Tips for finding work-related tax deductions when you’re self-employed
Salaried employees can no longer claim job-related deductions, but self-employed workers are eligible for a wide range of write-offs.
Uncle Sam is making some big tax changes this year, and one of the areas that concerns employees are the new rules surrounding tax deductions. Indeed, “2018 is a fundamentally different tax year,” says Mark Steber, chief tax officer at Jackson Hewitt, “so you need to know the new rules.”
Under President Trump’s new Tax Cuts and Jobs Act, salaried employees (read: those filing a W-2) can no longer claim deductions for unreimbursed work-related expenses. Job-search expenses are also no longer tax deductible.
Self-employed workers, though, can still deduct for a wide range of business expenses, says Lisa Greene-Lewis, CPA and Tax Expert at TurboTax. In fact, there’s a brand new tax cut for self-employed professionals called the Qualified Business Income (QBI) deduction.
In a nutshell, the QBI deduction lets business owners write off 20% of their net taxable business income on their tax returns. So, if you earned $100,000 as a self-employed worker, you’d be eligible to deduct $20,000 of your business income. The caveat? The deduction is more limited for independent workers with taxable income of more than $157,500 for single filers and of more than $315,000 for married couples filing jointly.
In addition, there are a number of other tax breaks for self-employed workers, including the following.
If you drive an automobile for work, there are two ways you can deduct for job-related transportation expenses. The simpler option is to deduct a flat rate for the number of miles you drove for work. This year, the standard mileage rate for the use is 58 cents per mile of business use.
The second, albeit more complicated option is the “actual expense method,” where you can write off the full costs to own and operate the automobile, proportional to the overall use of the auto for business. Eligible expenses include:
• Repairs and maintenance
• Deprecation (or lease payments)
• License and registration fees
• Parking fees and tolls
• Vehicle cleaning expenses
• Towing charges (for repairs only)
• Auto club dues / roadside assistance service fees
“For most people, the actual method is a bigger write-off,” says Steber. But, in addition to keeping up with your business mileage, you would have to meticulously track all of your car expenses in order to deduct using the actual method. “The IRS frowns on you estimating your automobile expenses,” Steber warns. “You need to keep detailed records. If you get audited, the IRS will ask to see documentation.”
Generally, expenses incurred while you’re traveling for work are tax deductible. This would include airfare, trains, buses, rental cars, taxis and car services, hotels, and meals while you’re away from home. But, if you’re treating clients to sporting events, concerts, or other forms of entertainment, these expenses are only deductible at half the actual cost.
“In the olden days, when you would go out and have a three-martini meal with a client, you’d deduct the cost wholeheartedly,” says Steber. “That’s now restricted.”
Computers, printers, and other business equipment are tax deductible, as well as business tools and supplies. “Depending on your accounting method and what you’ve purchased,” Greene-Lewis says, “you may be able to deduct the full cost of equipment for the year that you put it in service,” or you may have to amortize the deduction over time.
If you have a space in your house that’s devoted exclusively to business use, the IRS will let you deduct mortgage interest, insurance, utilities, maintenance and cleaning, repairs, and depreciation. How much you can deduct depends on the size of the office, relative to the overall square footage of the home.
For example, if your home office space is 10% of the total square footage of your house, you can deduct only 10% of utilities, insurance, property taxes, and other eligible expenses from your income.
Alternatively, the IRS offers a safe harbor home office deduction of up to $1,500, based on $5 per square foot of home exclusively used for business (maximum 300 square feet). If you take the safe harbor option though, you cannot deduct home depreciation. “Taking the simplified deduction might not save you as much money, but you at least avoid the hassle of record keeping,” says Alison Flores, principal tax research analyst at The Tax Institute at H&R Block.
Union and professional dues, work-related licenses, legal fees, and newspaper/magazine subscriptions
Many self-employed workers pay dues or fees to maintain professional licenses or certifications. These expenses are fully deductible “so long as they are an ordinary and necessary expense for your business,” Flores says.
Health insurance premiums are tax deductible as business expenses for self-employers workers, Greene-Lewis notes.
Work-related education expenses
Self-employed workers can claim deductions for job-related education programs, certification courses, and professional training. However, education expenses must be relevant to your scope of business. “If you’re an electrician and you take a photography class just for fun, that wouldn’t be tax deductible,” Steber says.
Business startup costs
If you started a business last year, you can deduct certain startup and organizational costs on your tax return this year. Eligible startup costs include:
- Analyzing products or markets
- Visiting potential business locations
- Consultant fees, such as attorneys and accountants
- Incorporation fees and expenses
- Legal fees
- Travel costs to locate suppliers and distributors
- Advertising expenses
No matter how many years you have in the workforce, it’s not easy to keep up with all the changes that affect you. Could you use some help? Join Monster for free today. As a member, you can sign up to have career advice, job search tips, and workplace trends sent directly to your inbox. From getting organized to getting a raise, we have the info to help you stay ahead of the curve.
This article is not intended as a substitute for professional tax advice. Always seek the advice of a tax professional regarding any questions you may have.