Whether you’re an influencer, a freelancer, contractor, graphic designer or other self-employed professional, there is a wide variety of tax deductions curated specially for you. From your home, car insurance and even retirement savings, these deductions could get you the tax break you need.
Read below to find the top five self-employment tax deductions.
1. Your Home Rent or Mortgage
Self-employment tax deductions are incredibly beneficial, especially if you work from your own home, or use part of it for your business.
What You Can Deduct: You will be able to deduct a portion of your mortgage, rent, property taxes, cost of utilities, repairs and maintenances, similar expenses and more. However, you should note that this deduction is only available to those who are self-employed. Regular employees will not be eligible to receive the home office deduction.
How It Works: Calculate the percentage of your home’s square footage that is used “exclusively and regularly” for business-related manners. The result? Your deductible. For example, if your home office takes up about 10% of your entire home’s square footage, 10% of those housing expenses for the year are deductible.
What Else You Can Do: You can always choose the simplified option. This lets you deduct $5.00 per square foot of any part of your home that is used for business-related manners, up to 300 square feet – which is about a 17-by-17-foot space. Remember that you also won’t have to keep as many records, but you might end up with a lower deduction. So, make sure to consider calculating it both ways before filing your taxes.
2. Your Health Insurance
You might also qualify for a self-employment tax deduction on the premiums, if you purchased policies for yourself or for your family.
What You Can Deduct: You can deduct medical and dental insurance premiums for you, your spouse, your dependents and your children, who are younger than the age of 27 at the end of the tax year. Additionally, long-term care insurance premiums also count, however you should note that there are specific rules to follow.
How It Works: This deduction is an adjustment to income rather than an itemized deduction. What does that mean? You don’t have to itemize to claim it. However, you may be disappointed, because even though you’re eligible to enroll in your spouse’s employer’s plan, you can’t take the deduction.
What Else You Can Do: You can also figure out if you can deduct the premiums as a medical expense. This usually works only if you pay your premiums out of your own pocket, and if your deduction is limited to expenses that exceed 7.5% of your adjusted gross income.
3. Your Education
In order to run a successful and growing business, you need to stay smart. There are self-employment tax deductions just for this very reason.
What You Can Deduct: You will be able to deduct the costs of “qualifying work-related education.” This includes factors such as tuition, books, supplies, lab fees, transportation to and from classes as well as other related expenses.
How It Works: This part’s easy. Just note that the expenses are deductible only if the education you’re receiving “maintains or improves skills needed in your present work.” Basically, if you’re enrolled in classes to change careers or you’re working toward the minimum educational requirements for a trade or business, this deduction most likely won’t work for you. However, you can qualify even if the education leads to a degree.
What Else You Can Do: Other options include looking at the American Opportunity Tax Credit or the Lifetime Learning Credit.
4. Your Car
Over the years, your car can experience some wear and tear – especially if you’re consistently driving it to meet vendors, make pickups or speak with clients. With these tax deductions though, you will be able to revive some of the damage.
What You Can Deduct: You will be able to deduct a little more than $1.00 for every two miles you put on your car. Remember, this is only for business purposes.
How It Works: When the time to file taxes finally arrives, all you have to do is tally the number of miles you drove in the car for business. Then, you can multiply that by the IRS’ standard mileage rate, which is 58 cents per mile in 2019 and 57.7 cents per mile in 2020. From there, deduct the total. If you’re audited, it is recommended to keep a mileage log.
What Else You Can Do: You can also deduct your “actual car expenses” instead, which include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires.
5. Your Retirement Savings
When it comes to retirement-related self-employment tax deductions, you have access to many options – such as the popular solo 401(k).
What You Can Deduct: You can deduct any and all contributions to a solo or one-participant 401(k) plan of up to $56,000 in 2019 ($62,000 if you’re 50 or older) or 100% of your earned income – whichever is less. In 2020, the limit is up to $57,000 ($64,500 if you’re 50 or older) or 100% of your earned income – whichever is less.
How It Works: The process is similar to a standard, employer-sponsored 401(k). For traditional solo 401(k)s, your contributions are pretax, and distributions after age 59½ are taxed. Note that you can also contribute as both an employee (of yourself) and as the employer, with salary deferrals of up to $19,000 in 2019, plus a $6,000 catch-up contribution if you’re 50 or older. These limits have risen up to $19,500 and $6,500 in 2020. Additionally, you can add approximately 25% of net self-employment income, not exceeding that $56,000 limit in 2019 or $57,000 in 2020.
What Else You Can Do: IRAs are another option to explore for retirement savings.