Tax Time? Don’t Miss These Self-Employment Tax Deductions

What we’ll cover:

• There are many tax deductions available for the self-employed, which could help lower your tax bill
• The self-employment deduction lets you write off 50% of the self-employment tax that you pay
• You may also be able to deduct select business expenses such as interest payments and insurance

Self-employment (e.g., freelance work) has its perks. You get to be your own boss and generally have more control over your work schedule.

But this flexibility also comes with additional bookkeeping responsibilities and costs – things that you might not have had to worry about if you were working for a company (think: self-employment taxes, utility costs, office space, insurance, etc.).

The good news is that there are tax deductions to help ease some of these costs. In this article, we’ll take a look at some common deductions you may be able to take when you’re self-employed. These deductions could save you money on your tax bill.

Good to know: Keep in mind that IRS rules and limits for deductions are always subject to change, so it's a good idea to visit IRS.gov or consult a tax professional for the most up-to-date information.

Self-employment tax deduction

When you work for someone else, your employer withholds various taxes, such as Social Security and Medicare, from your paycheck and sends them to the government on your behalf.

This is not the case for the self-employed. Generally, self-employed individuals who make $400 or more in net earnings are required by the IRS to pay a “self-employment tax” of 15.3% (12.4% for Social Security + 2.9% for Medicare).

When you’re an employee, this 15.3% tax is split between you and your employer – you’re responsible for 7.65% and your employer covers the rest.

Self-employed folks, however, act as both employer and employee, so you get the privilege of paying the full 15.3% rate.

This is where the self-employment deduction comes into play. The deduction lets you write off 50% of the self-employment tax on your tax return, which would help lower your adjusted gross income.

The self-employment deduction can be found on IRS Schedule 1 (Form 1040).

Home office deduction

Many self-employed individuals have the option of working from home. If you work from home, you may be eligible to take the home office deduction. You don’t actually have to own a home to claim the deduction. It's available for both qualifying homeowners and renters.

Generally, to qualify for the deduction, your home office must meet two conditions.

• Regular and exclusive use: This means the part of your home that you use as your “office” must be exclusively reserved for conducting business.
• Principal place of business: You must be able to show that most of your self-employed work is conducted within the home.

So how much can you deduct? The IRS gives you two options to calculate the deduction. You could use the “simplified option,” where you can deduct $5 per square foot of your home office space, up to 300 square feet.

You may also choose the “regular method,” where you add up the actual expenses associated with your home office space (e.g., insurance, utilities, etc). This method involves a little more work, because you’d need to calculate the qualified expenses based on the percentage of the home that’s designated for your business.

Keep in mind that these are simply general guidelines for the deduction. For complete eligibility and deductibility details, consult the IRS or a tax professional.

Self-employed health insurance deduction

If you’re self-employed, you may have to purchase your own health insurance coverage. This can be a significant expense, but you may be able to deduct your premiums if you’re self-employed and reported a net profit for the given tax year.

The deduction is available for premiums that you paid to obtain health insurance coverage – not only for yourself but also for your spouse and dependents.

See IRS's Topic #502, Medical and Dental Expenses for more information. Complete eligibility and deduction details can also be found in IRS Publication 535.

Retirement contribution deductions

If you contribute to a self-employed retirement plan (e.g., SEP Plan or SIMPLE IRA), your contributions may be deductible. Contribution and deduction limits vary from plan to plan and are usually adjusted each year by the IRS.

For example, the 2023 maximum annual contribution limit for a SEP Plan is $66,000, and the 2024 maximum annual contribution limit is $69,000 or 25% of compensation, whichever is lesser. See IRS "SEP Plan FAQ" for more details.

For a SIMPLE IRA, the 2023 maximum employee contribution is $15,500 ($16,000 for 2024). See IRS "SIMPLE IRA Plan" for more details.

The maximum amount that you’re allowed to deduct for these contributions is subject to special calculation rules and other limitations. So it’s best to consult the IRS (Publication 560) or a tax professional to double-check your math.

Deduction for other types of business expenses

Looking for more? Here are some additional expenses that you may be able to deduct. This list is not exhaustive but gives you a general idea of what to keep an eye out for as you track your business expenses.

• Business interest
• Business insurance premiums (e.g., general liability insurance, workers’ compensation insurance, etc.)
• Rent or lease payments
• Business vehicle expenses

Bear in mind that business expense deductions come with a number of complex eligibility rules and caveats (see IRS Publication 535). So don’t hesitate to work with a tax professional if you have questions.