No time of the year is more intimidating than tax time, especially if you’re self-employed. You need to remember all your tax deductions to avoid overpaying taxes, which is a job in itself.
If you track your expenses throughout the year, however, you can save yourself plenty of work when tax season rolls around. Here’s a cheat sheet to the most common expenses you may be able to write off – and some you can’t – when you’re self-employed.
This article is intended to help self-employed individuals with an LLC or a sole proprietorship in California, but some of these write offs may apply to other business entities. Consult with a tax professional if you’re unsure.
Expenses You Can Write Off
With self-employment deductions, there are several categories you can maximize for your deduction. Here are some of the standard deductions:
- Self-Employment Tax Deductions: Retirement, Medicare and Social Security taxes, health insurance
- Home Office Deductions: Rent or mortgage payments, utility bills, repairs, and insurance premiums for your office space
- Business Insurance: General liability, workers’ compensation, commercial auto coverage
- Business Vehicle Expenses: Maintenance and fuel costs, lease payments
- Depreciation: The value of business machinery or equipment that depreciated over time
- Business-Related Meals: Meals with business associates or clients
- Office and Supply Expenses: Pens, pencils, paper, postage fees
- Business Travel: Travel expenses to attend client meetings, conferences, etc.
- Professional Fees: Legal or accounting fees, such as for real estate accounting
- Business Software: Accounting, automation, customer relationship management
- Education Costs: Continuing education, seminars, or coaching
- Taxes and Licensing: Taxes or licensing fees to run your business
- Commissions: Commissions paid to agents or third-party vendors
- Contractor Labor: Costs associated with contractors or freelancers
- Qualified Business Income: Rental, trade, or business income
- Phone and Internet Bills: Bills for these services specifically related to your business
- Bad Debt: Any debts your business incurs that’s uncollected
- Charitable Contributions: Donations to charities or nonprofits
What You Can’t Write Off
Contrary to popular belief, you can’t write off just any expense that you have for your business or work. Here are some expenses that aren’t typically deductible:
- Groceries: These are considered a personal expense in most cases
- Cost of Clothing: Unless it’s required for work, this is considered personal use
- Federal Income Taxes: These taxes aren’t included in the other taxes that are deductible
- Monetary Value of Volunteer Work: The time you spend volunteering is not deductible
- Personal Phones: Phones used strictly for personal purposes are not deductible
- Pet Expenses: Vet bills, food, or professional services are not deductible unless your pet provides a service for your business
How to Prepare for Your Tax Season
The best way to maximize your deductions is by tracking your expenses throughout the year and ensuring that you don’t have any errors. Her are some tips to prepare for your tax season:
- Keep receipts and invoices to track your payments and dates
- Retain copies of bank statements to validate cash flow and assess total income
- Keep canceled checks to provide proof of payment for business expenses
- Make copies of credit card receipts and statements as proof of payments
- Track mortgage and loan documents to verify your business-related payments
- Keep interest statements to show revenue from interest-bearing accounts
Maximize Your Deductions at Tax Time
Expenses are a great way to reduce your taxable income, but many self-employed individuals are too afraid of their taxes to include all their deductions. Prepare for tax time during the year, learn your available deductions, and avoid overpaying on your taxes.
Shahar is a tax and accounting expert with over 20 years of experience in the field. He is an entrepreneur and known as The Tax Guru on the west coast. Shahar moved to Seattle from Israel and founded, scaled, and sold a leading tax and accounting firm in the Seattle Metro area. Over the years, he served thousands of business owners and perfected the playbook for self-employed tax strategy. That’s why he founded Formations, to make sure the self-employed never overpay on taxes again.