Self-employment brings freedom, but also a more complicated tax situation. You pay both the employee and employer portions of Social Security and Medicare taxes, and no one withholds tax from your income. The good news is that you can deduct ordinary and necessary business expenses, which can substantially lower your tax bill. This guide offers a practical checklist of deductions, plus recordkeeping and estimated tax tips.
How Self-Employment Taxes Work
If you earn income as a freelancer, independent contractor, gig worker or sole proprietor, you report it on Schedule C. Your net profit, which is income minus allowable expenses, is subject to self-employment tax of 15.3 percent on most earnings, covering Social Security and Medicare, in addition to regular income tax. You can deduct half of the self-employment tax when computing adjusted gross income.
Because no employer withholds tax, you generally must make quarterly estimated payments if you expect to owe $1,000 or more. Details are at irs.gov.
The Rule for Deductible Expenses
To be deductible, an expense must be ordinary, meaning common in your trade, and necessary, meaning helpful and appropriate for your business. Personal expenses are not deductible. If an expense is both personal and business, you can deduct only the business portion.
Common Deductions Checklist
Home Office
If you use part of your home regularly and exclusively for business, you may deduct a share of rent or mortgage interest, utilities, insurance and repairs. The simplified method lets you deduct a flat rate per square foot up to a limit, which saves recordkeeping. A kitchen table used for work and family meals generally does not qualify.
Vehicle and Mileage
You can deduct business driving using either the standard mileage rate, which the IRS sets each year, or actual expenses such as gas, insurance and repairs. Commuting from home to a regular workplace is not deductible. Keep a mileage log with dates, destinations and purposes.
Equipment and Supplies
Computers, phones, cameras, tools and office supplies used for business may be deductible. Depending on the item and tax rules, you may deduct the cost immediately under special provisions or depreciate it over time.
Software and Subscriptions
Accounting software, design tools, website hosting, professional memberships and industry publications are typical business costs.
Advertising and Marketing
Website costs, online ads, business cards and promotional materials are deductible.
Professional Services
Fees paid to accountants, attorneys and consultants for business matters count.
Business Insurance
Premiums for liability, professional or property insurance may be deductible. See our guide to general liability insurance for what policies cover.
Business Travel and Meals
Travel for business, including transportation and lodging, is generally deductible. Business meals are often deductible at a percentage, with specific rules. Keep receipts and notes on the business purpose.
Education and Training
Courses and training that maintain or improve skills in your current business may be deductible, but costs that qualify you for a new profession usually are not.
Phone and Internet
Deduct the business-use percentage of your phone and internet bills.
Bank and Payment Fees
Merchant processing fees, business bank charges and platform fees are deductible.
Deductions on Your Personal Return
Self-Employed Health Insurance
If you are not eligible for employer coverage, you may deduct premiums you pay for yourself, your spouse and dependents, up to your net business profit. Learn more about coverage options in our ACA enrollment guide.
Retirement Contributions
Self-employed workers can contribute to retirement accounts such as a SEP IRA, SIMPLE IRA or Solo 401(k), which can have higher contribution limits than a regular IRA. Contributions are generally tax-deductible, lowering your taxable income. Compare account types in 401(k) vs. Roth IRA.
Qualified Business Income Deduction
Many self-employed people can deduct up to 20 percent of qualified business income, subject to income limits and rules. This is a deduction on your personal return that can be significant.
Half of Self-Employment Tax
As noted, you may deduct the employer-equivalent half of the self-employment tax.
Recordkeeping Tips
- Separate business and personal accounts. A dedicated bank account and credit card simplify bookkeeping.
- Save receipts digitally with photos or scans.
- Track income and expenses monthly, not once a year.
- Keep a mileage log with a phone app or notebook.
- Document the business purpose of meals and travel.
- Retain records for at least three years, and longer for assets you depreciate.
Estimated Taxes
You generally pay estimated taxes four times a year. A common safe-harbor approach is to pay at least 90 percent of this year’s tax or 100 percent of last year’s tax (110 percent for high earners). Set aside a percentage of every payment you receive, such as 25 to 30 percent, in a separate savings account so you are not surprised. Learn how to reduce your taxable income with additional strategies.
Business Structure Matters
As your income grows, an LLC or S corporation election may change how you are taxed. Our guide to starting an LLC explains the options. Talk with a tax professional before changing your structure.
Common Mistakes
- Mixing personal and business expenses.
- Missing quarterly payments and incurring penalties.
- Claiming a home office incorrectly.
- Not tracking mileage.
- Skipping retirement contributions that could lower your tax.
- Deducting personal costs.
A Simple Monthly Routine
Set aside 30 minutes each month to reconcile your business bank account, categorize expenses, record mileage and update your income tracker. Move your tax savings, perhaps 25 to 30 percent of profit, into a separate account. By the time quarterly deadlines arrive, you will know your profit and what to send. This habit also gives you a clear picture of whether the business is growing.
When to Hire Help
Consider a bookkeeper or tax professional if you have employees, inventory, multiple income streams or a profit that is growing quickly. A professional can help you evaluate retirement plan contributions, an entity change and deductions you may be missing. The fee is itself generally deductible as a business expense.
Frequently Asked Questions
Do I need an LLC to deduct expenses?
No. Sole proprietors can deduct business expenses on Schedule C without forming an LLC.
Can I deduct my meals every day?
Only business meals with proper documentation and purpose, and usually at a reduced percentage.
What if I have a loss?
A business loss can offset other income, subject to rules, but the IRS expects a profit motive.
Will deductions trigger an audit?
Legitimate, well-documented deductions are fine. Keep clear records.
Bottom Line
Self-employed workers can claim many deductions, from home office and mileage to retirement contributions and health insurance. Keep clean records, pay estimated taxes on time and review your strategy with a tax professional each year.
Related guides
- How Capital Gains Tax Works on Stocks, Real Estate and More
- IRS Payment Plans: What to Do If You Can’t Pay Your Tax Bill
- Index Funds vs. ETFs: What’s the Difference?
- How to Start an LLC: Steps, Costs and Common Mistakes
This article is for general education only and is not financial, tax, legal or insurance advice. Rates, limits and rules change, so confirm current details with the provider or a licensed professional before you decide.