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Tax Deductions for the Self-Employed

Paying taxes is never fun. Fortunately, you may be able to reduce how much you owe in federal income taxes by claiming certain tax deductions. There are exclusive tax breaks for self-employed Americans. But the key to taking advantage of these benefits is knowing what’s tax-deductible. Check out the following seven self-employed tax deductions you might qualify for this season.

Check out our federal income tax calculator.

1. Self-Employment Tax Deduction

Normally, employees and their employers each pay half of FICA taxes, which cover Medicare and Social Security. Self-employed workers need to pay this entire tax (15.3%) on their own, but the IRS does consider the employer portion of the self-employment tax to be a deductible expense. This deduction for the self-employment tax is an above-the-line deduction. That means you can claim it on your income tax return (Form 1040) regardless of whether you’re itemizing your deductions. For your 2018 taxes, you would need to attach Schedule 4, which says that you’re taking the credit, and Schedule SE.

2. Self-Employed Health Insurance Deduction

Tax Deductions for the Self-Employed

If you’re self-employed, the dental, health and long-term insurance premiums that you paid for yourself, your spouse and your dependents may be tax-deductible. You may be able to claim the health insurance deduction for a child under 27 as well, even if he or she isn’t considered a dependent.

You’re ineligible for the health insurance deduction if you could’ve enrolled in an employer’s healthcare plan (like your spouse’s plan). To qualify for the tax break, you’ll also need to meet certain criteria. For example, you must have a net profit that you included on Schedule C, used Schedule SE to calculate your net earnings, reported your net earnings on Schedule K-1 (because you were part of a partnership) or paid insurance premiums (or had them reimbursed) as a more-than-2% shareholder in an S corporation.

Since it’s an above-the-line deduction, you can claim the self-employed health insurance deduction on your tax return.

3. Home Office Deduction

This tax break allows you to deduct a portion of the expenses you use exclusively for business purposes at home, like property taxes and utilities. Claiming this deduction won’t be easy, however. You’ll need to crunch some numbers and provide proof that you have a space that you use regularly for professional reasons only. Claiming this deduction is also a common trigger for a tax audit.

4. Tax Deduction for Business Use of a Car

You may qualify for a deduction if you drive your car for a business or work-related purpose. There are two ways to figure out how much you can deduct. You can use the standard mileage rate or add up your actual expenses. Trying out both methods could be a good idea if you’re not sure which one will offer the biggest deduction.

The standard mileage rate for 2018 is 54.5 cents per mile. You can apply that to all of the business miles you drove in tax year 2018. Just be sure to keep a mile log in case the IRS wants to audit your tax return. The actual expense method takes depreciation into account in addition to other expenses (like the cost of insurance, vehicle maintenance and gas).

5. Self-Employed Retirement Plan Deductions

The government encourages all workers to save for retirement. And there’s another good reason to build your nest egg: It could lower your tax bill. Self-employed workers can qualify for tax deductions by making contributions to SIMPLE IRAs and SEP-IRAs. They can also take advantage of other tax-deferred plans like individual 401(k) accounts.

6. Deduction for Education Expenses

Tax Deductions for the Self-Employed

Other business expenses may be tax-deductible, including the money you spend to gain new skills or improve your craft. Just know that you can only get a tax deduction for the expenses that relate to your current professional path. You can’t get a tax write-off for trying to pursue a new career.

If you decide to go back to school, you may qualify for the Lifetime Learning Credit. It’s worth up to $2,000.

7. Deduction for Business Loan Interest

If you took out a loan, the interest you paid or that accrued over time may be tax-deductible as a business expenses. But certain rules apply. For example, you must be liable for the debt you took on. And the loan interest you’re trying to write off cannot come from a personal loan.

In general, business expenses must be “necessary and ordinary” to be tax-deductible. An ordinary expense is defined by how common it is for someone in your industry. A necessary expense is one that’s appropriate for your business or trade.

Final Word

If you’re unsure of whether an expense is tax-deductible, it’s best to visit the IRS website or seek professional help. After all, you don’t want to pay the government more than you need to.

Next Steps

  • Get organized. Tax season will be much less of a headache if you have all of your documents in order and a clear idea of how much you’ll owe.
  • Aside from deductions, another way to save money next tax season is by working with a financial advisor. A financial advisor can help you draw up a financial plan to minimize your tax burden. A matching tool like SmartAsset’s can help you find a person to work with to meet your needs. First you’ll answer a series of questions about your situation and goals. Then the program will narrow down your options from thousands of advisors to three who suit your needs. You can then read their profiles to learn more about them, interview them on the phone or in person and choose who to work with in the future. This allows you to find a good fit while the program does much of the hard work for you.

Photo credit: ©iStock.com/stevecoleimages, ©iStock.com/Weekend Images Inc., ©iStock.com/monkeybusinessimages

Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz's articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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