Business Expense Deductions for the Self-Employed

If you work for yourself, full time or on the side, you are taxed on profit, not on what clients pay you. Every legitimate business cost you record lowers that profit, and for the self-employed it lowers two taxes at once: income tax and self-employment tax. Many freelancers and small business owners overpay simply because they never wrote down the mileage, the software or the share of their phone bill that was for work. This chapter explains what makes an expense deductible, what a deduction is worth to you, the main categories, and the records that make the deductions hold up.

What makes an expense deductible

The test is short: the expense must be ordinary and necessary for your business. Ordinary means common and accepted in your line of work. Necessary means helpful and appropriate, not that you could not operate without it. The expense must also be reasonable in amount and not personal.

Three ideas cover most of the hard cases.

• Mixed use. When something serves both your business and your personal life, such as a phone, an internet plan or a car, only the business share is deductible. You need a sensible way to measure that share, like the proportion of miles driven for business.
• Capital purchases. Equipment that lasts more than a year is normally recovered over several years through depreciation. In practice most small purchases can be written off in the year you buy them, through the de minimis safe harbor, the section 179 election or bonus depreciation. The 2025 law restored 100% bonus depreciation for qualifying property acquired after January 19, 2025, so equipment can usually be deducted in full in the year it is placed in service.
• Hobby or business. If an activity is not run to make a profit, its expenses are not deductible at all, though its income is still taxed. The IRS looks at how you run it: records, effort, expertise, history of profit, and whether you change methods to stop losses.

What a deduction is worth when you are self-employed

An employee and an employer each pay 7.65% of wages in Social Security and Medicare tax. A self-employed person pays both halves as self-employment tax: 15.3% on 92.35% of net earnings, about 14.1% of profit, once net earnings reach $400. The Social Security part applies only up to $184,500 of combined wages and self-employment earnings for 2026; the 2.9% Medicare part has no cap. You deduct half of the self-employment tax when working out income tax.

A single owner with $75,000 of profit owes $7,670 in federal income tax, before the deduction for half of self-employment tax and before the qualified business income deduction in chapter 7. Recording expenses that bring profit down to $70,000 lowers income tax to $6,570, a saving at the 22.0% marginal rate. Self-employment tax falls as well, by roughly 14.1% of the same expenses, so below the Social Security cap each dollar of deductible expense saves the marginal rate plus about 14 cents. Much of the extra cost of being self-employed comes back through deductions you document.

The same arithmetic shows why side income can be expensive. It sits on top of your wages, so it is taxed from your marginal rate upward.

An employee earning $90,000 owes $10,970. Side profit that brings total income to $110,000 raises income tax to $15,370, before self-employment tax on the profit. The side hustle tax calculator shows both taxes together, and the 1099 vs W-2 calculator compares contract and employee offers.

The main categories

Vehicle. You can deduct business driving with the IRS standard mileage rate, set each year, or with actual costs (fuel, insurance, repairs, depreciation, lease payments) times your business-use percentage. If you want the choice later, use the standard rate in the first year the car is used for business. Commuting from home to a regular workplace is never deductible; driving from a home office that is your principal place of business to a client usually is. Parking and tolls for business trips are deductible under either method.

Travel. When business takes you away from your tax home overnight, transport, lodging and incidental costs are deductible, and meals at 50%. On a trip that mixes business and vacation inside the United States, travel costs are deductible only if the trip is mainly for business, and the vacation days' costs never are.

Meals and entertainment. A business meal with a client, customer or contractor is 50% deductible if you or an employee attend and it is not lavish. Entertainment, such as concert tickets or a golf outing, is not deductible at all, even with a business discussion.

Equipment, software and supplies. Computers, cameras, tools, furniture, subscriptions and software you use for the business, written off as described above.

Phone and internet. The business share of your bill. A separate business line is fully deductible.

Professional help and services. Accountants, lawyers, contractors you pay, payment processing fees, bank fees, business insurance, licences and membership dues for professional organizations.

Marketing. Website hosting, advertising, business cards, and the cost of samples.

Education. Courses and conferences that maintain or improve skills in your current business. Education that qualifies you for a new trade does not count.

Health insurance. If you are self-employed and not eligible for an employer plan (yours or a spouse's), premiums for you and your family are deductible from income, though not from self-employment tax, and not above your business profit.

Home office and retirement plans. Each has its own rules and its own chapter: chapter 5 for the home office, chapter 6 for solo 401(k) and SEP plans, which are often the largest deduction a self-employed person has.

Records that hold up

The IRS does not require a particular bookkeeping system, but you must be able to show the amount, date, place and business purpose of each expense. Four habits cover most of it.

1. Use a separate bank account and card for the business. It turns your statements into most of your bookkeeping.
2. Keep receipts, digital copies are fine, and write the business purpose on meal and travel receipts while you remember it.
3. Keep a mileage log as you go: date, destination, purpose and miles. A log reconstructed at tax time is the most common reason vehicle deductions are lost.
4. Keep records at least three years after you file, longer in some cases: six years if income was understated by more than 25%, and as long as you own an asset for records of its cost and depreciation.

Pay as you go

No employer withholds tax from self-employment income, so you are expected to pay during the year. If you expect to owe $1,000 or more after withholding and refundable credits, make quarterly estimated payments. You avoid the underpayment penalty by paying at least 90% of this year's tax, or 100% of last year's (110% if last year's adjusted gross income was above $150,000). If you also have a job, raising your paycheck withholding can cover the side income instead. The quarterly estimated tax calculator sets out each 2026 payment.