Saving taxes: best tips for the self-employed

What exactly can business owners and free­lancers deduct from taxes? Do different rules apply to free­lancers? We provide the most important tax tips for self-employed in­di­vid­u­als and give an overview of which taxes apply.

The in­for­ma­tion is up to date as of April 2025.

1. Home office tax deduction

If you’re self-employed and work from home, you can deduct certain expenses related to your home office. The deduction is cal­cu­lat­ed based on the per­cent­age of your home used ex­clu­sive­ly and regularly for business. For example, if your home office occupies 10% of your total home space, you may be able to deduct 10% of home-related expenses such as mortgage interest, rent, utilities, and repairs.

However, there are strict re­quire­ments from the IRS. Your home office must be used ex­clu­sive­ly for business (e.g., you can’t also use it as a guest room), and it must be the principal place of business for your work. You’ll need to fill out Form 8829, “Expenses for Business Use of Your Home,” to claim this deduction.

2. Telephone and internet expenses

Self-employed in­di­vid­u­als can also deduct expenses related to their phone and internet services, but only the portion of these costs that is used for business purposes. For example, if you use your phone for both business and personal use, you can only deduct the business portion, which should be cal­cu­lat­ed based on how much of your total usage is related to your business.

For internet, if you use the same con­nec­tion for personal and business purposes, you must determine and deduct the portion used for business, which could be difficult if you’re not keeping track of specific usage. You need to have clear doc­u­men­ta­tion to back up these expenses, such as phone bills showing business-related calls or a detailed log of internet usage.

3. De­pre­ci­a­tion

De­pre­ci­a­tion allows self-employed in­di­vid­u­als to deduct the cost of certain business assets over time, rather than all at once. This includes tangible assets like buildings, vehicles, machinery, furniture, and equipment that are used in the business.

In addition to physical property, in­tan­gi­ble assets like patents, copy­rights, and software can also be de­pre­ci­at­ed. To calculate de­pre­ci­a­tion, you’ll need to determine the asset’s useful life, which can vary depending on the type of property. De­pre­ci­a­tion is claimed on Form 4562, “De­pre­ci­a­tion and Amor­ti­za­tion.”

For example, if you buy a computer for your business, instead of deducting the entire cost in the year of purchase, you can spread the deduction over several years, in line with the IRS’s de­pre­ci­a­tion rules. The exact method you use may vary, so it’s advisable to consult IRS guide­lines or a tax pro­fes­sion­al.

4. In­di­vid­ual Re­tire­ment Plans (IRAs)

Self-employed in­di­vid­u­als have several re­tire­ment savings options that can reduce their taxable income. Common options include:

• SEP IRA (Sim­pli­fied Employee Pension IRA): This plan allows you to con­tribute up to 25% of your net earnings (or $66,000 in 2023, whichever is less). It’s a great option if you’re self-employed without employees.
• Solo 401(k): A Solo 401(k) is specif­i­cal­ly designed for self-employed in­di­vid­u­als with no employees (except a spouse). In 2023, you can con­tribute up to $22,500, plus an ad­di­tion­al 25% of your net earnings, up to a total of $66,000.
• SIMPLE IRA: This plan is more suitable for smaller busi­ness­es or sole pro­pri­etors with fewer than 100 employees. The maximum con­tri­bu­tion for 2023 is $15,500, with a $3,500 catch-up con­tri­bu­tion if you’re over 50.

Con­tri­bu­tions to these accounts reduce your taxable income, which can help you save money on taxes while also saving for re­tire­ment. It’s essential to check the IRS website for the most current con­tri­bu­tion limits and el­i­gi­bil­i­ty re­quire­ments.

5. En­ter­tain­ment expenses

En­ter­tain­ment expenses related to business can be deducted, but there are strict rules. The IRS only allows a 50% deduction for business-related meals and en­ter­tain­ment if they are directly as­so­ci­at­ed with your business and you can prove the expense was necessary for business. This means you’ll need to have clear records that the purpose of the meal or event was to discuss business.

For example, if you take a client to a restau­rant to discuss a business deal, you can deduct 50% of the meal cost. However, purely social events or personal en­ter­tain­ment are not de­ductible. For en­ter­tain­ment expenses like tickets to events or con­fer­ences, the same rules apply—you must prove the expense was for business purposes.

6. Meal expenses

Meal expenses are often treated similarly to en­ter­tain­ment expenses, but there are specific rules. Generally, you can deduct 50% of the cost of meals that are directly related to business ac­tiv­i­ties. These include meals consumed while traveling for work or meals you provide while en­ter­tain­ing a client.

To claim these de­duc­tions, you must have proper receipts and records, including the date, location, and the business purpose of the meal. If you don’t have receipts, you can claim 50% of the standard meal allowance set by the IRS. Again, these expenses must be sub­stan­ti­at­ed to withstand scrutiny during an IRS audit.

7. Gift al­lowances

If you give gifts to clients or business as­so­ciates, you can deduct up to $25 per person per year. This can help foster client re­la­tion­ships, but the value of the gift must stay under the limit. For example, if you give a client a gift worth $30, you can only deduct $25 of that amount.

Ad­di­tion­al­ly, pro­mo­tion­al items costing less than $4 that are widely dis­trib­uted among clients cannot be deducted as gifts. However, small pro­mo­tion­al items like pens, mugs, or other branded mer­chan­dise that are handed out at con­fer­ences or events may still be de­ductible, as long as they don’t exceed the $4 threshold.

8. Car expenses

For self-employed in­di­vid­u­als who use their vehicle for business purposes, there are two methods to calculate car-related de­duc­tions: the standard mileage rate and the actual expense method.

• Standard Mileage Rate: In 2023, the IRS standard mileage rate is 65.5 cents per mile. This method is simpler as you just track the business miles driven, but you must keep a log of your miles to show how much was for business.
• Actual Expense Method: Under this method, you can deduct the actual expenses for operating your vehicle, such as gas, repairs, insurance, reg­is­tra­tion, and de­pre­ci­a­tion. You’ll need to keep detailed records of all these expenses and calculate the per­cent­age used for business purposes.

In both cases, you need to keep records of your mileage or expenses, and the IRS may require you to demon­strate that the mileage was primarily for business use.

9. Education expenses

Self-employed in­di­vid­u­als can deduct ed­u­ca­tion­al expenses related to improving or main­tain­ing skills for their business. For example, if you take a course to learn new software that enhances your work, you can deduct the tuition, books, and other costs related to that course.

However, the education must be directly related to your business ac­tiv­i­ties. If you take a course just for personal interest or it doesn’t improve your business skills, those expenses would not qualify for a deduction. Keep records of any education-related expenses, including receipts and course details, to sub­stan­ti­ate your claim.

10. Ad­ver­tis­ing and promotion expenses

Expenses related to ad­ver­tis­ing and promoting your business are generally fully de­ductible. This includes online ads, print ads, and costs related to the creation of marketing materials like brochures, business cards, or main­tain­ing your website.

You can also deduct the cost of hiring marketing pro­fes­sion­als, paying for social media ad­ver­tis­ing, or running email campaigns. The key here is that the expense must directly relate to promoting your business. You should maintain receipts, contracts, and doc­u­men­ta­tion that show the con­nec­tion between your ad­ver­tis­ing ac­tiv­i­ties and your business.

Different forms of self-em­ploy­ment at a glance

Free­lancer, sole pro­pri­etor, or business owner? When starting a business, one of the first questions you need to address is what category of self-em­ploy­ment you fall under. This clas­si­fi­ca­tion not only de­ter­mines the types of taxes you will need to pay, but also provides insight into how you can maximize your tax savings. Here’s an overview of different self-em­ploy­ment cat­e­gories and tax oblig­a­tions in the USA.

Free­lancer, sole pro­pri­etor, or business owner?

In the USA, self-employed in­di­vid­u­als can be clas­si­fied as either free­lancers/sole pro­pri­etors or business owners for tax purposes. Each category comes with different tax im­pli­ca­tions.

1. Free­lancer: A free­lancer is an in­de­pen­dent con­trac­tor who works for multiple clients, usually without long-term em­ploy­ment contracts. Free­lancers are often re­spon­si­ble for their own tax filings and must pay self-em­ploy­ment tax (which covers Social Security and Medicare), in addition to income tax. Free­lancers are generally con­sid­ered to be “in­de­pen­dent con­trac­tors” by the IRS.

2. Sole pro­pri­etor: A sole pro­pri­etor owns an un­in­cor­po­rat­ed business. This could be a freelance operation where you have clients but no employees, or a small service-based business. As a sole pro­pri­etor, you report your income and expenses on your personal tax return and pay taxes on profits (after de­duc­tions).

3. Business owner: As a business owner (es­pe­cial­ly if you operate as an LLC or cor­po­ra­tion), you are subject to business taxes, including income tax, self-em­ploy­ment tax, and po­ten­tial­ly excise tax depending on the business type. Business owners are required to file specific forms for their entity type, such as Form 1120 for cor­po­ra­tions or Form 1065 for part­ner­ships.

Taxes ap­plic­a­ble to self-employed persons

To ef­fec­tive­ly save on taxes, self-employed in­di­vid­u­als must un­der­stand the taxes they are required to pay:

Income Tax

Income tax applies to your taxable income, which is es­sen­tial­ly the profits you make from your self-em­ploy­ment ac­tiv­i­ties. This is the tax most in­di­vid­u­als are familiar with and is filed using Form 1040 (U.S. In­di­vid­ual Income Tax Return), and Schedule C (Profit or Loss from Business). Expenses related to your business, like supplies or office expenses, are de­ductible, helping to reduce your taxable profit.

Estimated Taxes

Self-employed in­di­vid­u­als must make estimated tax payments if they expect to owe more than $1,000 in taxes for the year. These payments cover both income tax and self-em­ploy­ment tax. Use Form 1040-ES to calculate and submit estimated taxes on a quarterly basis.

Self-Em­ploy­ment (SE) Tax

Self-em­ploy­ment tax is the equiv­a­lent of the Social Security and Medicare taxes that are au­to­mat­i­cal­ly withheld from employees’ paychecks. If you’re self-employed, you must pay these taxes yourself, which amount to 15.3% of your net earnings. If your earnings exceed $400 in a given year, you are required to file Schedule SE (Self-Em­ploy­ment Tax) with your Form 1040.

Federal Un­em­ploy­ment Tax (FUTA)

If you have employees, you are re­spon­si­ble for paying the Federal Un­em­ploy­ment Tax. This tax provides benefits to in­di­vid­u­als who lose their jobs. The FUTA tax is filed using Form 940, Employer’s Annual Federal Un­em­ploy­ment (FUTA) Tax Return.

Excise Tax

Excise taxes apply to certain goods and services, such as fuel, tobacco, or luxury items, and may also apply to certain types of business ac­tiv­i­ties. This is a flat tax on the sale or use of goods or services rather than a per­cent­age of the sale price. If your business involves goods or services subject to excise taxes (like a fuel dis­trib­u­tor or vehicle man­u­fac­tur­er), you must file Form 720, Quarterly Federal Excise Tax Return.

Please refer to the legal dis­claimer for this article.