Can I Take the Standard Deduction and Deduct Business Expenses?
Self-employed people and small business owners tend to spend a lot of their own money on work.
At the end of the tax year, all those business expenses can lead to sizable tax savings. And that's a good thing, especially considering the high self-employment tax rate. (You've got income taxes to worry about, and your self-employment taxes on top — the ones that cover your Social Security tax and Medicare taxes.)
Given the size of their tax bills, it's no wonder that self-employed individuals want to lower their taxable income by as much as possible. Here's a common question among independent contractors and freelancers: can you take the standard deduction and still deduct business expenses?
Long story short, the answer's yes. Here's everything you need to know about the standard deduction as a freelancer.
What is the standard deduction?
The standard deduction is a tax write-off that every single American can take. Here's how much it's worth as of 2021:
- For single filers and spouses filing separately: $12,500
- For married filing jointly: $25,100
- For Heads of Household: $18,800
Standard deduction vs. itemizing expenses
When it comes to the standard deduction, you've got a choice. You can either take the $12,000 and change, no questions asked, or you can itemize your personal deductions on your tax return.
It's important to note that these personal itemized deductions have nothing to do with your deductible business expenses, which you can claim on top of the standard deduction. More on that later!
Itemized deductions that you can replace with the standard deduction include the following:
- 👼Charitable donations
- 🏥 Medical and dental expenses
- 🛒 State and local income taxes or sales taxes
- 🏘️ Real estate taxes
- 💰Personal property taxes
- 💸 Mortgage interest
- 😷 Health insurance premiums (Though health insurance is deductible for self-employed people)
- 🌊 Disaster losses from a federally declared disaster
Tax filers who choose to itemize will indicate the personal deductions they're taking on Schedule A of their tax return.
Does it make sense to take the standard deduction?
If all the itemized deductions you can take add up to more than your standard deduction amount, then it makes sense to track them separately.
Most people, though, take the standard deduction. (87% of taxpayers opted for it in 2019.) It's been especially attractive in recent years. The Tax Cuts and Jobs Act, for example, nearly doubled it in 2017.
As a self-employed person, you'll have to make this decision along with every other American tax filer. Your business expenses, though, go in a whole other category.
You can always take those on top of the standard deduction.
What the standard deduction means for your taxes
If someone who only works W-2 jobs makes less than the standard deduction amount, they won't actually be on the hook for income taxes at all. Their taxable income gets reduced to zero.
Unfortunately, things are different for self-employed people. If you freelance, do gig work, or run a small business, you'll always have to pay self-employment tax on your 1099 income — even if it's much less than the standard deduction.
Here's an example. Let’s say you earn $50,000 a year. A solid $45,000 of that is from W-2 jobs. Only $5,000 is from a bit of 1099 work you do on the side — maybe driving for Uber on the weekends, or occasionally renting out a spare room on Airbnb.
In this scenario, your 1099 income is a lot less than the standard deduction. But you’ll still owe around $1,500 in taxes on just that income. (This assumes a standard 30% effective rate for 1099 income). That’s not nothing!
You can see how this works for yourself using our self-employment tax rate calculator. Enter an income from 1099 work — even a pretty low one — and you'll see how high the tax rate on it goes.
How to write off business expenses on top of the standard deduction
You'll always get taxed on your self-employment income, even if it's less than the standard deduction.
That's not exactly happy news. But luckily, it's also true that you can always deduct your business expenses — even if you take the standard deduction.
Personal vs. business itemized deductions
A lot of freelancers and independent contractors don't realize they can write off business expenses if they claim the standard deduction.
Why? Because it's pretty common to get personal itemized deductions confused with deductible business expenses.
Personal deductions go on your Schedule A, like we talked about above. But itemized business deductions are something else entirely. These are the purchases you make for the sake of your 1099 work.
These go on Schedule C. Just follow the instructions on the form.
Claiming business write-offs on Schedule C
If you’re self-employed, you'll use Schedule C to report both the earnings from your business and the expenses you incurred to run it. (This is true whether you have a sole proprietorship or a single-member LLC.)
You'll use Schedule C to figure out your net earnings. (After subtracting your business expenses from your gross income, you'll indicate whether you had a profit or a loss on line 7a.)
What business expenses can you deduct?
Everything you spend on your freelance work or small business is tax-deductible on your Schedule C.
If you want someone to keep track of your deductible expenses for you, give Keeper Tax a try. Our app automatically scans your transactions for eligible write-offs, so you won't have to do any manual expense tracking. You'll also get access to human bookkeepers who review your write-offs. (They'll even answer your tax questions!)
Want to learn more about the write-offs you can take? Check out our intro to tax write-offs, or take a look at our job-specific deduction finder. (Whether you're a real estate agent or a freelance designer, we've probably got a guide for you!)
In the meantime, though, here's a list of common business deductions.
🚗 Car expenses
If you drive at all for your 1099 work, you can deduct all your car-related expenses. From your gas and insurance, to your lease payments and vehicle depreciation, and more, all these costs are deductible on your taxes.
There are two ways to claim car expenses: using the standard mileage rate, or deducting your actual vehicle expenses. If you want to learn more about the pros and cons of each method, check out our post on mileage vs. actual expenses.
Here's a general rule of thumb: if you drive a pretty typical amount, you're probably better off deducting actual expenses. If you drive a lot for work, though — say, as a rideshare or delivery driver — you'll likely benefit from using the standard mileage rate.
🛫 Travel expenses
If you ever travel for your freelance work, the cost of those business trips is a deduction for you. That goes beyond obvious travel expenses, like your hotel fees and plane tickets. You can also write off things like laundry fees, Wi-Fi charges, and the meals you eat on the go.
To learn more — including what you can write off and what the IRS rules are for qualifying — check out our guide on business travel tax deductions.
Working for yourself means you need to keep your skills sharp. Luckily, courses and study materials related to your field count as tax-deductible education expenses.
You don't even need to get a degree or a certificate to write something off as an education expense. Some pretty unusual purchases can count — like a concert if you're a music teacher. To learn more, take a look at our post on work-related education expenses.
🏠 Home office expenses
The home office deduction is another popular business expense for self-employed people. This deduction lets you claim a portion of home-related expenses, like your rent, utilities, home insurance, and home repairs.
Of course, you'll only qualify if you use at least part of your home for business purposes — to store inventory, meet clients, or actually do your work. Want to find out if you can take this deduction? Check out our home office deduction quiz!
There are two ways to write off your home office expenses. The simplified option entails multiplying the square footage of your home office by a standard dollar amount, up to 300 square feet. (The current rate is $5 per square foot.) Meanwhile, the actual expense method lets you write off what you actually spend on housing.
To find out more, take a look at our article on whether you should use the simplified method.
🏢 Commercial rent
If you lease a separate workspace for your business, you can deduct your rent. Just keep in mind: The property you rent can’t be registered with your name.
You can also claim the rent you pay on any space where you store inventory.
💻 Computers and software
For most freelancers and independent contractors, it’s impossible to do any work without a computer. Luckily, your laptop (or desktop) is tax-deductible.
So is any software that you use on the job. That includes web conferencing programs like Zoom or Microsoft Meets, cloud storage systems, and design tools like the Adobe Suite.
🛍️ Inventory costs
If you're an online seller, the cost of your inventory will probably be one of your biggest expenses. The technical term for this is "cost of goods sold." It's one of the most popular write-offs in manufacturing and retail.
Here's how it works. You buy things that are initially categorized as inventory. When that inventory is sold, it's converted into your cost of goods sold. This lets you calculate the profit you make on your sales.
👔 Payroll expenses
Does your small business have any W-2 employees? (If you're running an S corp, this can include yourself!)
If so, you can write off the salaries and wages you pay. If your employees sometimes make work purchases that you later reimburse them for, you can deduct those costs as well.
📰 Advertising expenses
You can deduct all the costs associated with promoting your business. From billboard ads to Google ads, all kinds of promotional costs count, whether they're old-school or born-digital. Don't forget your website hosting fees!
✉️ Postage and delivery
Do you need shipping and delivery services to do your work? If so, all your postage, shipping, and packaging can be deducted.
💵 Tax and licenses
Any license and tax related expenses for your business are deductible. These can include annual LLC registration fees, state franchise taxes, and payroll taxes.
Unfortunately, though, you can't write off things like traffic tickets and penalties for failing to file your taxes by the deadline.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.