Self-employed contractors and business owners are eligible for a variety of business-related tax deductions that can significantly reduce income tax. Common tax write-offs for self-employed workers include health insurance, a portion of self-employment tax, home office expenses and the business use of a vehicle. Self-employed workers can also deduct individual retirement account contributions in most cases.
Self-employed workers have to pay a "self-employment tax" that helps fund Medicare and Social Security. The self-employment tax rate is 13.3 percent in 2012. You can deduct half of self-employment taxes you pay on your federal income tax return.
Self-employed workers don't have access to employer-offered job benefits like health insurance. It can be costly to purchase health insurance directly from an insurance company outside of a group insurance plan offered by an employer, but the Internal Revenue Service lets self-employed workers deduct health insurance premiums. The deduction applies to health, dental and long-term care insurance premiums paid for yourself, a spouse and your dependents. You can't take the deduction if you have access health insurance through a spouse's employer.
Home Office Expenses
The cost of operating a home office used regularly and exclusively as a main place of business is tax-deductible. Expenses directly related to running a home office, such as supplies and repairs to the office are fully deductible. Expenses shared between a home office and the rest of a home are deductible based on the office's size compared with the home's size. For instance, you can deduct 10 percent of shared expenses for a home office that takes up 10 percent of your home's total area.
Business Use of a Vehicle
The use of a vehicle for business purposes is tax-deductible. Business purposes include visiting clients, traveling from a main workplace to a secondary workplace and traveling away from a tax home. The cost of commuting to a normal workplace, such as an office away from home, is not deductible. The IRS lets you deduct your actual business-related vehicle expenses or take a deduction equal to your total business mileage multiplied by a standard mileage rate. The standard mileage rate is 55.5 cents per mile for the 2012 tax year and was set to increase to 56.5 cents per mile Jan. 1, 2013.
Other Business Expenses
A variety of other common business-related expenses can be subtracted from business income when calculating profit or claimed tax deductions. The cost of goods sold, which describes the costs that go directly into producing products, can be subtracted from gross business income when calculating taxable business income. Other deductible expenses include employee pay, contributions to employee retirement plans, rent and business-related taxes, interest and insurance.
You can deduct traditional individual retirement account contributions you make as a self-employed worker if you are unmarried, regardless of your income level. If you are married and your spouse has access to a retirement plan through an employer, you can't deduct IRA contributions if your joint income is $183,000 or more in the 2012 tax year.
- Internal Revenue Service: Deducting Business Expenses
- Intuit: Deducting Health Insurance Premiums If You're Self-Employed
- Bankrate.com: A Dozen Deductions for Your Small Business
- Internal Revenue Service: 2012 IRA Contribution and Deduction Limits - Effect of Modified AGI on Deductible Contributions if You are NOT Covered by a Retirement Plan at Work
- Internal Revenue Service: Standard Mileage Rates for 2013
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.