Knowing about these twenty-five self employment deductions will immensely help you save on taxes if you carry 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 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 freelancers, 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
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List of 25 Self Employment Deductions
1. Advertising Expenditure
if you have spent or paid for any advertisement 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 any other person generates your sale and you pay a percentage, 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 business is fully allowable. So, accounting for expenses like gas, insurance, registration, repairs, and maintenance of cars and motors used for business purposes is necessary for claiming vehicle running costs as deductible expenditures. [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 an inevitable part of the business. Such losses are allowable deductions, But keep in mind that an IRS audit may trigger for scrutinizing 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 the years and computed as per the rates of depreciation specified by the IRS. However, small business owners can opt for full depreciation by claiming a section 179 deduction in the year of asset purchase. See section 179 deduction calculator. [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, your business often runs from your home. 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. Self employment insurance deduction
A self-employed person can deduct personal health insurance premiums if the following criteria are met :
- Business is not at a loss for the tax year. Only if there is a profit you can claim personal health insurance expenses against that profit
- You were not eligible to enroll 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.
Thus, the answer to the question, “If self employed deduct medical expenses?” , is in the affirmative, subject to the abovementioned conditions.
Self employment health insurance deduction limitation
There are certain self employment health insurance deduction limitations as detailed below.
- A self-employed taxpayer can claim a deduction of premiums for medical, dental, and qualifying long-term care insurance coverage.
- As stated in 1, the expense can be claimed for self, spouse, and dependents.
- You could not claim health insurance expenses if you or your spouse were eligible for an employer-subsidized health plan for any month.
- The health insurance premium deduction can’t exceed the earned income you collect from your business.
- Self-employed persons can also claim expenses incurred to pay employees’ health insurance premiums.
[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 purposes 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 business from any source like credit cards, or business lines of credit, you could deduct the interest paid on the loan portion used for business purposes. [Where to find on Schedule C: Line 16b].
13. Labor on Contract
When you hire independent contractors for business-related jobs, say a web developer or temporary repair jobs for computers, such expenditures 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, and other professionals for any services used for your business are allowable 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 traveling out-of-town on a business trip can all be deducted. [Where to find on Schedule C: Line 24b].
16. Office Expenses
Various office maintenance-related expenditures like cleaning or general maintenance are also allowed business deductions. [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 deductible separately as deductions in Form 1040 Line 28 but not as business expenditures. [Where to find on Schedule C: Line 19].
18. Rental expenses on vehicles, equipment
Your business may require to rent or lease machines, equipment, and vehicles. When you pay for such rent or lease, it can be deducted from your 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, land, or any other item other than vehicles, can be deducted as deductible business expenses against the business’s gross profit. [Where to find on Schedule C: Line 20b].
20. Repairs and Maintenance
Repairs or maintenance of offices, fixing computers, or replacing worn equipment parts are necessary for the 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, and office decorations are allowed for business expenditure.[Where to find on Schedule C: Line 22].
22. Any Other Expenses
23. Self-Employed Contributions Act (SECA) Tax Deduction
The law allows any other expenses incurred exclusively for business to be deducted while computing the business’s profit. Thus, if business demands short-term courses for your staff or some skill development courses, banking fees, association dues, business gifts, and industry magazines, all such expenses are deductible. .[Where to find on Schedule C: Line 27a].
A self-employed pay his or her own share of Social Security and Medicare contributions, collectively known as SECA. You can deduct self employment 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].
You can claim various 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 Expenses
Expenditures on business trips that consist of expenses on lodging, airfare or rental cars, and local transportation are allowable business deductions. 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].IRS tax help on Schedule C
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