Tax deductions for self-employed individuals

With the uncertain economic times, you might think of starting a side business to complement your income or even become your own boss! Luckily, there are deductions in the US tax code specifically for the self-employed individuals!

Who is considered self-employed?

You are considered self-employed if:
•    you are an individual who carries on an unincorporated trade or you own a business that does not exist independently from you and you make all the business decisions and are entitled to 100% of the profits
(sole proprietor)

•    you are a member of a limited liability entity (
single member LLC, multimember LLC, Partnerships)

1 – Car expenses deduction

Self-employed individuals get the most generous and straightforward deduction when using their personal car: they have the choice between deducting actual costs or deducting mileage. With the standard mileage rate, you get a 58 cents deduction for every business mile (tax year 2020).

Read more of car expense deduction

2- Home office deduction

If you are self-employed and your use a room in your home exclusively for business (the room cannot be a guest room), you can elect to deduct a prorata of your actual home expenses or you can elect to deduct a standard rate  of $5 per square foot of your office.

Read more on home expense deduction:

3- Self-employment tax deduction

If you're self-employed, you're hit with an additional tax burden of having to pay 100% of your Social Security and Medicare taxes. By contrast, if you worked for someone else, your employer would pick up half this tab. The Self-employment tax is 15.3% of your business earnings, broken down as follows: 
Social Security portion (12.4%) and Medicare portion (2.9%). With the self-employed tax deduction, the Internal Revenue Service (IRS) effectively gives you back that other half. You still have to pay100% of the SE tax, but you get credit for 50% of the SE tax on your tax return.  

4- Self-employed retirement deduction

Self-employed individuals can open retirement plans that will give them multiple tax benefits. Those plans are the Simplified Employee Pension plan (
SEP) and the traditional Investment Retirement Account (IRA). The plans offer 2 benefits: first, they are tax-exempt accounts where earnings accumulate tax free. Second, you can deduct up to $56K (SEP)/ $6000 (IRA) of your plan contributions on your tax return.

Read more: other retirement tax benefits:  -

5- Self-employed health insurance deduction

 If you worked for someone else as an employee, you would have to itemize (
Schedule A) to claim a deduction for what you spend on health insurance premiums and that deduction would be subject to limitations. But if you are self-employed, you can deduct 100% of your health premiums.   

Read more - on health insurance-

For assistance in identifying these additional deductions, contact Karine Bauer, EA. As always, the views contained in this article are not tax or legal advice and are not a substitute for consulting with a tax professional.
Karine Bauer, EA is an Enrolled Agent licensed by the Treasury Department with unlimited rights to represent taxpayers before the Internal Revenue Service. She is an experienced tax professional with more than 20 years of international experience.

Bear in mind the date of this article as tax laws evolve over time

Updated on May 22nd, 2020