The 5 Best Tax Deductions for Freelancers & Solopreneurs

Ah, tax season. For many freelancers and solopreneurs, it’s a dreaded time when it finally sinks in: you don’t actually get to keep the money you make working hard in your business.

At least not all of it.

Whether you’re part of the gig economy, a full-time freelancer, or run some other sort of business, the government is willing and ready every year to take a percentage of the revenue you generated as a freelancer or solopreneur.

But just because you’re required to pay taxes every year doesn’t mean you should just roll over, throw your hands up in the air and hand over a huge sum of money without batting an eye.

No, there’s a better way.

When you work for yourself, there are a lot of great tax deductions that can save you quite a bit of money come tax time.

What is a tax deduction?

Before we dive into the list of best tax deductions for freelancers & solopreneurs, it’s important to understand what a tax deduction even is.

I hate to be the bearer of bad news, but a tax deduction is not the reduction of the actual amount you pay in taxes.

So if you have a $1,000 tax deduction, it doesn’t necessarily mean you’ll be saving $1,000 in taxes this year.

Instead, a tax deduction is a reduction of your total taxable amount of income. So if you have a $1,000 tax deduction, in reality you may potentially not have to pay taxes on that $1,000 which you spent.

The other bad news, which I alluded to above, is that most deductions (in order to claim them) have to be spent on something. More clearly: most deductions only occur once you’ve spent money on some sort of business expense like marketing or travel.

That’s why it’s important that you track your business expenses very closely. Every mile you drive, every expense you pay for could potentially come back to reduce your total amount of taxable income—ultimately saving you money.

Today, we’d like to share with you some of the most common (and hassle-free) deductions you can claim as a freelancer, side-hustler, solopreneur, or gig-economy worker.

We’re sharing this list as both a professional accountant and as someone who has spent over a decade coaching freelancers & solopreneurs.

After reviewing the list, you should still get with your own accountant for professional advice. As always, the authors of this post shall be held liable for the use or misuse of the information found herein (my lawyer makes me say that).

Now, on to the list!

Quick wins: 5 Best tax deductions for freelancers & solopreneurs

1. Everyday Supplies

When it comes to tax deductions and preparation for freelancers, supplies used as part of your business are some of the most common and best deductions available to save money on your taxes. Such supplies include electronic equipment like headphones or microphones. It can include office supplies even as simple as paper clips or sticky notes.

For most freelancers or solopreneurs, it can be hard to differentiate between what is personal and what is business. For example, if you are purchasing several items at a time, whether online or in a brick-and-mortar store, you should separate the items you purchased for personal use and the items you purchased for business use.

One easy way is to use debit or credit cards that are opened specifically for your business transactions. This will also help you in being able to deduct the sales taxes you pay on the everyday supplies you are purchasing since the sales tax is built into the purchase.

Sometimes freelancers feel that it isn’t worth the time to separate personal from business transactions when the purchases are so insignificant. As I explain in my Udemy course, every dollar you have in expenditures on supplies or any other items can save you around $0.25 or more on taxes at the end of the year. So keep track of even the little things.

Supplies are one of the most common expenditures as part of any business. If you keep track of the money you are already spending on those supplies, regardless of how insignificant that you think they are, you may find yourself saving some of your hard-earned money at tax time.

2. Software Subscriptions and Service Fees

For most freelancers or solopreneurs, one of the largest expenses related to operating a small business is subscriptions for various types of software. This could include any type of marketing software, subscriptions to freelance job sites, tax preparation or accounting software, invoicing apps, or any other kind of software subscriptions.

Those amounts can add up to be a significant deduction for you when you go to file your taxes. Especially when they are items you need to keep your business operating.

Another expenditure that is similar to software subscriptions costs is service fees paid for using certain pieces of software. Often these costs are not charged on a regular basis but they act the same way that subscription costs do.

A common example of these types of service fees include PayPal service fees or the percentage charged by websites like Fiverr, Upwork, Udemy, Etsy, or other similar platforms when you generate a sale through their website.

These types of fees can only add to the total deductions that you have a right to when you go to file your taxes each year.

3. Home Office Deduction

Another major potential deduction designed for freelancers and solopreneurs is the home office deduction. Fortunately, you can take this deduction for exactly what it sounds like. This is a deduction for the office space in your home when you use it as part of your business.

However, there are some requirements that must be met in order to take this particular deduction.

First, you must use the home office on a regular basis. This typically means that you use the space several times each week as you work on your freelance jobs, similar to how you would use an office at work. It also means that the office is your main workspace for your business.

The other requirement is the one that most often disqualifies freelancers and solopreneurs from taking the deduction. It is the requirement that the home office be used exclusively for your business.

This means that you can’t use the space for personal use whatsoever. You can’t store personal items in the office space, allow pets in the office, sleep in the designated space, or even watch netflix at your home office desk.

Obviously, satisfying the exclusive use requirement can be difficult to prove. However, doors with locks and other similar measures can help in proving that it is used exclusively as part of your business.

There are multiple ways to calculate the amount of the deduction you can take. However, under the simplest method, you can take a deduction for up to $1,500 per year. This could mean a tax savings of around $400 each year with this deduction alone.

Most tax preparation software and tax professionals can help in filing the correct forms to take the deduction but it is up to the taxpayer to qualify for this deduction.

4. Self-Employed Health Insurance Deduction

One of the most common issues faced by freelancers and solopreneurs is finding and paying for affordable health insurance. Often, the self-employed individual has much higher health insurance costs than someone who is working as an employee.

Because of this, there is a deduction that can be taken for the amount paid for self-employed health insurance that the typical employee cannot take.

Let me be clear, this is not meant to be taken as a business expense. Rather, it is taken as an adjustment to your total income, which is a better way to take this deduction.

As you prepare your taxes or have a professional prepare them for you, you should be asked for the amount of health insurance premiums you paid throughout the year. As a final note, this deduction is only for premiums paid by a self-employed individual and not for premiums paid as part of an employer provided health insurance plan.

5. Retirement Contributions Deduction

The last deduction we will focus on for the freelancer or solopreneur is for contributions made to self-employed SEP IRA plans.

A SEP IRA stand for a Simplified Employee Pension Individual Retirement Arrangement. Simply put, it is a retirement account created for self-employed individuals with less than 100 employees. The good news is that the contributions to such accounts can be tax deductible.

For the 2018 tax year you can contribute the lessor of $55,000 or 25% of your compensation (net earnings from the business if self-employed). This is nearly 10 times the amount that can be contributed to a traditional IRA by those that are not self-employed. Further, this contribution decreases your taxable income dollar-for-dollar.

In other words, if your taxable income fell in the 22% tax bracket and you contributed $10,000 to your SEP IRA during the year, you would save approximately $2,200 in taxes.

One of the downsides to making contributions to a SEP IRA is that you are not allowed to take the funds out until retirement without paying penalties.

Additionally, contributions to IRA accounts can be made until the original tax filing deadline for the prior year. In other words, if you are reading this prior to April 15, 2019, you are still able to make a contribution for 2018.

In this way, many people will prepare their tax return then evaluate whether they want to make a contribution for the prior year to reduce their overall taxes. The brokerage company in which you set up your SEP IRA can help you make the contribution for the prior year rather than the current year.

What are you waiting for?

That completes our list of the 5 best tax deductions for freelancers and solopreneurs. Of course, there are far more options and opportunities depending on the kind of work you do, how much you make and other variables.

We’d suggest you run any or all of these ideas past a tax professional when filing your taxes this year.

For now, go out and see if you can save yourself a little bit of money to reinvest back into your small business.