1. Start-up costs
Did you start your new small business or side hustle last year? If so, you may be eligible to deduct certain expenses on your tax return. Start-up costs are expenses incurred before your business opens. For example, if you incurred expenses related to hiring and training employees before opening, advertising your new venture to prospective customers, consulting fees, or similar costs, you may be able to deduct up to $5,000 from your gross income. You may also be able to deduct up to $5,000 in expenses related to getting your business entity formed, such as by establishing a corporation or Limited Liability Company (LLC). You can keep track of these expenses and more using a Small Business Tax Worksheet.
2. Professional service fees
Fees paid to attorneys, tax professionals, accountants, and consultants (such as legal fees or tax preparation fees) are also typically deductible business expenses, as long as the underlying reason you incurred the expense was related to your self-employment.
3. Retirement plans
If you worked for an employer that offered an employee retirement plan, you would be able to save money on a tax-deferred basis for retirement. Self-employed people can also take advantage of retirement plan tax breaks. One option is to establish a Solo 401(k), designed for self-employed persons who do not have employees. Review the IRS contribution limits, which are updated annually, to determine how much you can contribute and deduct for the most recent tax year. Your IRA contributions may also be deductible.
4. Business meals
For 2022, self-employed persons and small business owners were able to deduct 100% of business-related meals (food and beverages) purchased at restaurants when there was a legitimate business purpose for the meal. For 2023, the deduction is now back down to 50% of business-related meals. This can still be a good deduction, depending on your line of work and industry.
5. Advertising and marketing costs
Advertising your business can be expensive. Fortunately, you may be able to deduct the advertising and marketing dollars you spent on trying to attract and retain customers as long as the expenses are ordinary and necessary. Some limitations apply, however, most regular marketing expenses are deductible.
6. Business loan and credit card interest
If you are paying off a business loan or have a credit card you use exclusively for business purchases, you can deduct the interest accrued on the loan or credit card purchases.
7. Office supplies
Most self-employed individuals and small business owners purchase office supplies from time-to-time. If you purchase things like paper, envelopes, postage, pens, and ink, be sure to keep your receipts as these items are generally tax-deductible expenses.
8. Home office expenses
Do you have a separate home office or use a dedicated space in your home to work on your business? If so, deducting qualified home office expenses could help lower your tax bill. You may be able to deduct a portion of your mortgage payment (including principal and mortgage interest paid) or rent, property taxes, utilities, maintenance costs, and more.
There are two options for claiming this itemized deduction. The simplified version provides a fixed deduction of $5 per square foot of your home used regularly and exclusively for business purposes, up to 300 square feet. The other option requires you to determine what percentage of your overall home’s square footage is used exclusively and regularly for your self-employment. For example, if you use 7 percent of your home for your business, then you may be able to deduct 7 percent of the expenses identified above. This option requires greater record-keeping and work at tax time but may provide a higher tax deduction.
9. Office rent
If you lease office space, warehouse space, or maintain off-site storage for your small business, you can generally deduct the full amount of reasonable rent paid to someone else as a business expense.
10. Business phone and internet
If you have a cell phone (or one of the few remaining landlines still in operation) that you use exclusively for business purposes, you can deduct the full amount of your phone bill. Similarly, if you own or lease dedicated office space and pay for internet connectivity, you can deduct your internet expenses. If your phone and internet expenses cover both personal and business uses, you may still be able to deduct a portion of your bills for work-related use.
11. Vehicle expenses
Many self-employed people use their own personal vehicles for business. For example, they might drive to meet with clients or vendors, or use their vehicle to make deliveries.
As with the home office deduction, you have two options for deducting car expenses on your taxes. First, you could take the simplified method, which involves tracking your business mileage and then claiming the IRS standard mileage rate ($0.655/mile for 2023).
The other option is to use the actual expense method. This option, which is more involved but may provide a higher deduction, offers a tax deduction based on your actual vehicle expenses, including maintenance, gas, oil, tolls, insurance, lease payments, registration fees, garage fees, depreciation, and more. If your vehicle is used exclusively for business, it is far easier to determine your deductible vehicle expenses than if you use a vehicle for both personal and business travel.
With either approach, be sure to keep detailed documentation to support your calculation. In the event your taxes are audited, you may be required to provide these records to substantiate your deductions.
12. Business travel expenses
If you travel for your small business, you may be able to deduct any incurred expenses. Generally, self-employed persons can deduct legitimate business travel expenses, including airfare, hotels, food, and ground transportation. Keep all receipts and documents that show the business purpose for your travel to support your tax records in the event of an audit.
13. Business insurance
You may have a variety of business insurance policies in place to protect yourself financially. Business insurance premiums, including things like errors and omissions (E&O) coverage, employee health policies, worker’s compensation premiums, coverage for leased office space, business auto insurance, and more, may be deductible on Schedule C to form 1040.
14. Health insurance premiums
If you purchased medical or dental insurance for you (and your spouse and dependents under age 27, if applicable) because you are self-employed and do not have access to employer-sponsored plans, you may be able to deduct the amount you paid in premiums during the year. You may also be able to deduct long-term care insurance premiums.
15. Memberships and subscriptions
If you pay membership fees to a professional organization related to your business, such as a trade association, chamber of commerce, business league, or professional organization, you can likely deduct the amount paid in dues. However, you cannot deduct membership costs for country clubs or similar organizations where the purpose is to provide access to entertainment or recreation.
You can generally also deduct the cost of subscriptions to industry or trade-related publications.
16. Continuing education
Certain expenses paid to further your education or improve your skills related to your current business may be deductible on your federal tax return. Qualified expenses typically include tuition, fees, books, supplies, the cost of transportation to and from your classes, and related expenses. Note that this deduction is limited to expenses related to your present work.
While taking classes to learn a new skill or to qualify for a different type of work may help you financially in the future, you cannot deduct those educational expenses on your current tax return.
17. Depreciation for large business purchases
If you purchased items for your business that are expected to last for more than one year, you can depreciate their cost over a period of years (based on an IRS determination of the item’s useful life). This may include things like business vehicles, computer equipment, and commercial real estate.
18. Self-employment taxes
Self-employment taxes, which represent both the employer’s share and the employee’s portion of Medicare and Social Security taxes, can be a significant expense for many self-employed people. The good news is that you can deduct one-half of the amount paid when you file your income tax return.
19. Qualified business income (QBI)
Finally, the qualified business income (QBI) deduction offers substantial tax savings for some self-employed taxpayers. If you have pass-through business income from a sole proprietorship, LLC, partnership, or S-corp, and if your income was under the applicable threshold amounts ($182,100 for single taxpayers or $364,200 for joint filers in 2023), you may qualify to deduct 20% of your otherwise-taxable business income. Note that this deduction is scheduled to end on December 31, 2025, unless it is extended by Congressional action.
Small business taxes can be complex. Working with a qualified tax professional to prepare and file your tax return can help ensure you have leveraged all of the tax deductions and tax credits you are entitled to claim for your self-employment income. If you have questions about a particular deduction or tax credit, or other questions about your self-employment, reach out to a Rocket Lawyer network attorney for affordable legal advice.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.