Self-Employment Tax Deductions for Freelancers

Freelancers and sole proprietors pay two kinds of federal tax: self-employment tax (15.3% on 92.35% of net earnings) and income tax. Deductions work on both, but not equally. A deduction taken as a business expense on Schedule C reduces both taxes, because it lowers the net profit that both are calculated from. Deductions taken on Form 1040 reduce only income tax. Knowing which is which helps you prioritize record-keeping and plan purchases.

The standard for a business expense

The IRS lets you deduct expenses that are both ordinary (common and accepted in your trade) and necessary (helpful and appropriate for your business). They must be for the business, not personal use. When an item is used for both, such as a phone or a car, deduct only the business percentage. You must be able to substantiate expenses with receipts, invoices, mileage logs or bank records.

How much a deduction is worth

At $100,000 of gross receipts with no expenses, a single freelancer in Texas has a total federal tax bill (self-employment tax plus income tax) of $22,365. Add $20,000 of legitimate business expenses and net profit becomes $80,000, with total tax of $16,647. The $20,000 of expenses cut the tax by $5,717, or about 29% of every dollar spent. The saving is substantial, but remember that spending a dollar to save about 28 cents of tax still leaves you out of pocket; deductions reduce the cost of a necessary purchase, they do not make unnecessary ones free.

Adjustments that come off before income tax

1. Half of your self-employment tax

You may deduct the employer-equivalent half of your SE tax on Form 1040. It is automatic, handled on Schedule SE, and reduces income tax but not SE tax. On $80,000 of profit, the SE tax is $11,304, so the deduction is $5,652.

2. Self-employed health insurance

If you are not eligible for an employer-subsidized plan (including through a spouse’s job), premiums for medical, dental and qualifying long-term care insurance for yourself, your spouse and dependents are deductible, up to the net profit of the business. This is an "above the line" deduction on Schedule 1.

3. Retirement plan contributions

Self-employed retirement plans can be very effective:

• SEP-IRA: contributions up to 25% of compensation (effectively about 20% of net profit after the SE tax deduction), with a 2026 maximum of $72,000.
• Solo 401(k): an employee deferral up to $24,500 (plus $8,000 catch-up if 50 or older) and an employer profit-sharing contribution, subject to the overall $72,000 limit. For a freelancer who wants to save a high amount from modest profits, this usually allows more than a SEP-IRA.
• SIMPLE IRA: lower limits, but easier administration.

Retirement contributions reduce income tax but not self-employment tax.

4. Qualified business income (QBI) deduction

Eligible sole proprietors can deduct up to 20% of qualified business income, limited to 20% of taxable income before the deduction. For specified service businesses (such as consulting, law or health) the deduction phases out for taxable incomes above the threshold amounts. It applies on Form 1040 and does not reduce SE tax. Our calculator includes it by default.

Schedule C business expenses

5. Home office

If part of your home is used regularly and exclusively as your principal place of business, you can deduct a share of rent, utilities, insurance and depreciation (actual method) or use the simplified method of $5 per square foot up to 300 square feet, a maximum of $1,500. A kitchen table you also eat at does not qualify.

6. Vehicle expenses

Use either actual costs (gas, repairs, insurance, depreciation) times the business-use percentage, or the standard mileage rate. For 2026 the rate is 72.5 cents per mile for business miles from January 1 through June 30 and 76 cents per mile from July 1 through December 31. Commuting from home to a regular workplace is not deductible, but trips from a home office to clients generally are. Keep a mileage log with date, destination, purpose and miles.

7. Equipment and computers

Laptops, cameras, tools and furniture used for business can often be deducted in the year of purchase through Section 179 expensing or bonus depreciation, subject to limits and business use. Smaller items can often be deducted as ordinary expenses under the de minimis safe harbor (up to $2,500 per invoice or item for taxpayers without an applicable financial statement).

8. Software and subscriptions

Accounting, design, project management, cloud storage and professional memberships are all deductible if used for the business.

9. Internet and phone

Deduct the business percentage of your bills. If you use your phone 60% for business, deduct 60%.

10. Advertising and marketing

Website costs, domain names, ads, business cards, and sponsorships.

11. Professional services

Fees paid to accountants, tax preparers, attorneys and consultants for the business are deductible.

12. Insurance

Business liability, professional liability (errors and omissions), and business property insurance.

13. Education and training

Courses and books that maintain or improve skills for your current business are deductible. Education to qualify you for a new profession is not.

14. Travel

Airfare, lodging, rental cars and local transport for business trips are deductible. Personal days added to a trip are not.

15. Meals

Business meals are generally 50% deductible when the meal is directly related to business and not lavish. Keep a record of who you met with and why.

16. Subcontractors and help

Payments to contractors are deductible. If you pay a contractor $2,000 or more in 2026, you must file Form 1099-NEC. Tools like Tax1099 can file these forms electronically.

17. Bank and payment processing fees

Merchant fees, platform fees, invoicing fees and business bank account charges.

18. Interest on business debt

Interest on business loans and business credit cards is deductible.

19. Startup costs

In the first year you can deduct up to $5,000 of startup costs, with the excess amortized over 15 years; the deduction begins to phase out when startup costs exceed $50,000.

20. Licenses, permits and dues

State business licenses, professional licenses, and trade association dues.

Things you cannot deduct

• Personal living expenses, clothing that is suitable for everyday wear, and commuting costs.
• Fines and penalties, including parking tickets.
• Federal income tax and self-employment tax themselves (aside from the deduction for half of SE tax).
• Political contributions and most lobbying costs.
• The personal portion of mixed-use items.
• Expenses reimbursed by a client, if the reimbursement is not counted as income.

Keeping records that hold up

An expense is deductible only if you can prove it. Practical habits include: using a separate bank account and card for the business; saving digital copies of receipts the day you get them; keeping a mileage log (apps make this easy); recording the business purpose of meals and trips; and reconciling your books monthly. The IRS generally has three years to audit a return, and longer in some cases, so keep records at least that long. Your tax preparer will ask for totals by category that line up with Schedule C lines, so using those categories from the start makes filing easier.

Planning ahead: deductions and estimated taxes

Deductions reduce what you owe, which also reduces what you must pay in estimated taxes. Estimate your profit realistically, subtract expected deductions, and use the quarterly estimated tax calculator for the quarterly amount; the estimated taxes guide explains the safe-harbor rules that prevent penalties. If you are deciding between working as a freelancer and taking a job, the 1099 vs. W-2 comparison shows how these deductions affect the break-even rate. This article is general information, not tax advice, so consult a tax professional about your specific situation.