7 Great Self-Employment Tax Deductions

Self-Employment Tax Deductions To Take in 2023

Self-Employment can help you to find a better work-life balance. It give can give you the freedom to create your own schedule while allowing you to work in environments that help you perform at your best.

If you are thinking of launching a business or going freelance – or already are – there are a number of tax benefits you may be able to take advantage of.

Self-employed workers have more complicated taxes and don’t get the benefit of an employer helping out with Social Security and Medicare – but they do get deductions and tax write-offs to help lower their tax bill come tax season

7 Great Self-Employment Tax Deductions

Let’s take a closer look at some of the best self-employment deductions that could save you money on your taxes year.

Home Office Deduction

If you have a home office or a dedicated space where you run your business, you can deduct a portion of your housing cost from your taxes. To qualify, your home office must meet two criteria:

You must use your home office regularly and exclusively for your business. It can’t be a multi-purpose room like your kitchen or a family room.
It must be your principal place of business. You have to use this space to conduct business including meetings and doing tasks beyond checking your inbox.

A home office deduction is not just limited to your mortgage or rent. You can also deduct other related expenses like utilities, maintenance, and in some cases, property taxes. Allowable deductions are itemized on Schedule C and have to be backed up by meticulous recordkeeping. While the simple deduction is easier, a calculated deduction could lead to much larger savings on your total tax bill.

Credit Card and Loan Interest

The interest generated by credit cards and loans used to support your business can be deducted from your taxes. According to the IRS, purchases you make that contribute to your business’s operations may be eligible for a deduction. This can include things like internet, wages, rent, and loan interest.

When your business is just getting started you might rely heavily on high-interest financing from credit cards. Taking an interest deduction can help reduce your overall tax bill.

If you’re self-employed and don’t have a business credit card you are still eligible for this deduction. A personal card used exclusively for business expenses can qualify for the interest deduction too.

Training and Education

Education is not only important but oftentimes essential for you to grow your business. You need to constantly learn new skills to be able to provide quality services to your clients and customers.

Educational expenses incurred to help you obtain new skills related to your line of work may be eligible for a deduction. This can include expenses like tuition or course fees, books, and related supplies. If you commute to and from a physical classroom, your mileage may also be deductible too. This brings us to our next deduction….

Business Mileage

Depending on your line of work, you may be required to use your personal vehicle for business-related activities. If you drive to client sites for meetings, make deliveries, or travel locally for your business, you can deduct the mileage from your taxes.

To qualify for the business mileage deduction, you must meet the following requirements:

You own or lease your vehicle
You operate less than five vehicles at a time
You are not claiming depreciation on your vehicles

For 2023, the standard mileage rate is 65.5 cents per mile, up from 62.5 cents per mile in the second half of 2022. To maximize your advantages, it’s important that you maintain good records of how you use your car for business-related activities. Keep a log of your business miles to keep them separate from personal trips.

Health Insurance Premiums

One challenge of self-employment is not qualifying for an employer’s health care plan. You’ll have to pay for your own insurance either directly with a company or through your state’s healthcare marketplace.

As a self-employed person, your health insurance premium may be eligible for a deduction. This can include the premium you pay for yourself, your spouse, and any dependents or children under age 27 who are on your health plan, even if you don’t claim them on your tax return.

Retirement Savings

Self-employed individuals can make retirement contributions to a qualified tax-deferred plan like a 401(k) or SEP IRA. This allows individuals to benefit from investing pre-tax dollars just like regular W-2 employees.

In 2023 the IRS allows individuals to contribute up to $22,500 in a 401(k). Self-employed individuals can contribute an additional 25% of their net earnings for a total contribution of $66,000. Individuals contributing to a SIMPLE IRA can save up to $15,500 in 2023 with an additional 2% fixed contribution or a 3% match.

A tax-deferred contribution is, well, tax-deferred, and therefore not deductible on your taxes. However, it can reduce your overall adjusted gross income and thus the tax bracket you fall in. Depending on your earnings, moving into a lower tax bracket can translate into significant savings.

Start-Up Costs

When you start your own business you can include start-up costs as a deduction. This can include the cost of acquiring a business or the fees you have to pay to register a corporation or partnership.

The IRS allows you to deduct up to $5,000 in business start-up costs and up to $5,000 in organizational costs.

Being self-employed is a great way to find work-life balance but it does come with some trade-offs. For one, self-employed individuals don’t get employee-covered health insurance premiums, taxes for Medicare and Social Security, and matching retirement contributions.

The good news is that there are a number of deductions that self-employed individuals can take to reduce their taxable income. Individuals looking to benefit from these deductions should always keep good records that demonstrate work-related expenses that are separate from personal expenses.

These deductions also allow you to invest in yourself, which may be the ultimate benefit of self-employment.