As the worker and the boss, a self-employed taxpayer must file IRS Schedule C to claim expenses and list income, as well as Schedule SE to figure self-employment taxes. Deductible expenses are common: phones, internet connection, office supplies, computers, printers, toner, insurance and transportation, for example. Although the IRS allows these and many other useful write-offs, the expense must be related to the production of taxable income.
Consider also: Guide to Home Office Deductions
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Office expenses are deductible for businesses of any size. For the self-employed taxpayer working out of a home office, this means a write-off of home expenses such as rent, mortgage payments, insurance and utilities. The expenses must be pro-rated by the percentage of floor space used for the office. For example, if you have a 2,000-square-foot house and your office is 200 square feet, your office is 10 percent of your house.
Any expenses dedicated to the business, such as phone charges, computers, furniture, postage and internet service, are deductible. If the room doubles as a nursery or workout room, you can't claim the entire space as an office.
The IRS allows the self-employed taxpayer to write off educational expenses related to the business, including tuition, fees, course books, webinars, training and software.
Don't worry about a home office being a "red flag" that triggers an audit by the IRS. That's a myth – the IRS has enough trouble auditing the big cheaters to go after self-employed workers claiming a small home office deduction.
Consider also: Standard Deduction: How Much Is It, When to Take It & How to Use It
Vehicle and Transportation Expenses
If you use a vehicle in your business, you can write off 56 cents a mile for 2021, and 58.5 cents in 2022 when you're using the vehicle for business purposes. This covers all of your vehicle expenses, including loan or lease costs, gas, oil, tires, maintenance and repair. An alternative to this standard mileage rate is to keep track of actual expenses for running and maintaining your vehicle.
If you use the vehicle for both business and personal transportation, you pro-rate the expenses by the percentage of miles actually driven for business purposes. Other forms of transportation, such as flights, trains, taxis and buses, are deductible if you travel for business purposes. If you combine business and personal travel, such as taking a vacation after you attend a meeting, you can only deduct your room nites, meal, parking and other expenses that directly relate to the days you spent working.
Consider also: Schedule A: Instructions on How to Itemize Deductions
Miscellaneous Business Deductions
If your business requires some form of insurance, it is deductible, as are advertising and promotion of your work, uniforms, signage, license and permit fees, equipment or office space. The cost of inventory bought for resale, storage, raw materials and taxes are not deductible; these expenses are included in "cost of goods" and used to calculate business net income.
The IRS allows the self-employed taxpayer to write off educational expenses related to the business, including tuition, fees, course books, webinars, training and software. Any magazine subscription or organization membership fee can be deducted if it's business-related.
Retirement Plan Contributions
Self-employed taxpayers can also deduct contributions to a retirement savings plan. Even without employees, a solo business owner may set up a 401(k) plan, which defers taxes until withdrawals are made after age 59 1/2. For 2021 taxes, the one-participant tax rules for a 401(k) tax rules allow a deduction of up to $19,500 ($20,500 for 2022) for payments, plus 25 percent of any net income reported on Schedule C.