46 Self-Employment Tax Deductions You Didn’t Know You Could Take
Don’t just give away money to the IRS.
If you’re hustling to make a living in the gig economy and you’re complaining about the amount of taxes you have to pay, it’s important for you to realize that you’re a business now. The government realizes that you’re going to have to make payments that others may not have to pay to further your business. For example, gas payments must be driving you crazy. But you can subtract that from your gross income. You can even subtract the depreciating value of your car due to the extra mileage.
Because when you work for companies like Uber, Lyft, GrubHub, or Doordash, you are not an employee; you’re an “on-demand” worker or an “independent contractor.” The same goes for anyone working freelance, consulting, and other independent trades. Legally, you’re a sole proprietor, meaning you are in business for yourself and can deduct expenses from your gross income to get your total taxable income. This information is filed on Schedule C, Profit or Loss from Business, which attaches to your 1040 income tax return.
Remember that your self employment work has to be conducted with a “reasonable degree of regularity” to be considered a business rather than a hobby. If your work is considered a hobby, you will not be able to take full advantage of the deductions listed below. If you have doubts about whether your work is actually a business, talk to an experienced accountant. As a general rule, if you don’t show profit for at least three out of five consecutive years, the IRS can decide that your work is a hobby if they are not otherwise convinced you are operating a legitimate business. The IRS is doing a great job of catching up with the gig economy and, as recently as 2019, has created a gig economy knowledge center.
With that in mind, let’s explore the different deductions a self-employed worker is entitled to. Keep in mind that the information should be verified by a tax professional.
You’re actually allowed to deduct accountant fees from your income. This includes but is not limited to accounting, bookkeeping, tax return preparation, and tax advice. You can even deduct the subscription cost of accounting and tax software used to determine your tax liability.
When you set up a home office, there are various items that can be deducted. You can add up the total expenses and deduct them from your gross income. You don’t have to have a home-based business to set up a home office deduction. The space can be a traditional office, workshop, studio, warehouse, store, or showroom. “Home” is not limited to a house but also includes apartments, lofts, trailers, mobile homes, and detached structures that are part of your residence like garages, sheds, or other buildings.
The tax deductions relate to expenses associated with the space, like rent or depreciation, utilities, insurance, property taxes, maintenance, home repairs, remodeling, air conditioning, alarm systems, answering machines, telephone answering service fees, internet services, and much more.
Before you take a home office deduction, speak to a tax professional to see whether your office space qualifies. Generally, the space needs to be your “principal place of business” and it needs to be used “regularly and exclusively”(with few exceptions). Like many rules, the definitions for some of the terms create complexities that are best handled by a tax professional. See IRS Publication 587, Business Use of Your Home.
Fun note: A percentage of cell phone cost expense related to business can be deducted. Other deductible offense expenses include greeting cards and holiday cards
Additionally, you can deduct business assets like tools, furniture, and vehicles. It’s important to know that there are two modes of deduction when it comes to assets.
One is the Safe Harbor rule for anything $2,500 or less. The IRS doesn’t care if you fully deduct the cost of the asset.
But for anything over $2,500, Section 179 applies and things get a bit more complex. For example, if you want to deduct expenses from a vehicle, you are subject to a maximum amount you can deduct. The deduction itself cannot exceed your gross income. Importantly, if you converted the car previously used for leisure into a car for business, you cannot deduct the price of the car under Section 179. You can only calculate depreciation. More on depreciation on the section for vehicles. Talk to your accountant to learn how much you can deduct from your expensive business assets. See IRS Publication 535 to learn about general business expenses.
If you work as a freelancer and you advertise your services on Google or Facebook ads, you can deduct the cost of advertising your business from your income. Advertising includes promotional devices like giveaways. For example, you might give away pens with the name of your business on them and then be able to deduct the cost of those pens.
Many YouTubers hold contests and the costs of operating these contests can be deductible. Also, when a YouTuber gives away money to random strangers, they may take a deduction for promotion since the act of giving increases goodwill(you can’t deduct under charity if you’re not a corporation). Prizes are included as long as there is an incentive to generate sales. Unfortunately, the recipient of a prize has to pay taxes on the value of the prize if that prize’s value is over $600. So, if you win an iPhone from an influencer, know that you owe taxes on that phone and that they likely received a nice tax deduction.
Fun note: If you want to get into the YouTube game or if you use a drone to advertise your business, you can deduct the cost of the drone. Keep in mind that the price of the drown can effect how much you can deduct in a year.
Clothing with your company’s logo or uniforms worn exclusively for your work are deductible. But that doesn’t mean you can’t wear them outside of work as well. For example, YouTubers who create merch can deduct the costs of articles of clothing including hats, shirts, jackets, even if their logo appears on them. The cost of cleaning them is also deductible! The reasoning behind this is that clothing with logos on them can be considered a form of promotion, and promotions are deductible. This type of expense category is still considered under supplies.
Those in the gig economy can deduct the cost of their vehicle if purchased for business or they can deduct the Standard Mileage Rate, a method used to calculate depreciation. The policy is that your car goes down in value the more you use it, so by continually using your vehicle, you’re losing money. Read IRS Publication 946, How to Depreciate Property for more information. You can also deduct the cost of fuel when using your vehicle.
Fun note: You can actually deduct the cost of a bike if it was purchased in the tax year, or you can deduct the depreciating value of the bike.
You can hire your own children and get a deduction for their wages. The children themselves are not liable for federal income tax or payroll tax. The children must be under 18 and make a maximum of $6, 350(maximum subject to change from year to year) to exempt them from paying taxes. The children of course have to actually be doing work related to your business. IF you pay the children above the maximum, the children would have to file W-4s and you will have to file W-2 and W-3 payroll forms at the end of the year. However, the children do not need to pay the Social Security and Medicare tax and you don’t have to pay payroll tax.
See IRS Publication 15, Employer’s Tax Guide for more information.
Bank charges, services, ATM fees, penalties, check writing fees, check printing fees, and credit card fees are deductible. Specifically, you can deduct the interest cost of credit cards For any purchases made using the ATM, you can deduct the ATM fees from your gross income.
If you hired a freelance web developer to build a website for you, you can deduct that fee from your gross income under commission and fees. This applies to other freelancers and independent contractors.
This section may be most beneficial to freelance web developers who may be paying a subscription fee for various types of software, like development environments. But this also applies to other freelancers who use enterprise software to increase their productivity. You can deduct the amount paid in cash for the tax year from your gross income. Software also includes paid apps used in the course of business.
When you do freelance work long enough, you’re bound to encounter a customer that refuses to pay you for your services. This is called “bad debt,” Unfortunately, you can’t take a bad debt deduction for the time you spent working on that website or copy. But if the customer pays you with a check that bounces, you can deduct the expense from your net income.
Note: If you’re a drop ship seller on Shopify, you can take a bad debt deduction even if the customer does not pay. That’s because inventory is deductible at the end of the year as costs of goods sold.
Because of Amazon, Ebay, and Shopify, there are a lot of resellers making money as sole proprietors. Did you know the cost of packaging is considered part of inventory and so is deductible?
Even if you’re a drop shipper who doesn’t physically hold inventory, goods you have drop-shipped are still considered inventory, so you’re entitled to include warehousing and shipping fees to costs of goods sold. Additionally, weekly delivery service charges are deductible
You can actually deduct the cost of learning new skills while you are self-employed if what you are learning improves your skill in your business. For example, a freelance web developer who already knows how to program can pay for an advanced programming course and deduct the cost of that course. But a freelance programmer cannot deduct money spent on a cooking course because it doesn’t improve his programming skills.
Also, you can’t decide to learn how to program before starting your web design business, and then deduct the cost of learning from your gross income once you do start the business. All learning must take place while you are in business for you to deduct expenses. And you can’t deduct education if that education is required to meet minimum requirements for the employment; a wannabe Uber driver can’t deduct cost of driving school, because you need to know how to drive to be self-employed in that field.
You can deduct as part of education expenses: tuition, registration fees, course fees, instructional material, textbooks, supplies, laboratory fees, and commuting fees to the education center.
Phew. That was a lot of deductions! Now you can begin to see how important it is to either hire an accountant to bookkeep or use some type of accounting software to keep track of all of your expenses. Even if you only consider yourself as a gig worker, tracking your bank charges and vehicle depreciation can get a little overwhelming. Fuel and mileage alone require detailed accounting. But it’s worth it because reducing your tax liability can save you serious money.
Kamoroff, Bernard C.P.A. 475 Tax Deductions For Businesses And Self-Employed Individuals : An A-To-Z Guide To Hundreds Of Tax Write-Offs. Guilford, Connecticut, Lyons Press, 2019.
IRS Publication 946
IRS Publication 15
IRS Publication 578