If you are a freelancer or self-employed professional, you could be eligible for a number of money-saving tax deductions that can boost your bottom line. This article is an overview of 10 potential tax deductions to keep in mind as you prepare for tax season. (As with almost anything tax-related, there will be some nuance regarding what can be written off and for how much, so be sure to conduct additional research or consult with an accountant as needed.)
Business Startup Costs
If you just started your business or are contemplating forming one, you might be able to deduct up to $5,000 in startup costs during your first year. This could include costs related to market research, attorneys’ fees, accountant fees, and even organizational costs such as incorporation fees. Think of this deduction as an added potential boost as you venture into entrepreneurship!
The Self-Employment Tax Deduction
Freelancers and self-employed small business owners are generally required to pay a 15.3% self-employment tax, which equals the 7.65% employee and employer portions of the standard employment tax (i.e. Medicare and Social Security). The self-employment tax deduction allows you to deduct the 7.65% employer-portion of your self-employment tax from your net income when calculating your income tax.
Home Office Deduction
If you work from home or use part of your residence in the course of operating your business, you might be able to deduct certain expenses including utilities; repairs and maintenance costs; and even your rent, mortgage, and/or property taxes. The home office deduction can be a complex but valuable deduction, and you can calculate it in a couple different ways. For more information on how to calculate this deduction, see IRS Publication 587.
Health Insurance & Business Insurance Premiums
You may be eligible for multiple deductions related to your insurance. First, if you are self-employed and purchase your own health insurance, you might be able to deduct your health, dental, and/or qualified long-term care insurance premiums. You may even be able to deduct the premiums you paid for your spouse and dependents. In addition to health insurance premium deductions, you could also potentially deduct premiums for business insurance (e.g., liability insurance, car insurance, etc.).
If you are traveling for business, attending a conference, or entertaining a client, a meal might be a tax-deductible business expense. Generally, you will be able to deduct 50% of the meal’s actual cost if you keep your receipts or 50% of the standard meal allowance if you maintain time, place, and business purpose records. (And take note that eating lunch or dinner your computer while working is unfortunately not deductible:)
This deduction can be particularly useful for freelancers. If you are one of the many freelancers who receives funds or payments via third party platforms like PayPal, Square, or Etsy, the related transaction fees you pay to those vendors in the course of your business could be a deductible business expense.
7. Retirement Contributions
Since self-employed individuals are responsible for setting aside funds for retirement without the benefit of employer contributions, their retirement contributions may also be tax deductible when putting money into a SEP, solo 401(k), or IRA. You may have more options than you realize and even more flexibility than you would with an employer-sponsored retirement plan, so be sure to do your research and talk with a financial advisor if needed.
8. Licenses & Membership Dues
If your business necessitates that you maintain a professional license or certification, the related expenses could be deductible. Likewise, if you are a member of a qualified business or professional organization (trade organization, chamber, board, etc.), these membership dues might also be tax deductible.
- Educational Expenses
Educational expenses including tuition, books, and supplies can also be deducted if they are related to your current line of work or if they are maintaining or improving the skills needed in your business. Check out IRS publication 970 for detailed requirements on deducting these expenses.
Self-employed individuals and freelancers can deduct business-related mileage. “Business-related mileage” includes things like driving to meet clients or vendors and making product deliveries. The IRS standard mileage rate for calendar year 2021 is 56 cents per mile. Note that you can either track mileage or deduct actual car expenses like depreciation, gas, parking, etc. Additional information can be found here.
There are a number of deductions available to freelancers and self-employed individuals, including, and in addition to, the 10 detailed above. These deductions help make starting and running you business and being your own boss even more appealing. If you need assistance or support with your freelancing business, visit SoleVenture, the complete back office for your company of one.