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8 Tax Tips for Self-Employed Workers
Updated on 02/24/2023
Self-employment can be incredibly fulfilling, but it can also come with increased tax burdens and deductions you’ll need to keep track of. However, if you know the deductions you may qualify for, you may be able to reduce the amount of taxes you owe.
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So, what is self-employment? Self-employed workers do not typically work regularly for a single employer. There are many types of self-employed individuals, such as the following:
- Independent contractors
- Freelancers
- Small business owners
- Gig workers
One of the cornerstones of self-employment is that you do not usually have an employer or other entity withholding taxes from your paychecks; you’re responsible for doing it yourself. Whether you’re newly self-employed or you’ve got a couple tax years under your belt, here are 8 tax tips you can use to help you navigate the self-employment tax process.
1. Get Familiar with the Self-Employment Tax Rate and Deduction
Self-employment taxes are generally higher than taxes for traditional employees. The difference boils down to Medicare and Social Security taxes. With traditional employment, employees and employers share this tax burden. But without an employer, you alone are left responsible.
As of the 2022 tax year, the self-employment tax rate is 12.4% for Social Security and 2.9% for Medicare, for a total of 15.3%. Additionally, 0.9% could get tacked on for Medicare if you have an income over a specific threshold:
- Single: $200,000
- Married, Filing Separately: $125,000
- Married, Filing Jointly: $250,000
- Head of Household: $200,000
- Qualifying Widow(er) with dependent child: $200,000
Fortunately, there are several deductions you may be able to take that could reduce the amount of taxes you’ll need to pay.
2. Determine Your Home Office Deduction
The home office deduction is one of the most common self-employment deductions, but it’s also one of the more complicated ones. The home office deduction covers a portion of the expenses for a workspace you use exclusively and regularly for your job, regardless of whether you rent or own it.
While you don’t usually need to prove these expenses, you’ll need to be prepared to in the event of an audit. Sometimes, the IRS may order an audit, which is a verification of the information you’re claiming on your federal income tax return.
To prepare, you may want to keep accurate measurements of your office, since the square footage of your office determines the amount of your expenses covered by the deductions. Qualifying expenses include the following:
- Rental costs
- Mortgage interest and depreciation
- Utilities
- Homeowners insurance
- Repairs made during the tax year
The percentage of the amount of space that your home office occupies within your home is the percentage of deductions you can take of qualifying expenses. For example, if you use 10% of your home as a home office, 10% of your annual utility costs can be deducted.
3. Calculate Deductions for Your Internet and Phone Bills
Do you use your internet or phone for business? You may be able to deduct a portion of these bills. The key to determining your deduction amount is to first calculate the percentage of time you use these services for business. Let’s say you use your cell phone for business for 50% of your usage. In that case, you can deduct 50% of your phone bill’s annual cost.
4. Know Your Health Insurance Premium Deductions
Self-employed workers are often able to deduct health insurance premiums they pay if they cannot obtain insurance through their spouse’s employer. These premiums include those for health, dental, and qualifying long-term care insurance.
Additionally, you can deduct the insurance premiums you paid during the tax year for your spouse, dependents, and any children you have who are younger than 27 by the end of the tax year, so long as they do not have access to other insurance options.
5. You Might Qualify for Meal Deductions
Not every self-employed worker can take meal deductions, but you may qualify if you have to travel for business. For example, if you frequently attend business conferences or meetings with clients, you may be able to deduct these expenses. Usually, you can deduct meal-related expenses at 50%. However, an amendment temporarily allowed full deduction for qualifying meal expenses until the end of 2022.
Meals you eat during the day outside of travel do not qualify for meal deductions. If you do qualify for meal deductions, be sure to keep separate invoices for these expenses and always keep your receipts.
6. What About Travel Deductions?
Meals aren’t the only expenses you may be able to deduct when traveling. Generally, you might qualify for travel deductions if the travel is longer than an ordinary workday, takes place away from the general area of your business, and requires you to sleep elsewhere. Additionally, your business trip must have a specific business purpose where you will be engaging in work-related activities, such as meeting with clients or learning new skills that relate to the type of work you do.
Qualifying travel expenses are 100% deductible. However, you must keep all receipts and invoices related to your business trip. It’s also worth knowing that deducting several travel expenses often draws the most scrutiny from the IRS and may result in an audit. Examples of expenses that you can claim for the deduction include the cost of transportation, lodging, and plane fare.
7. Figure Out Your Vehicle Use Deduction
Do you use your vehicle for your business? If so, you may qualify for a vehicle use deduction. The deduction includes expenses related to the following:
- Mileage
- Vehicle maintenance and repairs
- Car insurance
- Registration fees
- Gas
The amount of your deduction is determined by the percentage of time your vehicle is used for business, similarly to other deductions. When claiming a vehicle use deduction, you can either choose actual expenses or use their standard mileage rates. For business use, that’s 65.5 cents per mile.
Should you choose to claim actual expenses, be prepared to keep track of and supply receipts for all of the expenses related to your vehicle’s business use.
8. Be Aware of Other Common Deductions
While the above self-employment deductions are the most common, there are several other deductions you may qualify for. One way to make sure you receive the maximum amount of deductions is to hire a tax professional to help you file your return and by keeping good records of all of your business-related expenses. If you choose to use a tax professional, you’ll often pay a fee for his or her services.
Here are some additional common deductions that you may qualify for:
- Interest deductions on business loans
- Publication, subscription, and advertisement deductions
- Education-related expenses, such as costs to further skills related to your business or to learn new skills
- Business insurance expenses
- Deduction for startup costs
- Regular office supply expenses
- Contributions toward retirement plans
