Spend smart. Deduct wisely.
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One of the advantages of being self-employed is that many ordinary business costs can reduce your taxable income. From office supplies to mileage and home office expenses, these deductions lower the profit subject to income tax and self-employment tax. The key is knowing which expenses qualify and keeping clear, accurate records. Most of these deductions are claimed on Schedule C when you file your return as part of tax reporting for the self-employed.
Key Points
- Self-employed tax deductions are claimed on Schedule C (Form 1040).
- You may qualify for the home office deduction if you use part of your home exclusively for business.
- Wages and employee benefits may be deductible, but hiring employees brings additional payroll and reporting requirements.
Deductible business expenses for the self-employed
Schedule C allows you to deduct many ordinary and necessary business expenses from your small business income, including:
- Advertising. Costs you paid to promote your business.
- Business meals. Generally deductible at 50% if they are ordinary, necessary, not lavish, and involve a current or prospective business contact. Entertainment costs arenât deductible.
- Car and truck expenses. If you use your personal vehicle for business, you can deduct either actual expenses (such as gas and insurance) or the standard mileage rate (70 cents a mile in 2025; 72.5 cents in 2026).
- Commissions and fees. Payments made to others for services. If you pay more than $600 to one person, you must issue Form 1099-NEC. The threshold increases to $2,000 for payments made in 2026 and later.
- Contract labor. Payments to independent contractors. Form 1099-NEC may be required if payments exceed reporting thresholds.
- Depreciation. The cost of business property that is expected to last more than a year (see Form 4562 and Publication 946).
- Insurance. Premiums for business-related coverage. Health insurance for self-employed individuals is deducted separately and not reported on Schedule C.
- Interest. Interest paid on loans for business property.
- Legal and professional fees. Including tax preparation fees.
- Office supplies and postage. Items used during the year for your business.
- Retirement contributions. SEP or SIMPLE plan contributions may be deductible (see Publication 560).
- Rent. Payments to lease office space, equipment, or other business property.
- Repairs and maintenance. Costs to fix or maintain business property. Improvements that add value or extend the propertyâs useful life must instead be capitalized and depreciated.
- Taxes and licenses. State income taxes, real estate taxes on business property, and required licenses or fees.
- Travel. Lodging and transportation for business trips (see Publication 463).
- Utilities. Services such as a dedicated cell phone or Internet connection used only for business.
- Wages. Compensation paid to employees.
Home office deduction for the self-employed
If you use part of your home regularly and exclusively for your businessâwhether as your principal place of business, as storage for inventory or products, or as a day care facilityâyou may be able to deduct certain expenses.Â
The IRS requires that the space be used exclusively for businessânot as a den or family TV room, for example (with limited exceptions for home-based day care providers). If youâre a W-2 employee working from home, you generally canât claim the home office deduction; it applies only to self-employed individuals who report income on Schedule C. See Publication 587 for details.
The simplified method is the easiest way to claim the home office deduction. You calculate it by multiplying the number of square feet used exclusively for your businessâup to 300 square feetâby $5.
The resulting deduction canât exceed your business income after other business expenses are taken into account. Separate rules apply to home-based day care businesses.
Clear small business accounting practices help ensure your income and expense calculations are accurate.
An alternative to the simplified method is to calculate your home office deduction using Form 8829. This formula requires determining the percentage of your home used for business and applying that percentage to eligible household expenses.
As with the simplified method, your deduction canât exceed your business income after other business-related expenses are accounted for.
Home-related expenses generally fall into three categories:
- Direct expenses. Costs that apply to only the business portion of your home, such as painting or repairs, are fully deductible.
- Indirect expenses. Costs that apply to the entire home, including insurance, depreciation, and utilities, are deductible based on the percentage used for your business.
- Unrelated expenses. Costs such as landscaping or remodeling other parts of the house arenât deductible.
Special rules apply to real estate taxes and home mortgage interest, because these items can also be deducted on Schedule Aâand you canât take the deduction twice.
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Hiring employees: Payroll rules and deductible wages
Hiring employees comes with additional payroll and reporting obligations. Employers must comply with federal and state wage laws, withhold and remit payroll taxes, provide Forms W-2, pay unemployment taxes, and meet other employment requirements.
At the same time, wages paid to employees are deductible business expenses. You can also deduct certain employer-paid benefits, such as contributions to health plans, group-term life insurance, dependent care assistance programs, and employee retirement, profit-sharing, and annuity plans.
Qualified business income (QBI) deduction
The qualified business income (QBI) deduction allows eligible self-employed taxpayers to deduct up to 20% of their qualified business income from their federal taxable income. The deduction is subject to income thresholds and other limitations, and you must file Form 8995 (or Form 8995-A) to claim it.
Business expenses the IRS wonât let you deduct
Not all business-related spending is deductible. Schedule C doesnât allow deductions for:
- Political contributions and lobbying expenses
- Bribes, kickbacks, penalties, and fines
- Certain sexual harassment or abuse settlements subject to nondisclosure agreements
- Charitable contributions (may be deductible on Schedule A instead)
- Most recreational or social club dues
- Entertainment expenses
- Improvements to real estate or personal property
- Personal or family expenses
The bottom line
As a self-employed taxpayer, youâre responsible for reporting your income and claiming only legitimate business deductions. The IRS allows you to reduce your taxable income by deducting ordinary and necessary expenses, but only if theyâre properly documented and truly business related.
The goal isnât to spend money just to lower your taxes. Itâs to run your business wisely, keep good records, and claim the deductions youâre entitled to.
This article was most recently revised and updated by Nancy AshburnThis article was most recently revised and updated by David Schepp
