The deductions self-employed people most often miss

Every dollar of legitimate business expense you fail to claim costs you both income tax and self-employment tax — a combined marginal cost that frequently exceeds 30%. A missed $2,000 of deductions is not a $2,000 problem; it is a $600 one.

These are the ones people most often leave on the table, and why.

The home office deduction

The most under-claimed deduction in freelancing, avoided because of a persistent myth that it triggers audits. It does not. It is a standard deduction claimed by millions of people, and the IRS created a simplified version specifically to make it easier.

The simplified method: $5 per square foot of dedicated workspace, up to 300 square feet — a maximum of $1,500. No receipts, no calculations, one line.

The actual expense method: work out what percentage of your home the office occupies, then claim that share of rent or mortgage interest, utilities, insurance, and repairs. On a $2,400 monthly rent with a 12% workspace, that is around $3,500 a year — more than twice the simplified cap.

The requirement is regular and exclusive use. The space must be used for business regularly, and not for anything else. A spare room used only for work qualifies. The kitchen table does not, because you also eat there. A corner of a bedroom with a desk used only for work can qualify, since the test applies to the area, not the whole room.

One important limit: as an employee you cannot claim this at all. It is for self-employment income only.

Mileage

The standard mileage rate is meant to cover fuel, insurance, maintenance and depreciation in a single number, and for most freelancers it beats tracking actual costs — both in value and in effort.

What counts is narrower than people assume. Driving from home to a regular office is commuting and is never deductible. But if your home is your principal place of business, trips from there to clients, suppliers or job sites are business miles from the moment you leave the door. Establishing a qualifying home office therefore converts a large amount of previously non-deductible driving into deductible mileage.

You need a contemporaneous log — date, destination, purpose, miles. An app that runs in the background is worth the small subscription, because reconstructing a year of mileage from memory in April is both miserable and indefensible if questioned.

The phone and internet you already pay for

You almost certainly use both for business, and the business share is deductible. Most freelancers claim nothing, because splitting a personal bill feels like a grey area.

It is not, provided you are honest. Estimate the business percentage reasonably — 50% for a phone is common and defensible for someone whose work involves calls and email — and apply it consistently. Keep a note of how you arrived at the figure.

On a $90 phone bill and $70 internet, a 50% business share is about $960 a year in deductions. Worth ten minutes of thought.

Health insurance premiums

If you are self-employed and not eligible for coverage through an employer or a spouse’s employer, your health, dental and qualifying long-term care premiums are deductible above the line — you get them whether or not you itemise.

This is one of the largest deductions available to a freelancer paying for their own coverage. Family premiums can easily reach $20,000 a year.

Two things to know. It reduces your income tax but not your self-employment tax. And it reduces your QBI, which slightly reduces your QBI deduction. Still overwhelmingly worth claiming.

Retirement accounts that dwarf an IRA

A regular IRA lets you contribute a few thousand dollars. The self-employed versions operate on an entirely different scale, and this is the largest lever most freelancers have.

SEP-IRA — contribute roughly 20% of net self-employment income, up to a cap in the high five figures. Simple to open, no annual filing, and you can set one up and fund it right up to your filing deadline including extensions. That last point matters: you can decide in April, after you know what you earned, to reduce the tax on the year that just ended.

Solo 401(k) — usually allows a larger contribution at moderate income, because you contribute both as employee and as employer. More paperwork, and it generally must be established before year end, but at $80,000–$150,000 of profit it typically shelters more than a SEP.

Either one reduces your income tax substantially. Neither reduces self-employment tax, because that is calculated before these contributions.

Things people wrongly believe they cannot claim

• Education that improves skills you already use. Courses, books, conferences and professional subscriptions are deductible. Training that qualifies you for a new profession is not.
• Bank and payment processing fees. Stripe and PayPal fees are a real cost of doing business and are fully deductible. On $80,000 of income processed at 2.9%, that is over $2,300.
• A portion of a meal with a client, at 50%, when there is a genuine business purpose and you keep a note of who and why. Meals alone while working locally are not deductible.
• Business start-up costs from before you had any income — up to $5,000 in the first year, with the rest amortised.
• Software, subscriptions and tools, which for most freelancers quietly add up to more than they realise once listed out.

Things you genuinely cannot claim

• Your own time. Unpaid work has no deductible value.
• Commuting to a regular workplace.
• Clothing unless it is genuinely unsuitable for ordinary wear. A suit is not deductible however strictly work requires it.
• The whole of a mixed-use item. A laptop used 70% for business is 70% deductible.

The point of all this

Deductions reduce your net profit, and net profit is what both self-employment tax and income tax are calculated from. That is why they are worth more to a freelancer than to an employee: you are saving roughly 14% of self-employment tax on top of your income tax rate.

Once you know your real net profit, the calculator below will show what you actually owe on it, and what to set aside each time you get paid.