Knowing about these twenty-five self employment deductions will immensely help you save on taxes if you are carrying any trade or business, whether full-time or part-time or contractual or otherwise. The Internal Revenue Code taxes your income differently than a person who is drawing salary or wages for employment with any other person. So the deductible expenses and deductions allowed to a self-employed person are quite different than an employed person.
Where do you claim self employment deductions?
Schedule C of form 1040 pertains to people who are freelancers or gig economy workers or carrying on a business, as this annexure to Form 1040 is for reporting income or loss from a business. Part II of the Schedule 2 to Form 1040 for 2022 has nine major fields that incorporate the following 25 types of expenditure as deductions from gross business income. See the screenshot
Video on Self Employment Deductions IRS Allows
List of 25 Self Employment Deductions
1. Advertising Expenditure
if you have spent or paid for any kind of advertisement which is for your business purpose , you are allowed to deduct the expenditure. Any materials for marketing your business () and the cost of developing those (e.g. agency or designer costs).[Where to find on Schedule C: Line 8 ]
2. Commissions and Fees
If your sale is generated by any other person and you pay a percentage on that sale , such payments whether known as commission or brokerage or fee is your business expenditure. It is fully claimable [Where to find on Schedule C: Line 10 ]
3. Business Insurance Premium
You need insurance to protect your business from fire, theft, flood, malpractice, errors and omission, general liability, etc. Such expenditure is a deductible expense [Where to find on Schedule C: Line 15 ]
4. Vehicle Running Costs
Any expenditure on a car or another vehicle you use for carrying out business is fully allowble expenditure. So, account for expenses on. gas, insurance, registration, repairs and maintenance of cars and motors used for business purposes is deductible expenditure. [Where to find on Schedule C: Line 9 ]
5. Loss or Depletion
In certain types of businesses, like the distribution of oil, gas etc., some loss of inventories or stocks or depletion is inevitable part of the business. Such losses are allowable deductions, But keep in mind that IRS will scrutinize these deductions more than others, so deductions need to be reasonable and properly authenticated or vetted by an accountant for [Where to find on Schedule C: Line 12 ]
6. Depreciation on business assets
You should claim depreciation expense on business assets like computers, office equipment, tools, furniture, and cars. The depreciation claim is divided over years and computed as per the rates of depreceition specified by the IRS. However, for small business owners, there is a chance of opting full depreciation by claiming a section 179 deduction in the year of purchase of the asset itself. Read separate postings on how to claim 100% depreciation under section 179 of US code 26 . [Where to find on Schedule C: Line 13 ]
7. Employee Wages
Expenses on salaries, commissions, and bonuses to employees can be claimed as wage expenditures. [Where to find on Schedule C: Line 26 ]
8. Employee Benefit Programs
Apart from the usual salary or wages to employees, you may provide your employee’s health or life insurance, education assistance, etc. These can be claimed as deductible expenses under employee benefit programs. [Where to find on Schedule C: Line 14 ].
9. Home Office Deduction
As a small business owner, often your business run from your home itself. So home office expenses should be determined by apportioning expenditures on rent, utilities, repairs, insurance, and mortgage interest related to your home. Claiming home office expenses is easy, but there is a great chance of an IRS audit on this claim. So it is prudent that you create a dedicated area within your home for exclusive use for business purposes and only proportionate expenses pertaining to that area should be filled in IRS Form 8829. [Where to find on Schedule C: Line 30 ].
10. Health Insurance Deduction
A self-employed person can deduct personal health insurance premiums if the following criteria are met :
- Business is not at loss for the tax year. Only if there is profit that you can claim personal health insurance expense against that profit
- You were not eligible to enrol in an employer’s health plan or a plan for your spouse.
- You can only claim premiums paid for the months when you were not eligible for an employer’s health plan.
[Where to find: This is not on Schedule C but on Line 29 of Form 1040 ].
11. Interest (mortgage)
Any interest paid on a mortgage for a property that is used for business purpose is allowed expenditure. Make your claim on the basis of Form 1098 that you receive from the lender if you pay mortgage interest during the year. [Where to find on Schedule C: Line 16a].
12. Interest (other than home mortgage)
If you borrowed money for the purpose of business from any source like credit cards, business lines of credit, you can deduct the interest paid on the portion of the loan used for business purpose. [Where to find on Schedule C: Line 16b].
13. Labor on Contract
When you hire independent contractors for a job related to business say a web developer or temporary repair jobs for computers , such expenditure are fully allowable against business profit). [Where to find on Schedule C: Line 11].
14. Legal or Professional Services
Professional fees paid to attorneys, tax preparers, accountants, other professionals for any services used for your business is allowble expenditure.[Where to find on Schedule C: Line 17].
15. Client Entertainment
Entertaining clients may be a requirement for your business as part of marketing or sales effort. The expenditure on meals and entertainment of clients or on travelling out-of-town on a business trip are all allowed to be deducted. [Where to find on Schedule C: Line 24b].
16. Office Expenses
Various office maintenance related expenditure like cleaning services or other general maintenance are also allowed business deduction. [Where to find on Schedule C: Line 18].
17. Employees Pension Plans
Your share on your employees’ retirement plans like 401(k) is allowed business expense. Yes , contributions for any pension plan for yourself are deducctibel separately as deductions in Form 1040 Line 28 but not as business expenditures. [Where to find on Schedule C: Line 19].
18. Rental expense on vehicles, equipment
Your business may require to rent or lease machines, equipment, vehicles . When you pay for such rent or lease , it can be deducted from business profit . [Where to find on Schedule C: Line 20a].
19. Rent or Lease (other business property)
Rent or lease payments including any government taxes on office or land or any other item other than vehicles, can be deducted as deductible business expenses against the gross profit of the business. [Where to find on Schedule C: Line 20b].
20. Repairs and Maintenance
Repairs or maintenance of offices, fixing computers or replacing worn parts on equipment are a necessary parts of business. Expenditure on such repairs can be deducted . [Where to find on Schedule C: Line 21].
21. Office Supplies
Any office supplies like cleaning supplies if you clean office or business space, pens or printer ink, hot/cold bags used for office , office decorations are allowed business expenditure .[Where to find on Schedule C: Line 22].
22. Any Other Expenses
Law allows any other business expenses incurred exclusively for business to be deducted while computing profit of the business. Thus, if business demands short term course for your staff or some skill development courses,banking fees, association dues, business gifts, industry magazines, all such expenses are deductible expense. .[Where to find on Schedule C: Line 27a].
23. Self-Employed Contributions Act (SECA) Tax Deduction
A self-employed pay his or her own share of Social Security and Medicare contributions, collectively known as SECA. You can deduct SECA deduction on Line 27 of Form 1040. You will compute this amount as part of Schedule SE.[Where to find on Form 1040: Line 27].
24. Taxes/Licenses
You can claim various types of business taxes like your share of the Federal Insurance Contributions Act (FICA tax) for your employees, state or local licenses fee, or licenses required for your business type . Where to find on Schedule C: Line 23].
25. Travel & Tour Expense
Expenditures on business trips that consist of expense on lodging, airfare or rental cars, and local transportation are allowable business deduction. IRS rule says that the travel must be overnight, away from your residence and primarily for business. [Where to find on Schedule C: Line 24a].
