It is important for the self-employed taxpayers to know what they are eligible to deduct. Deductions help reduce taxable income, reducing the taxes for which you are liable as a self-employed taxpayer. Here are some important deductions for each self-employed taxpayer to consider.
Home Office Deductions
If part of your home is used for your business, you may be able to claim a home office deduction. The home office space must be used regularly and exclusively for business activities. No personal use is allowed. There are two methods allowed by the IRS:
The Simplified Method allows you to deduct $5 per square foot, with a limit of 300 square feet.
The Regular Method allows you to deduct a portion of your home expenses using the percentage of the home used for business.
Retirement Contributions
There are multiple options for self-employed individuals to contribute to retirement plans. These include SEP IRAs, SIMPLE IRAs, and solo 401(k)s.
A SEP (simplified employees’ pension) allows you to contribute as much as 25% of your net earnings from self-employment, up to the limit of $69,000 in contributions (as of 2024 tax year).
A 401K plan allows an individual to defer up to $23,000 in 2024 plus $7,500 if you are 50 years or older. You can also contribute an additional 25% of net earnings from self-employment that total contributions of no more than $69,000 for 2024.
For SIMPLE IRA plans (Savings Incentive Match Plan for Employees), you can include all of your net earnings from self-employment up to $16,000 for 2024 with an additional $3,500 if you are 50 or older.
For more information on what option is best for you, please contact your tax advisor, and visit the IRS website regarding SE retirement plans.
Travel Expenses
As a self-employed individual, you are able to deduct travel-related expenses, including hotels and airfare. It is important to remember that only business expenses are deductible, therefore if part of the travel is personal, only the portion considered “ordinary and necessary” for business purposes is deductible. Be sure to keep records to support your travel expenses.
Business Expenses
There is an assortment of business expenses that can be deducted for self-employed taxpayers. Here are a few examples to consider:
Professional and legal fees
These can include hiring an accountant or attorney. You can also include any software that is required for business such as accounting or management software.
Office expenses and equipment
Supplies for business are allowable as deductions as well as equipment (computers, printed, furniture, etc) that may be fully deductible or depreciated over several years. It is important to keep track of the receipts as they will be needed when preparing your tax return.
Advertising
Any spending that promotes your business can be considered advertising expense and is fully deductible. Consider a website, social media, or sponsorships to help promote your business.
Business Meals
Business meals can be deducted at 50% of the cost of the meal. The IRS requires the meal expense be directly related to business. These types of meals should take place with a client or potential client where business is discussed. Please note that entertainment expenses are not deductible. If you have a question if a meal expense is deductible, please reach out to a tax advisor.
Qualified Business Income Deduction (QBI)
The qualified business income deduction was introduced with the Tax Cuts and Jobs Act. It is also sometimes referred to as Section 199A deduction. The deduction allows self-employed individuals to deduct up to 20% of qualified business income. The calculation for QBI can be quite complex, so reach out to a tax professional [insert contact us link here] to make sure you meet the appropriate thresholds and are including the appropriate items.
Get the Most Deductions Possible
As a self-employed individual it is important to consider deductions that may decrease your taxable income. In addition to the common deductions above, consult with a tax professional to help you understand what additional deductions you are eligible to take. Contact us to speak with one of our tax professionals about your unique situation.