Commonly Missed Tax Deductions for Self-Employed

Navigating the financial responsibilities of self-employment requires a detailed understanding of the U.S. tax system. For freelancers, independent contractors, and small business owners, leveraging legitimate tax deductions is a key part of financial health. These deductions are intended by tax law to allow business owners to recover the costs of running their enterprise, thereby reducing their taxable income. Effectively identifying and claiming all available deductions can substantially impact a self-employed individual’s net earnings.

Home Office and Vehicle Expense Deductions

When your home serves as your principal place of business, you may be able to deduct expenses for its business use. The IRS provides two methods for calculating the home office deduction. The simplified method allows for a standard deduction of $5 per square foot of home used for business, with a maximum of 300 square feet. This option is straightforward and requires minimal calculation.

A more complex option is the actual expense method. This approach involves calculating the percentage of your home that is used “regularly and exclusively” for business activities. You can then deduct that percentage of your total home-related expenses, which can include a portion of your mortgage interest, homeowners’ insurance, utilities, necessary repairs, and depreciation. Analyzing both options is necessary to determine which provides the greater tax benefit.

Deducting the business use of a vehicle also offers two calculation methods. The standard mileage rate is a simplified option that allows you to deduct a set amount for each business mile driven, which is 70 cents per mile for 2025. To use this method, you must maintain a log of your business mileage, but you do not need to track individual vehicle expenses.

Alternatively, the actual expense method involves tracking all costs associated with operating your vehicle and deducting the portion attributable to business use. Qualifying expenses include gasoline, oil changes, repairs, tires, insurance, registration fees, and depreciation. To determine the deductible amount, you must calculate the percentage of total miles driven for business and apply that to your total vehicle expenses.

You must choose one method per vehicle. If you choose the standard mileage rate in the first year a car is used for business, you can switch to the actual expense method in a later year. However, if you initially select the actual expense method, you cannot switch to the standard mileage rate for that same vehicle in subsequent years.

Health Insurance and Retirement Plan Deductions

Self-employed individuals can generally deduct 100% of the premiums paid for medical, dental, and qualifying long-term care insurance for themselves, their spouse, and their dependents. This is an “above-the-line” deduction, meaning you claim it directly on Schedule 1 of Form 1040. This lowers your adjusted gross income (AGI) regardless of whether you itemize or take the standard deduction.

Eligibility for this deduction has specific requirements. The business must have a net profit for the year, as the deduction cannot exceed the business’s income. You cannot claim this deduction for any month in which you were eligible to participate in an employer-sponsored health plan, including through a spouse’s employer. The rules are applied on a month-by-month basis.

Contributions made to qualified retirement plans are also deductible as a business expense, lowering your taxable income for the year. Several retirement plan options are tailored for self-employed individuals, including the SEP IRA, SIMPLE IRA, and Solo 401(k).

A SEP (Simplified Employee Pension) IRA allows you to contribute up to 25% of your net adjusted self-employment income, not to exceed $70,000 for 2025. A SIMPLE IRA has lower contribution limits, allowing contributions up to $16,500 in 2025, with a $3,500 catch-up for those age 50 and over. A higher catch-up of $5,250 is available for individuals aged 60, 61, 62, and 63.

The Solo 401(k) is for sole proprietors with no employees other than a spouse, allowing contributions as both “employee” and “employer.” As the employee, you can contribute up to $23,500 in 2025, plus a $7,500 catch-up contribution if you are age 50 or over. For 2025, this catch-up increases to $11,250 for individuals aged 60, 61, 62, and 63. As the employer, you can contribute an additional 25% of your net adjusted self-employment income, with total contributions not to exceed $70,000.

Overlooked Operating Expense Deductions

Many day-to-day costs can be deducted as operating expenses but are frequently forgotten. These include:

• The cost of business-related software and subscriptions, such as accounting software, project management tools, and trade publications.
• Professional development costs for courses, workshops, seminars, and books that maintain or improve your skills in your existing profession.
• Business insurance premiums, including general liability, professional liability, and any specialized policies required for your industry.
• Fees paid for professional services from accountants, lawyers, or consultants for business-related matters.
• Bank fees associated with a dedicated business bank account, such as monthly service charges or transfer fees.
• The costs of advertising and marketing your business, including website development, online ad campaigns, and printed materials like business cards.

The rules for deducting business meals require careful attention. You can deduct 50% of the cost of a meal if it is an ordinary and necessary business expense. This applies to meals with clients or associates where business is discussed, or meals consumed while traveling for business.

The Qualified Business Income and Self-Employment Tax Deductions

Self-employed individuals may be eligible for deductions calculated directly on their tax return. One is the Qualified Business Income (QBI) deduction, which allows owners of many pass-through businesses to deduct up to 20% of their qualified business income. Pass-through businesses include sole proprietorships, partnerships, and S corporations. The QBI deduction is an above-the-line deduction that reduces your overall taxable income.

The QBI calculation is subject to limitations based on your taxable income and the nature of your business. For 2025, the deduction may be limited for taxpayers with taxable income above $197,300 for single filers and $394,600 for joint filers. For those in a specified service trade or business, the deduction is fully phased out once taxable income reaches $247,300 for single filers or $494,600 for joint filers.

Another deduction relates to the self-employment (SE) taxes you must pay. Self-employed individuals are responsible for both the employee and employer portions of Social Security and Medicare taxes, which amounts to a 15.3% tax rate on net earnings. The tax code allows you to deduct the “employer-equivalent” portion of your SE tax. This means you can deduct one-half of what you pay in self-employment taxes as an above-the-line deduction, which reduces your income subject to income tax.

Essential Record-Keeping for Your Deductions

To claim any business deduction, you must have documentation to substantiate it. Without proper records, you risk having your deductions disallowed during an IRS audit.

For vehicle expenses, this means keeping a detailed and contemporaneous mileage log showing the date, mileage, and business purpose for each trip. If using the actual expense method, you must also keep receipts for all vehicle-related costs.

If you claim the home office deduction using the actual expense method, you will need to keep utility bills, mortgage interest statements, property tax records, insurance statements, and receipts for any repairs.

For all other operating expenses, you must keep receipts, invoices, and bank or credit card statements. This documentation should show the expense amount, date, vendor, and business purpose. For business meals, it is wise to also note who attended and the business topics discussed.