Tax deductions and tax tips for freelancers

Major tax deductions for freelancers

There are many expenses you can deduct from your business. Below are just a few examples.

• You may be able to deduct your costs when setting up an active trade or business, investigating the possibility of creating or buying a business, and some legal fees.
• You can choose to deduct up to $5,000 of business start-up costs now and claim a deduction of the remaining cost over 15 years. Franchise fees, goodwill, and certain other expenses are also amortizable.
• In addition, if you have employees, your employees' wages and salaries are deductible if they are paid during the tax year for work directly related to your business, and the pay is reasonable. You must verify the payments were made for duties performed. There are various types of withholding for different types of employees. You must use specific forms for reporting payments made to employees. You can reach out to your Tax Pro if you feel this may apply to you.

It’s good to note that IRS regulations do not allow you to deduct the full cost of assets used in a business the year you buy them. Instead, the IRS allows depreciation, which is a percentage of the asset to be deducted each year over a pre-determined “life” of the asset.

There are some rules in place that allow for a greater upfront deduction, such as the Special Bonus Depreciation and Section 179 deduction. You can work with your Tax Pro to figure out which of your assets may be eligible for this.

Self-employment tax deductions

Before we go deeper into the deductions, we will cover self-employment tax. The self-employment tax refers to the Medicare and Social Security taxes that self-employed people must pay. This includes freelancers, independent contractors, and small-business owners.

The self-employment tax rate is 15.3%: 12.4% for Social Security and 2.9% for Medicare. For W-2 employment, employers and employees share the self-employment tax. Each pays 7.65%. People who are fully self-employed pay for both parts themselves. An additional 0.9% Medicare tax rate applies if income is above a certain threshold.

The threshold figures as of 2023 are as follows:

• Married filing jointly – $250,000
• Married filing separately – $125,000
• Single – $200,000
• Head of household (with qualifying person) – $200,000
• Qualifying widow(er) with dependent child – $200,000

You can always reach out to your Tax Pro with any questions you may have on this or on estimated taxes.

Vehicle expenses deduction

You can write off a portion of your car expenses, if you use it for business purposes. You may choose the actual-expense method or use the standard-mileage rate. If you choose the actual-expense method, you must also keep track of your vehicle-related expenses for the year. Vehicle-related expenses include gas, oil, insurance, repairs, cleaning, and registration.

You can deduct the business part of your personal property taxes and vehicle loan interest. It’s a good idea to figure out both and choose the option that gives you the biggest tax break. Whichever method you choose, you must keep track of the mileage on your car from the first day of the year through the end of the year.

Workspace or home office deduction

You can calculate a home office deduction using the standard method or the simplified option. The standard method requires calculations using IRS Form 8829, Expenses for Business Use of Your Home, to deduct your home office expenses.

With the simplified option, your home office square footage is multiplied by a predetermined rate set by the IRS. There is a standard deduction of $5 per square foot of home used for business (maximum 300 square feet). The allowable home-related itemized deductions claimed in full on Schedule A. There is no home depreciation deduction or later recapture of depreciation for the years the simplified option is used.

To deduct expenses for business use of the home, you must use part of your home as one of the following:

• Exclusively on a regular basis as your principal place of business for your trade or business;
• Exclusively on a regular basis as a place where you meet and deal with your patients, clients, or customers in the normal course of your trade or business;
• A separate structure that's not attached to your home used exclusively on a regular basis in connection with your trade or business;
• On a regular basis for storage of inventory or product samples used in your trade or business of selling products at retail or wholesale;
• For rental use; or
• As a daycare facility.

Always work with your Tax Pro on what parts of your home you’re using for personal use versus business use, and make sure that you’re keeping any receipts for separate spaces you may be renting.

Deducting medical expenses: Health insurance deduction

Medical expenses and emergencies can be hard to plan for in general, and at times, being self-employed can make it even more complex—especially if the expenses aren’t covered by the insurance you buy in the health insurance marketplace. 

If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents.

• Enter this health insurance write-off on Part II of Schedule 1 as an adjustment to income and then entered on page 1 of Form 1040.
• Because this wouldn’t be an itemized deduction, this health insurance premium deduction is beneficial because it lowers your adjusted gross income (AGI), which lowers your taxes.
• Having lower AGI can reduce the odds that you’ll be affected by unfavorable phase-out rules that can cut back or eliminate various tax breaks.

It’s important to note that eligibility is determined month-by-month. You can only claim the health insurance premiums write-off for months when neither you nor your spouse were eligible to participate in an employer-sponsored health plan.

You can also deduct medical expenses that exceed 7.5% of your AGI. For example, if you have an AGI of $50,000 and $10,000 in total deductible medical expenses, 7.5% of $50,000 is $3,750. You can deduct $6,250 of medical expenses as part of your itemized deductions.

To qualify as deductions, your medical or dental expenses must be legal in the U.S. and be for yourself, your spouse, or a dependent. Below is a brief list of medical and dental expenses that may be considered deductible:

• Medical copays – Including payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and other medical practitioners for preventative care, surgery, dental or vision care, x-rays, lab fees, and more
• Prescriptions – Including insulin and medical devices such as hearing aids, dentures, wheelchairs, crutches, etc.
• Treatment facility payments– Including addiction services
• In-hospital payments– Including lodging and meals
• In-home health care – Including visiting nurse payments
• Dental expenses– Including braces and dentures
• Eye exams, prescription glasses, and contact lenses and associated cleaning supplies

Retirement contributions deduction

There are many avenues open for you to save for retirement on a tax-deferred basis as a freelancer, or self-employed person.

You could consider a Simplified Employee Pension (SEP). With this, you may contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $66,000 for 2023. An IRS-approved “prototype SEP plan” offered by many mutual funds, banks and other financial institutions, and by plan administration companies.

You can also make annual salary deferrals up to $22,500 in 2023, plus an additional $7,500 in 2023 if you're 50 or older either on a pretax basis, or as designated Roth contributions.

If the SEP doesn’t work for you, try a Savings Incentive Match Plan for Employees (SIMPLE) plan. The maximum contribution to a SIMPLE plan is $15,500, with a $3,500 catch-up contribution for taxpayers 50 or over.

Business travel deduction

You may be required to go to conferences, meet with clients, source products, and so on, as a self-employed person.

The good news is that you can deduct business travel expenses when you are away from both your home and the location of your main place of business (tax home). Deductible expenses include transportation, baggage fees, car rentals, taxis and shuttles, lodging, tips, and fees.

If you're self-employed, you can deduct travel expenses on Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship). As always, it’s important to keep your receipts and records for any trips you may make to account for them when you’re filing your taxes.

Internet and phone bills deduction

Your computer, cell phone, Internet service, and software are possible tax deductions if you must use them to run your business.  

One caveat: If a phone or internet service isn’t 100% for your business, you can only write off your business use percentage. That means that, if you use your phone for work 40% of the time, you'd be able to write off 40% of your phone bill.

Deducting advertising and marketing expenses

You may deduct advertising expenses including business cards, billboards, car wraps, ad agencies, and so on.

What do I need to file if I’m self-employed?

You will need to file Form 1040. You will also need to include Schedule 1 and Schedule C with your tax return. These are the required forms when you are self-employed. You may need other forms, such as Schedule 2, Schedule SE, Form 4562, and others.

If you’re not sure which of these deductions do or do not apply to you, ask a tax professional for help. Jackson Hewitt’s Tax Pros can help you figure out which deductions make sense for your specific work situation. We’re always here to answer your questions year-round.

About the Author

Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.

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