January 1, 2023
What we’ll cover:
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 many tax deductions out there to help ease some of these costs. In this article, we’ll take a look at some of the important deductions you may be able to take when you’re self-employed. These deductions could save you money on your tax bill.
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).
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. Now, you don’t actually have to own a home to claim the home office deduction. The deduction is available for both homeowners and renters.
Generally, to qualify for the deduction, your home office must meet two conditions.
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.
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.
Complete eligibility and deduction details can be found in IRS Publication 535.
Contribution and deduction limits vary from plan to plan and are usually adjusted each year. The 2023 maximum contribution for a SEP Plan is $66,000 ($61,000 for 2022) or 25% of compensation, whichever is lesser. See IRS "SEP Plan FAQ" for more details.
And for a SIMPLE IRA, the 2023 maximum employee contribution is $15,500 ($14,000 for 2022). 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.
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.
Bear in mind that business expense deductions come with a slew of complex rules and caveats (see IRS Publication 535). So don’t be shy about bringing in a tax professional to help you hunt down all the deductions that you’re entitled to.
This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed.