Tax deductions are gold, especially if you’re self-employed, paying out of pocket for all your expenses.
How do tax deductions work when you’re self-employed?
When you work for yourself, the IRS considers you a business. That means most business expenses that are necessary and reasonable can be deducted from your taxes.
We’ve compiled the most common 1099 and freelance tax categories below. Read it through, and check it twice to make sure you don’t miss out on any tax savings.
You can use the links to jump directly to each write-off to learn if it’s relevant to you.
The 16 best self-employed tax deductions
- Business insurance
- Car and truck expenses
- Commissions and fees
- Contract labor
- Home office expenses
- Interest payments
- Legal and professional services
- Office expenses
- Rent or lease payments
- Repairs and maintenance
- Taxes and licenses
- Travel, meals, and entertainment
It’s a good idea to ask your accountant before you claim these tax deductions. They’ll be able to catch any missing ones, and tell you which ones don’t apply to you.
When the time comes to claim them, the tax form for self-employed expenses is Form 1040, Schedule C.
All advertising costs are fully tax deductible. Some examples include the cost of printing flyers and business cards, running Google Adwords and Facebook ads, and trade show promotions. You can also deduct any “middleman” costs, such as fees paid to PR agencies or freelance copywriters.
You can deduct premiums for various types of business insurance, including theft, fire, and general liability insurance.
Car and truck expenses
For some 1099s, vehicle expenses can be the single most important source of deductions. If your car or truck is in your business name and used 100% for business use, then it’s fully deductible.
If the vehicle is in your personal name and used partly for personal, partly for business use, there are two ways to calculate the deduction:
- Deduct the actual expenses of operating your vehicle, including gas, maintenance, insurance and depreciation.
- Deduct a standard rate on each “business” mile driven for the year. If you use this method, you’ll need to keep track of how many “personal” miles you drove too.
If you used five or more vehicles in your business, you must use the first method.
For most other businesses, we recommend sticking with the second method. Not only is it simpler, it will also usually give you a higher deduction. For the 2017 tax year, the rate is 53.5 cents per mile.
Remember to add all business parking fees and tolls paid during the year, as these are deductible too.
Commissions and fees
Deduct all commissions paid to non-employees for sales and marketing purposes. This can include payments to individual sales reps, or marketing channels and platforms like Amazon, eBay or Uber.
If the size of the commission exceeds $600, you will have to file Form 1099-MISC.
You should also capitalize any commissions paid for the sale of property, unless you are a real estate agent or broker yourself.
This includes all fees paid to non-professional independent contractors. If you hired a graphic designer to design a logo for you, or contracted with a developer to create your website, their fees are fully tax deductible.
If you paid a contractor $600 or more, you will also have to file Form 1099-MISC.
If you own any business assets that get worn down over the course of the year, that depreciation is fully deductible. Some common examples include furniture, cars, and computers. Improvements that you have made to leased business property are also depreciable. However, do note that inventories, stock-in-trade, and land cannot be depreciated.
Section 179 lets you deduct the full purchase price of certain qualifying business assets in the year you bought them. You can read more on Section 179 here.
In most cases, you will also have to declare depreciation of assets on Form 4562.
Further reading: What Is Depreciation? and How Do You Calculate It?
Home office expenses
If part of your home is used only for business, you can claim a tax deduction in one of two ways:
- Use Form 8829 to itemize the various expenses involved in using and maintaining your home office
- Determine the square footage of your home office and multiply by $5
The second method is much simpler and makes sense for most contractors.
Deductible interest payments fall under two main categories.
The first category is mortgage interest. If you have a mortgage on a property that is primarily used for your business (that is, not your primary home), you can write off the interest on that mortgage. You’ll have to get a Form 1098 from the lender to report the interest paid in that year.
The second category includes all other types of interest. Examples are business credit cards, lines of credit, or interest on auto loans. For car loans, you should only deduct the portion of interest that relates to the business usage of your car. For example, if you drove 40,000 miles, and 30,000 of those were for business, then you should deduct 75% of the interest.
Legal and professional services
You can deduct any fees paid to licensed professionals such as attorneys, accountants and online bookkeeping services like Bench. This includes fees paid for tax advice, which means preparation of Schedule C is a deductible expense (how meta).
If the professional service involved both personal and business matters, only the part of the expense related to your business will be deductible. For example, if you’re preparing a will that includes the assignment of equity in your business, you can deduct a portion of the fees paid.
If you use a dedicated office for your business, expenses related to that office are deductible. The most common expenses are maintenance, cleaning and repairs. But don’t deduct home office expenses here—they have their own separate category (covered below).
Rent or lease payments
If you rent office space, cars, or any physical equipment for your business, all those expenses are deductible.
If you leased your car for a term of 30 days or more, though, you may have to reduce the deduction by an “inclusion amount.” For more information, refer to the “Leasing a Car” section in chapter 4 of Pub. 463.
Repairs and maintenance
This category includes incidental repairs and maintenance made to machines and other property. For example, you can deduct costs for re-carpeting your office or fixing your broken photocopier.
There are a number of important exceptions you should not include in this category:
- The value of your own labor
- Substantial improvements that add to the property’s value or prolong its life—declare these under “Depreciation and Section 179”
- Car maintenance and repairs – declare these under “Car and Truck Expenses”
- Amounts spent to restore or replace property – these should be capitalized instead
For consumable materials and supplies, you can only deduct the amount you actually used in that tax year, not the total amount you purchased. On the other hand, “incidental” supplies for general office use (such as pens, paper clips and post-its) can be fully deducted, regardless of how much you used.
This category can also include materials used to improve delivery of services, such as professional instruments, books and equipment, but only if they will be useful for a single year. If they will remain useful beyond one year, then you should report them under “Depreciation and Section 179”.
Taxes and licenses
You can deduct any business licenses, certifications and regulatory fees related directly to your business. This can include incorporation fees and small business licenses for your state.
Taxes are slightly more complicated. These taxes are deductible:
- State and local sales taxes (for goods and services to be resold)
- Property taxes on business assets (including real estate)
- Federal highway use tax
- Payroll taxes (not many contractors have employees, but if you do, payroll taxes are fully deductible)
These taxes are not deductible:
- Federal income taxes, including your self-employment tax – declare this on Form 1040 instead
- Taxes on personal use property (including your home)
- State and local property sales taxes
- Sales taxes to be collected from buyers of your goods and services for remittance to state or local governments
Tax filing done for you. From start-to-finish.
BenchTax connects you to a tax expert, trained by Bench. It’s tax filing, every deduction you deserve, and your smoothest tax season yet—done for you.
Travel, meals, and entertainment
Travel, lodging, and local transportation costs are deductible if the trip is:
- Primarily for business
- Away from your tax home
- Shorter than one year
Travel expenses for your spouse and children are not deductible unless they are traveling with you for a legitimate business purpose.
For self-employed meal deductions, you can deduct 50% of all meals with clients that are specifically about business. For business meals while traveling, you can either choose to deduct the actual cost of your meals (again, 50% deduction), or use the standard meal allowance specified by the General Services Administration.
Further reading: How to Deduct Meals and Entertainment in 2019
Office utilities like power, water and internet are tax deductible. However, don’t include home office utilities here—they should be recorded under the “Home Office” category instead.
If you use your home phone or cell phone for both personal and business use, you can write off the portion of your phone bill used for business. A simple way to do this is to track your phone usage for a month, then multiply that value by 12.
Any other ordinary and necessary business expenses not included elsewhere can be declared in this category.
Some common deductions include:
- Costs for acquiring or defending trademarks and trade names
- Bad debt
- Business start-up costs (up to $5,000 if your business was started in this tax year)
For more information, refer to IRS Pub. 535.