How to Deduct Write-Offs Without an LLC
The best proof that there’s too much red tape in the world is the anxiety we feel when it’s missing. Our form-obsessed culture drives people to prematurely register their companies as LLCs, often resulting in higher compliance fees and taxes.
What many self-employed people and small business owners don’t realize is that you can still write off your business expenses without registering as an LLC.
How you’re taxed as a sole proprietor
A “sole proprietor” is just a fancy term for someone who works for themself and who hasn’t registered their business as its own legal entity.
It’s a default classification, so you don’t have to file anything to begin operating after acquiring your normal business licenses and permits. (Depending on the industry that you’re in, though, you might have to get local permits to operate.)
That’s right — as a sole proprietor you are not required to register with federal or state governments. You’re off the grid. At least until April 15, when you have to file your taxes.
Sole proprietors vs single-member LLCs
Sole proprietors are taxed the same way as single-member LLCs (SMLLC). A SMLLC is simply a sole proprietor that has registered their business as an LLC with the state.
Both sole proprietorships and SMLLCs are considered “disregarded entities” for tax purposes, meaning the IRS doesn’t recognize any legal difference between the business and its owner: they are one and the same.
Disregarded entities are reported on the owner’s individual 1040 tax return.
How sole proprietors can write off business expenses
To write off your business expenses, you’ll use — drumroll please — the legendary Schedule C!
First introduced in 1950, this Baby Boomer of a form has been a faithful companion to freelancers for decades. One of the more straightforward forms in the IRS repertoire, the Schedule C is officially titled Profit or Loss from Business (Sole Proprietorships). This form makes it easy to report your gross sales and business expenses, which you can write off. You enter these on Part II of the form.
You’ll use your Schedule C to figure out your net income, which is your revenue minus your business expenses. This is what you’ll actually be taxed on as a freelancer.
What sole proprietors are taxed on
Once complete, your “net income” is reported on Schedule 1 of your personal 1040 and is subject to income and self-employment taxes.
Self-employment taxes, or FICA, are Social Security and Medicare tax. Normally, a W-2 employee has their portion of FICA (7.65%) withheld from their wages, and their employer matches it, with the combined rate being 15.3%.
Since self-employed individuals are both the employee and the employer, they’re required to pay FICA in both capacities. In other words, the full 15.3%.
Bummer, I know. Don’t shoot the messenger. On the bright-side, the employer portion of the tax can be written off.
After you figure out all your income and expenses, you then attach the Schedule C to your 1040 and send it to the IRS.
Write-offs you can claim without an LLC
A 15.3% tax rate would ruin anyone’s day, but luckily, only your net income is subject to it. So the best way to avoid paying Uncle Sam is to claim as many business expenses as possible.
In terms of eligible write-offs for sole proprietors, think outside the box! Most freelancers and independent contractors underutilize the deductions available to them, which means they’re overpaying on their taxes.
Below is a list of tax-deductible expenses that frequently get missed:
- Business use of your home office: If you regularly work at an at-home workstation, you can deduct home-related expenses like your rent and utilities — not to mention all your office furniture
- Business use of your vehicle: If you drive for your business, you’re allowed to deduct either your annual business mileage or a portion of your vehicle's actual expenses.
- Health insurance premiums: Out-of-pocket health insurance is fully deductible. Even better, you can claim your spouse’s and dependents’ as well! The fine print is that this only reduces your income taxes, not your self-employment taxes.
- Continuing education: This includes any costs incurred to hone your skills or further your expertise.
- Marketing and advertising costs: Website fees, logo designs, professional headshots — all of these count . However you decide to promote yourself or your business, it’s tax-deductible.
- Business meals: The lunch you paid for while meeting with a client, donuts for the staff meeting, or dinner at a tradeshow — all business meals are 50% deductible. (And, in 2021 and 2022, restaurant meals are 100% tax-deductible!)
If you want to make sure you’re not missing any write-offs, you can use Keeper Tax! The app automatically scans your purchases for eligible business expenses, so you don’t overpay on your taxes.
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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 email@example.com if you have questions.