Tax Year 2020: The Ultimate Tax Deductions List for Self-Employed Business Owners
Updated: Jan 2
Self-employed tax deductions are the superheroes of your business taxes. They swoop in, lower your tax bill, and save your wallet from some serious destruction. But before you can reap the benefits of tax write-offs, you need to know what expenses are tax-deductible if you work from home.
That’s where we come in. We’ve put together an epic list of self-employed deductions. And while not every deduction will apply to you, knowing what’s deductible can help you plan your future expenses.
Who Can Claim These Tax Deductions?
If you’re self-employed, then you can claim these tax deductions. The IRS defines self-employment as carrying on a trade or business as a sole proprietor, independent contractor, single-member LLC, or as a member of a partnership.
Even if your business isn’t making money, as long as you’re engaged in an activity that’s “profit-driven” (in other words, your goal is to make money eventually), then you’re still considered self-employed.
You also don’t have to be in business for yourself full time. If you have a side hustle and a part-time job, you’re still considered partially self-employed.
Self-Employed Tax Deductions
Advertising & Marketing
The cost of telling the world about what you do can quickly add up. The good news is that you can write off advertising expenses such as:
Online ads, like ad placements on websites and Google Ads
Social media advertising, like ads on Facebook, Instagram, Twitter, LinkedIn, and Pinterest
Print advertising in newspaper, magazines, and industry journals
Business directory listings
Email and social media marketing software
Content marketing costs
The cost to attend networking events
Even if you work from home, you still have to venture out into the world. If you drive your car for work, then you can write off your business driving and other costs associated with the trip. Driving to meet vendors, make pickups and woo clients can be hard on your car, but a few self-employment tax deductions might help you recoup some of that wear and tear.
What you can deduct: Deduct your “actual car expenses” instead. These include depreciation, licenses, gas, oil, tolls, parking fees, garage rent, insurance, lease payments, registration fees, repairs and tires. You may have to do this anyway if you’re using five or more cars in your business. If you’re leasing your car, check out IRS Publication 463 for rules about the amount of lease payments you can deduct.
There are two ways to write off the use of your car, through the mileage reimbursement (this is the most common method for home-based businesses) and the actual cost method.
Mileage reimbursement: Every year, the IRS sets a standard mileage rate. For 2020, the rate is 57.5 cents per mile. The way the reimbursement works is that you multiply your total annual business mileage by the standard rate. The result is your tax deduction.
Total business mileage x Standard mileage rate = Tax deduction
Let’s say you drive 1,200 business miles this year. When you do your taxes, you’ll multiply 1,200 by 57.5 cents:
1,200 x $0.575 = $690
In this example, you have a $690 deduction.
Actual cost: With the actual cost method, you write off a percentage of your total vehicle expenses. The percentage is calculated by dividing your business mileage by your total annual mileage.
Business mileage / Total mileage = Deductible percentage
For example, if you drive 1,200 business miles in a year and 6,000 total miles, then you’ll write off 20% of your car expenses. Car expenses include gas, insurance, car washes, oil changes, and repairs.
Let’s say your total annual car expense is $7,500. Here’s how you’ll figure out your deduction:
$7,500 x 0.20 = $1,500
Regardless of what method you use, it’s essential to understand what counts as business mileage. Business mileage is anywhere you drive for business that’s not to or from your principal place of business.
Your principal place of business is where you conduct most of your business. If you work from home, then your principal place of business is your home. If your principal place of business isn’t your home, then any drives from your home to that location are nondeductible.
But, don’t despair. All other business driving counts as business mileage, including driving to:
Visit clients or job sites
Meet with colleagues or contractors
Workshops and other educational events
Run errands for your business
The airport for business travel
What happens if your principal place of business is your home? Then anywhere you drive to and from for business is tax-deductible!
At the end of the year, tally the number of miles you drove in the car for business, multiply that by the IRS’ standard mileage rate — 57.5 cents per mile in 2020 — and deduct the total. Be sure to keep a mileage log; you’ll need it if you’re audited.
Got fees? No worries. You can deduct them if you only use your bank account for business.
Monthly maintenance fees
Credit card membership fees
Loan setup costs
Protecting yourself isn’t cheap, but you can write off the cost of your premiums for business insurance, employee accident and employee health insurance.
As business owners, we can’t do everything ourselves. Sometimes we need to outsource a job to an independent contractor, like a graphic designer or virtual assistant.
Anything you pay a contractor is tax-deductible, with one important caveat. If you pay someone more than $600 in a tax year for business-related services, you must file a Form 1099-MISC. The only exception is if you pay your contractor via credit card or PayPal. Then, the credit card processing company (or PayPal) is responsible for filing a 1099-K.
Commissions paid to affiliate partners are tax-deductible. Just be sure to file a Form 1099-MISC if someone earns more than $600 in commission, since affiliates are considered independent contractors.
Computer & Tech Equipment
From laptops and tablets to desktops and webcams, if you’re using a computer and other tech equipment for your business, you can write them off. And don’t forget about the small stuff, like replacing the laptop charger your dog chewed or swapping out your mouse for a snazzy new trackpad.
Dues & Memberships
Professional membership groups are a great way to stay connected with others and beat the work-at-home blues. Plus, you can write off the dues that you pay to be part of a professional organization.
Generally, you can’t club memberships in clubs (especially country clubs and travel-related clubs). However, the IRS carves out exceptions for memberships to boards of trade, business leagues, chambers of commerce, civic or public service organizations, professional organizations such as bar associations and medical associations, real estate boards and trade associations.
Renting equipment for occasional use? Keep track of those costs because equipment rental, including vehicles, is tax-deductible.
If you host events for your customers, you can write off the costs associated with throwing an event. You can write off:
Food and drinks
Supplies, like paper goods and flatware
Rentals, such as tables, chairs, and linens
Event staff, such as hiring a bartender
Furniture & Decor
No matter what you do, working in an empty space isn’t fun or practical. You can deduct the cost of furnishing and decorating your home office, offsite office, or other workspaces. The types of expenses you can write off are:
Furniture, such as a desk and chair
Decorative items, such as curtains, rugs, throw pillows, plants, and artwork
Health Insurance Premiums
Writing off your health insurance premiums as a self-employed business owner is a little tricky. You don’t write this off as a business expense. Instead, you write it off as a personal deduction.
And, this write-off isn’t limited to just health insurance. You can also deduct your dental and long-term care premiums.
To qualify, you must meet two requirements:
You aren’t eligible for an employer-sponsored health plan. This means you didn’t have an employee job that offered you health insurance. It also means your spouse didn’t have the option to enroll you in their employer-sponsored health plan. Even if your spouse chooses not to enroll you, if the option is there, then you can’t take this deduction.
Your business has net profit. Your business must have some taxable income to qualify for this deduction. How much profit your business earns determines how much of your health insurance you can deduct. If your business’s profit is more than your total premiums, then you can write off 100% of your premiums. If your business’s net profit is less than your total premiums, then you can only write off the amount equal to your net profit.
Ah, the coveted home office deduction. While home business tax deductions can add up to a significant write-off, there’s a lot to know about taking these deductions properly.
First, what counts as a home office?
You must use the home office “regularly,” which means, for example, you can’t see a client once in your home and call it a home office. But you don’t have to use your home office daily. It just needs to be used on an ongoing, consistent basis.
You must also use the office exclusively, meaning you only use the space for business and it’s clearly defined from your personal living space. That means you can’t claim your dining room table, couch, or bed as a home office.
If you have a qualifying home office, then there are two types of expenses you can write off: direct and indirect expenses.
Direct expenses: These are expenses that only relate to your home office and not your entire home. Direct home office expenses are fully deductible, and you’ll track them just like any other business expense.
Indirect expenses: These expenses are shared between your personal living space and your home office. You’ll write off a percentage of these expenses. To calculate the deductible percentage, divide your home office square footage by your home’s total square footage.
Home office square footage / Total home square footage = Deductible percentage
For example, if your home is 1,500 square feet and your home office is 300 square feet, it would look like this.
300 / 1,500 = 0.20 or 20%
You can write off 20% of your indirect home office expenses.
Indirect home office expenses include:
Mortgage interest and property taxes
Homeowners or renter’s insurance premiums
Homeowners association fees
Utilities, such as gas, electric, water, and garbage
Repairs made to your entire home, such as reflooring
Let’s say your total home expenses are $40,000. Here’s how you would calculate your deduction:
$40,000 x 0.20 = $8,000
In this example, your home office deduction is $8,000!
No one likes paying interest, but if you have to do it, at least you can write off the interest you incur on business loans or credit cards.
You don’t necessarily need to have a business credit card to deduct qualifying interest charges. If you use a personal card exclusively for business expenses, for example, you can generally still deduct the interest charges.
Licenses & Permits
Most businesses are required to obtain specific licenses and permits to operate legally. You can write off:
Permits from local, state, and federal agencies
The most important thing to know about the meals category is that it’s only 50% deductible. While you’ll pay for the whole meal through your business, you can only deduct 50% of the total cost.
The types of meals you can write off are:
Business meals with clients or colleagues (you must pay for the entire meal)
Travel meals (for you or an employee)