January 15, 2025
Working for yourself can have its perks – you get to be your own boss and typically have more control over your schedule. But this flexibility often comes with additional responsibilities and costs, including bookkeeping, self-employment taxes, office space, and insurance.
The good news is that there are federal 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, which could lower 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.
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 self-employed individuals, who typically have to make estimated tax payments throughout the year. The estimated tax is used to pay your income tax as well as other taxes like the self-employment tax. 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 individuals, however, act as both employer and employee, so they are responsible for 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).
If you work from home, you may be eligible to take the home office deduction, which is available for both qualifying homeowners and renters. In other words, you don't actually have to own a home to claim the deduction.
Generally, to qualify for the deduction, your home office must meet two conditions.
For more details on these qualifying rules, see IRS Topic #509: Business use of home.
So how much can you deduct for your home office space? 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 generally speaking, 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 probably purchase your own health insurance policy from the marketplace (unless you’re covered on someone else’s plan). This can be a significant expense. However, if you qualify, you may be able to deduct your healthcare premiums on your tax return.
Per the IRS, self-employed individuals who report a net profit for the year may be eligible to claim the self-employed health insurance deduction. 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 here.
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 depend on the type of plan you have and are usually adjusted each year by the IRS (see SEP FAQs and SIMPLE IRA FAQs for details).
Also keep in mind that the maximum amount that you’re allowed to deduct for your retirement 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.
Keep in mind that business deductions often come with a complex set of eligibility rules and caveats. The IRS offers a guide to qualified business expenses to help taxpayers navigate these deductions. You may also want to check in with a tax professional if you have more specific questions.
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.
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