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 you can deduct most reasonable and necessary business expenses on your tax return.
We’ve compiled the most common 1099 and freelance tax breaks 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 19 best self-employed tax deductions
- Business insurance
- Business startup costs
- Car and truck expenses
- Commissions and fees
- Contract labor
- Employee benefits
- Home office expenses
- Interest payments
- Legal and professional services
- Office expenses
- Rent or lease payments
- Repairs and maintenance
- Retirement plan costs
- Taxes and licenses
- Travel, meals, and entertainment
It’s a good idea to talk to 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 to claim 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, general liability, and workers compensation insurance.
Business startup costs
You can deduct up to $5,000 of all the costs related to starting a new business if your business was started this tax year. This can include things like market research, advertising for your business launch, and even the cost of hiring a business coach or consultant.
Any startup costs over that $5,000 limit have to be capitalized and amortized over 15 years.
Learn more: The Startup Costs Deduction
Car and truck expenses
For some 1099 contractors, vehicle expenses can be a valuable 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:
Track your actual car expenses, including gas, maintenance, insurance and depreciation and deduct a percentage based on the number of business miles you drive.
Deduct a standard rate on each “business” mile driven for the year. For 2020, the standard mileage rate is 57.5 center per mile driven for business use, down from 58 cents per mile in 2019.
No matter which method you choose, you’ll need to keep track of how many business and personal miles you drive. You can do this using a log kept in your car’s glove compartment, or use an app like MileIQ or TripLog.
Further reading: The Five Best Mileage Tracker Apps in 2020
If you used five or more vehicles in your business, you must use the actual expense method.
If you want to keep things simple, stick with the standard mileage rate since you aren’t required to keep receipts every time you stop for gas or get an oil change. If you prefer, you can try calculating your deduction both ways and use the method that gives you the higher deduction.
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 or eBay.
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 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 over the course of the year, you will also have to file Form 1099-MISC.
If you own any business assets that are expected to last more than one year, rather than deducting the cost of that asset in the year you buy it, you depreciate the cost over its useful life. That depreciation is fully deductible. Some common examples of depreciable assets include furniture, cars, and computers. Improvements that you make 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?
Many independent contractors and freelancers don’t have employees. But if you do, and you provide health insurance and other benefits for those employees, the cost of providing those benefits is fully deductible.
Don’t deduct the cost of your own health insurance as a business expense. You can claim those costs on Form 1040 as an above-the-line deduction.
Home office expenses
If part of your home is used only for business, you can claim the home office deduction in one of two ways:
Standard method. Use Form 8829 to itemize the various expenses involved in using and maintaining your home office. This includes rent or mortgage interest payments, utilities, homeowners insurance premiums, and property taxes.
Simplified method. Determine the square footage of your home office (up to 300 square feet) and multiply by $5.
The second method is much simpler and makes sense for most contractors, but you’re allowed to calculate the home office deduction both ways and see which one results in a lower tax bill.
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 equipment loans.
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 is 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
Retirement plan costs
If you have employees and offer an employer-sponsored retirement plan, such as a SIMPLE-IRA or 401(k), you can deduct the cost of establishing and maintaining the plan, as well as any matching contributions.
Business owners can’t deduct contributions to their own SEP or IRA retirement accounts. These get deducted on Form 1040.
For consumable materials and supplies, such as those that go into producing inventory, you can only deduct the amount you actually used in that tax year, not the total amount you purchased. On the other hand, you can fully deduct “incidental” office supplies (such as pens, paper clips and post-its), 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 business 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, such as the employer portion of Social Security and Medicare tax
These taxes are not deductible:
- Federal income taxes, including your self-employment tax
- Taxes on personal use property (including your home)
- Sales taxes to be collected from buyers of your goods and services for remittance to state or local governments
Travel and meals
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 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 (for businesses that keep their books on the accrual basis)
- Bank fees, including maintenance and overdraft fees
- Dues and subscriptions
- Education and training expenses
- Business gifts (up to $25 per person)
For more information, refer to IRS Pub. 535.