If you’re a self-employed business owner, navigating the world of tax deductions can sometimes feel like trying to find your way through a maze. It's easy to feel lost among the endless rules and regulations, especially when you're busy managing everything else in your business.
Let's face it: taxes might not be the most exciting part of your day, but it's definitely one of the most important. From ensuring your employees are paid accurately to making strategic decisions about your own finances, there’s a lot to keep track of.
Roll by ADP™ can take at least one of those things off your plate. Our innovative payroll app for small businesses is designed to make your life easier, allowing you to run payroll in minutes. With simple chat-based commands, you can easily:
- Pay W-2 and 1099 employees in all 50 states
- Manage raises, bonuses, and wage garnishments
- Direct deposit same-day and next-day funds
Roll also calculates, deducts, and pays your taxes for you while streamlining payroll reporting and providing automated tax statements. Thanks to our advanced platform, managing your payroll has never been easier.
But when it comes to your own finances, how can you make smart decisions? In this blog, we'll explore tax deductions for self-employed individuals so you can make the most of your finances.
What are Tax Deductions for Self-Employed Workers?
When you’re employed as a W-2 worker, taxes are relatively simple. Your employer withholds income tax from your regular paycheck and covers Medicare and Social Security taxes.
Things get a little more complicated when you branch out on your own. You’ll have to pay both your income tax and a self-employment tax, which covers your Medicare and Social Security.
When you’re self-employed, you can lower your tax burden by deducting expenses related to your business. These deductions lower your taxable income, which lowers the amount you owe the IRS. You might be surprised by how much you can save!
How Do Tax Write Offs Work for the Self-Employed?
To take advantage of tax write-offs for self-employed individuals, be sure to keep track of your business expenses throughout the year. Save all your receipts — trust us, they’ll come in handy later!
There’s a lot to know about paying yourself as a business owner, but staying on top of your own taxes is a crucial part of the process. When it’s time to file, you’ll calculate your gross income for the year. This is the total income you earned from all sources. Then, subtract the tax deductions you qualify for to get your adjusted gross income (AGI.) This is the amount that you’ll be taxed on for the year.
Sounds complicated, right? Roll’s powerful platform makes payroll and taxes a breeze for both you and your employees.
8 Tax Deductions for Self-Employed Individuals
They say you’ve got to spend money to make money. While that tends to be true, we’ve got some good news: the money you spend on your business may be tax-deductible!
Here are some of the top tax deductions for the self-employed.
- Home Office
Many self-employed entrepreneurs work from home. If that’s the case for you, you can deduct a portion of your home-related expenses. This includes your rent or mortgage, property taxes, utilities, and home insurance.
To calculate this tax deduction, start by determining the percentage of your home you use for work. This is the percentage of your home expenses that you can deduct. For example, if you use 10% of your home for work, you can deduct 10% of all your home expenses from your income. The IRS also offers a simplified home office deduction of $5 per square foot used. For example, if your home office is 100 square feet, the corresponding deduction would be $500.
Some self-employed people opt to work from a coworking space, rather than a home office. If this is the case for you, you can deduct the cost of your membership. However, you cannot deduct both your coworking space membership and your home office.
- Mileage or Car Expenses
If you regularly hit the road for business purposes, you can deduct mileage and some other car expenses from your taxes. This deduction does not apply to a regular daily commute, but it does apply to trips for things like business meetings or deliveries.
The IRS offers two ways to calculate this deduction. The easiest way is the standard mileage rate, which is $0.655 for self-employed taxes in 2023. With this option, you’ll only need to track the number of miles you drive for work. You’ll multiply the number of miles you drove by $0.655 to get your total deduction amount.
Alternatively, you can calculate this deduction by taking a percentage of your car expenses, such as gas, car insurance, and maintenance costs. For example, if 10% of your total car use was for business, you could deduct 10% of your total car expenses. This approach could help you save more money if you’re driving frequently, but you will also need to save all relevant receipts and document your trips.
- Retirement Account Contributions
Did you know saving for retirement can also help you save on taxes? It's a dual benefit that many self-employed individuals overlook. When you contribute to a retirement plan like an IRA (Individual Retirement Account) or a solo 401(k), these contributions can be deducted from your taxable income for the year. This deduction effectively lowers your tax bill, making it a financially savvy move for your present and future.
The amount you can deduct isn't a one-size-fits-all figure — it varies based on several factors:
For example, if you’re single and have an AGI of less than $73,000, you can deduct your IRA contributions in full. Note that this limit changes annually, so it’s important to stay updated. This also changes if you're married and filing jointly or have a different income bracket.
- Work-Related Equipment
In most cases, purchases of work-related equipment are fully tax-deductible. This means when you buy things essential for your business – whether it’s office supplies, computer equipment, or specialized tools – these expenses are not just necessary for your work, but they can also be fully deductible from your taxable income.
The scope of what you can deduct is quite broad. Take, for instance, the cost of advertising. Whether it's an ad campaign, a billboard, or business cards, if it's a marketing expense, it might be deductible. Traditional office expenses like printers, desks, and even software subscriptions are included. However, it's important to note that these items must be solely for business use. Keeping detailed records of these purchases and their business use is crucial for both accurate tax filing and in case of any audits.
- Educational Expenses
Taking continuing education courses helps you learn new skills and stay competitive in your industry, but there's an added financial benefit to this commitment to learning – it can lead to tax deductions. For self-employed individuals, the costs associated with education directly related to your current line of work are often deductible. This includes not just the tuition fees, but also related expenses like textbooks, necessary supplies, and even some travel expenses if the education requires it.
For example, if you own a graphic design company and you’re taking a course on the latest design software, the costs of this course – from enrollment fees to the software purchase for class – could be deductible. Keep in mind that these deductions must be directly linked to your current business or trade. Courses taken for a new career or personal interest, even if tangentially related to your work, typically don't qualify for these deductions.
- Internet and Phone Bills
Any modern entrepreneur knows all too well the importance of staying connected. Luckily, internet and phone bills can be deducted from your taxes. However, they must be used for business purposes to qualify. If you find yourself frequently on calls with clients or using the internet for work-related research, a portion of these costs can be deducted. This deduction is proportional to how much these services are used for work purposes, so make sure that you’re tracking business vs personal use.
In most cases where you have a dedicated phone line or internet connection exclusively for work, you will likely be able to deduct the entire cost of these services. We’ve said it before, but we’ll say it again: documentation is key. Maintaining clear records and bills will make it easier to confirm these deductions and keep track of your expenses.
- Health Insurance Premiums
As a self-employed worker, you don't have the luxury of employer-provided plans. However, there's a silver lining: self-employed individuals can deduct part or all their health insurance premiums. This deduction isn’t just limited to your own premiums but may also extend to cover the costs for your spouse and dependents.
However, there's a caveat to this rule. If you or your spouse has the option of enrolling in an employer-sponsored health plan, then this deduction may not be available to you. Evaluate your eligibility carefully to ensure you're making the most of this tax benefit.
- Meals and Travel
- IRAs and solo 401(k)s have different contribution limits and rules.
- Your adjusted gross income (AGI) plays a critical role too. The lower your AGI, the higher the likelihood you can deduct your full contribution.
- Age and filing status are also crucial. If you’re over 50, you're allowed higher contribution limits, known as “catch-up contributions,” designed to help you save more as you near retirement age.
If you need to travel for a meeting or conference, the cost of meals, lodging, and transportation can quickly add up. However, many of these costs are tax deductible.
For example, you can deduct 50% of work-related meal costs (as long as you’re not balling out on extravagant meals). Deductions must be for meals served in a restaurant, rather than pre-packaged foods from grocery or convenience stores. You can also deduct 50% of other necessary travel costs, such as lodging, airfare, and taxis.
Self-Employment Tax FAQs
Have questions about self-employment taxes? We’ve got you covered.
Do I have to pay quarterly taxes my first year of self-employment?
Yes, you will need to start paying quarterly taxes as soon as you start making money working for yourself. Quarterly estimated taxes are due on January 15th, April 15th, June 15th, and September 15th of each year.
How much is self-employment tax?
The self-employment tax rate is 15.3%. This includes 12.4% for Social Security and 2.9% for Medicare. You will need to pay self-employment taxes in addition to income taxes.
How do I file taxes if I get paid cash?
If you’re filing tax self-employed with a 1099 for cash payments — don’t panic. If you get paid in cash, you can still file your taxes. You will need to keep track of how much you make on your own. When it comes time to file taxes, you can report cash income on your Schedule C.
Do 1099 employees get tax refunds?
You might be wondering how to get a tax refund if self-employed. Unfortunately, if you’re a contract employee receiving a 1099, you typically won’t get a tax return. Instead, you’ll need to pay self-employment taxes. The only exception is if you pay more in estimated quarterly taxes than you need to.
Payroll Made Easy with Roll
Roll’s small business payroll app offers automated features that make it easy to check payroll and taxes off your list. Whether you’re paying a team of contractors or you’re a solopreneur navigating your own payroll taxes, Roll makes it easier than ever to manage your finances.
From automated tax statements to easy payroll reporting, Roll handles all your payroll and tax needs. Ready to streamline your day-to-day? Sign up for Roll!
By Roll Editorial Team on February 19, 2024
4 min read