your own for yourself or your family, you might qualify for a self-employment tax deduction on the premiums.
What you can deduct: Medical and dental insurance premiums for you, your dependents, your spouse/ and your children who are younger than 27 at the end of the tax year. Long-term care insurance premiums also count, but there are specific rules. IRS Publication 535 has the details.
How it works: It’s an adjustment to income rather than an itemized deduction. This means you don’t have to itemize to claim it. But you might be let down because if you’re eligible to enroll in your spouse’s employer’s plan — even if you choose not to, maybe because it’s more expensive than your own — you can’t take the deduction.
#3 Continuing education
You have to stay educated to manage a growing business, and self-employment tax deductions exist.
What you can deduct: The costs of “qualifying work-related education,” including things such as tuition, books, supplies, lab fees, transportation to and from classes, and related expenses.
How it works: The expenses are deductible only if the education “maintains or improves skills needed in your present work.” This means if you’re taking classes to change careers or you’re working toward the minimum educational requirements for a trade or business, this probably won’t work for you. But you can qualify even if the education leads to a degree. Check IRS Publication 970 for the requirements.
#4 Your car
Using your car to meet vendors & make pickups can be hard on your car, but some self-employment tax deductions might help you recoup some of that usage
What you can deduct: A bit over $1 for every two miles you put on your car for business purposes.
How it works: At the end of the year, tally the number of miles you drove in the car for business, multiply that by the — 56 cents per mile in 2021 and 58.5 cents per mile in 2022— and deduct the total. Don’t forget to keep a mileage log; you’ll need it if you’re audited.
# 5 Retirement savings
There might be more options than you can think of regarding retirement-related self-employment tax deductions. One popular choice is the solo 401(k).
What you can deduct: Contributions to a solo or one-participant 401(k) plan of up to $58,000 in 2021 and $61,000 in 2022 (add an extra $6,500 if you’re 50 or older) or 100% of earned income, whichever is less.
How it works: Similar to a standard, employer-sponsored 401(k). For traditional solo 401(k)s, your contributions are pretax, and distributions after age 59½ are taxed. You can contribute as both an employee (of yourself) and as the employer, with salary deferrals of up to $19,500 in 2021 and $20,500 in 2022, plus a $6,500 catch-up contribution if you’re 50 or older. And you can add approximately 25% of net self-employment income, not exceeding $58,000 in 2021 and $61,000 in 2022.
# 6 Self-employment taxes as self-employment tax deductions.
You can deduct self-employment tax as a business expense. It’s one of the most common self-employment tax deductions. The self-employment tax rate is 15.3% of net earnings. That rate is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings. Self-employment tax is not the same as income tax.
What you can deduct: You can deduct half of your self-employment tax from your income taxes.
How it works: For example, if your Schedule SE says you owe $2,000 in self-employment tax for the year, you’ll need to pay that money when it’s due during the year, but at tax time, $1,000 would be deductible on your Form 1040.
#7 Business insurance premiums
Protecting your business can also protect your tax bill.
What you can deduct: Premiums for business insurance, employee accidents, and employee health insurance.
How it works: Schedule C is a dedicated area for deducting your insurance premiums. But make sure you’re deducting the right stuff. IRS Publication 535 has the details.
What else you can do: As we explain in the section about health insurance, you might be able to deduct some or all of your health insurance premiums if you’re self-employed.
#8 Office Supplies
Everyday things you use to run your business could get you some self-employment tax deductions.
What you can deduct: Office supplies and similar items you use daily to run your business.
How it works: In most cases, you deduct the cost of office supplies that you actually used during the tax year. But, if you have office supplies on hand that you don’t usually inventory or record the use of, those are typically deductible in the year you buy them, too.
What else you can do: For “bigger” products like computers or special equipment, the general rule is that you can deduct them in the year you buy them if their useful lives are a year or less. If their useful lives are longer than a year, the IRS may view those things as assets that depreciate over time. Even though this means not being able to deduct the full cost of the item all at once, you likely can deduct the depreciation on the item over its useful life.
#9 Credit card and loan interest
Check your credit card statements for potential self-employment tax deductions.
What you can deduct: Interest accrued on purchases that were business expenses.
How it works: You can’t deduct credit card interest accrued from business expenses if the purchase was made on someone else’s credit card, for instance.
#10 Phone and internet costs
Anyone from real estate agents, journalists, daycare providers, and jewelry makers could deduct part or all of their annual cell phone or internet bill.
What you can deduct: You can deduct your entire bill if you have a dedicated business cell phone or internet connection.
How it works: You must use your smartphone or internet service for business, and your employer — if you have one — must not reimburse you.