Have you launched a new business venture, recently become self-employed, or found yourself side-hustling up a storm? If so, you might be wondering: “What can I deduct as a self-employed individual?”
This tax season, make it your mission to get on top of your tax deductions and credits to relieve stress and boost your bank account with these tax tips for the self-employed.
We’ve covered tax deductions for your side hustle or new business entity before, so read that article first if you haven’t already. In this new blog post, we look at even more ways to take advantage of the best available tax deductions for self-employed individuals. When it’s time to file your tax return, you’ll be grateful that you took advantage of these tax tips.
For even more detailed information, download our free comprehensive guide to small business tax deductions, which is full of tips and strategies to help you understand the overall impact of business expenses on your tax return.
Here are 6 common deductions and tax tips for self-employed individuals:
1. Vehicle expenses
If you drive your own car for business, you can deduct the expenses associated with business travel. If you use your vehicle solely for business purposes, then you can deduct all of the operating costs; if you use your vehicle for both personal and business use, you will only be able to deduct the costs associated with business use, such as making deliveries, driving to a client’s location, buying business supplies, or any other work-related purposes.
There are two ways to calculate the vehicle expenses deduction:
- Standard mileage rate: The IRS provides a mileage rate that is updated annually.
- Actual car expenses: Add up all your car-related expenses for the year (gas, insurance, oil, tires, repairs, parking, tolls, registration fees, lease payments, depreciation, etc.) and multiply by the percentage of miles driven for business purposes.
Top tax tips for self-employed individuals:
- Keep detailed records of all costs associated with the business use of your vehicle
- Keep good records of the miles and dates you drive for work
- Consider using an app to help you keep a detailed log
Can I use the standard mileage rate if I’m self-employed?
Yes, self-employed individuals can use the standard mileage rate deduction provided they keep track of trips, including the beginning and ending odometer reading for each. The deduction is based on the number of miles you drive.
Is gas deductible for the self-employed?
Yes; as a self-employed person, you can claim deductions for expenses related to owning and operating a vehicle for business purposes, including gas and maintenance. However, if you’re using the standard mileage rate, it’s intended to cover expenses, like fuel. So, you deduct one or the other (most people choose the standard mileage rate).
2. Health insurance premiums
Although medical expenses are effectively deductible, not many taxpayers get to deduct them for the following reasons:
- You must itemize your deductions in order to deduct medical expenses
- Deductions are only available to the extent that medical expenses exceed 7.5% of your adjusted gross income (AGI)
- Most taxpayers get a greater benefit from the standard deduction
When you become self-employed, however, you can deduct health insurance premiums for yourself, your spouse, and your dependents. Note that this only applies if you are not eligible for any employer-sponsored health insurance through another job or your spouse’s job.
Another benefit is that if you continue to run your business after qualifying for Medicare, you can deduct the following health insurance premiums:
- Medicare Part B and Part D
- Supplemental Medicare (Medigap) policies
- Medicare Advantage plan
3. Special Social Security tax
In lieu of having payroll taxes taken out of your paychecks like a W2 employee, you need to pay a special 15.3% tax if you’re self-employed. This tax consists of two parts:
- 12.4% Social Security tax
- 2.9% Medicare tax
The maximum amount of self-employment income is subject to the 12.4% Social Security tax changes annually. You can find the latest thresholds on the IRS website.
The good news is that you can deduct half of your self-employment tax on your income taxes without having to itemize to take advantage of this deduction.
4. Retirement tax credits and shelters
Once you become self-employed, the door opens wide to tax-sheltered retirement plans. W2 employees are generally limited to whatever their employer offers, with independent plans generally subject to lower contribution limits. When you work for yourself, you can choose from a number of options, such as contributing to a Simplified Employee Pension (SEP) IRA, traditional IRA, Roth IRA, or a solo 401(k).
Don’t be tempted to neglect your retirement planning in favor of growing your business. Contact us if you would like assistance ensuring you’re saving for your future in a tax-advantaged savings vehicle.
You can find the latest retirement contribution limits here.
5. Qualified business income deduction (sunsetting in 2025)
The qualified business income deduction (Section 199A deduction) will expire in 2025, so make the most of it now! The deduction is available for the following business legal structures: owners of S corporations, partnerships, LLCs, and other pass-through entities, along with self-employed individuals operating as sole proprietors.
The qualified business income deduction (QBI) has several special rules and restrictions, but it is well worth taking if you’re self-employed. We recommend consulting a qualified tax advisor to ensure you’re following the rules.
You may also be interested in: What small business owners need to know about the 2025 tax credit sunset
What is qualified business income, or QBI?
QBI is the net amount of business income, gain, deduction, and loss included in your taxable income (less certain dividends, capital gains and losses, interest income, wage income, and some other items).
For now, eligible self-employed individuals can generally deduct up to 20% of qualified business income (QBI) from their business. The QBI component is subject to limitations, depending on the taxpayer’s taxable income. Another limitation phases out the deduction for high earners running certain types of businesses, such as accounting, actuarial science, athletics, consulting, health, law, performing arts, financial services, and more.
You can learn more about QBI and its limitations on the IRS website.
6. Expensing
When you buy new equipment for your business, you have two ways to declare the costs: depreciation (for assets) or expensing. The option you choose depends on the type and cost of the purchase. Depreciable assets are generally bigger-ticket items that have a lifespan of over a year in service.
Below is some more information about the two options to help you decide which is best for your business:
Depreciate the cost
Depreciating the cost involves deducting the cost of the item over the number of years the IRS estimates to be the lifespan of the equipment. For example, a computer has a life of five years, which means you can write off the cost over five years according to depreciation formulas.
Expensing
Does Section 179 reduce self-employment income?
Yes, it can (for now!). Expensing the cost of an asset (also known as the Section 179 deduction) lets you deduct 100% of the qualifying cost in year one. You can find the latest dollar limits of equipment eligible for expensing on the IRS website.
NOTE: The Section 179 deadline is December 31, 2025.
Now is a great time to invest in new or used equipment to benefit your business in the current year. You can claim an immediate deduction by purchasing or financing qualifying equipment and placing it into business service before midnight, December 31, 2025.
Get your Small Business Tax Deductions Guide
Want to learn more about the best tax deductions for the self-employed? We have put together a comprehensive guide of small business tax tips and strategies for tracking expenses, using detailed examples to help you take advantage of these tax savings.
When in doubt about whether you’re making the most of the top tax deductions for the self-employed, get in touch with our team to help with your tax and financial planning.