7 Essential Tax Deductions for Freelancers and Gig Workers
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Updated for tax year 2023.
Freelance and gig work have become increasingly popular in recent years, offering individuals the flexibility and independence they desire. However, being your own boss also means being responsible for managing your taxes.
Fortunately, several tax deductions are available specifically for freelancers and side hustlers. Here are seven tax deductions you won’t want to miss out on.
1. Self-employment tax deduction
As a freelancer or gig economy worker you are subject to (SE tax). The SE tax rate is 15.3%, covering your Social Security and Medicare taxes.
Thankfully, the IRS allows you to deduct 50% of self-employment tax owed, reducing your taxable income. Here’s how to calculate the SE tax manually. But to make it easy for you, give our self-employment tax calculator a try.
2. Home office deduction
The first one you may already be familiar with — the home office deduction for small businesses. To claim this deduction, you must follow specific IRS requirements. Mainly, you must use a portion of your home exclusively for freelance or gig work.
If you qualify, this deduction allows you to write off a percentage of related expenses like your rent/mortgage, utilities, real estate taxes, or insurance.
To determine what percentage of your home expenses are deductible, you’d need to divide the square footage of your home office by the total square footage of your home. For example, if your house is 1,800 square feet and your office is 225 square feet, you’d use this equation: 225 ÷ 1,800 = 0.125 (or 12.5%). This means 12.5% of your home expenses would be deductible under the home office deduction. You could then list all your home expenses and multiply them by 0.125 to find the deductible percentage of each.
If you’d rather not deal with numbers, the IRS offers a simplified method to determine your deductible expenses. To use this option, your home office must be 300 square feet or less, and you would get a standard deduction of $5 per square foot. Using the example above, you’d multiply the square footage of your home office by five to calculate your deduction amount: 225 x $5 = $1,125.
3. Business startup and organizational costs
As a freelancer or gig worker, you likely have some startup costs, such as filing fees for permits or business licenses. You can immediately deduct up to $5,000 each in business startup and organizational costs if you spend less than $50,000 total. Most freelance and gig workers won’t exceed the $50,000 limit, but if you did, your first-year deduction amount would decrease by $1 for every dollar over the limit, and you would need to amortize (gradually write off) the remaining costs over the following tax years.
4. Retirement contributions
There are several retirement plan options for those who are self-employed. You can take advantage of different tax benefits depending on which one you choose.
For instance, a Simplified Employee Pension (SEP) IRA could be a good option for you. SEP-IRA contributions are tax-deductible, and for 2023 you can contribute up to $66,000 (up from $61,000 in 2022) or 25% of your business earnings — whichever is lower.
You could also open a traditional IRA or a Roth IRA. Traditional IRA contributions are tax-deductible as well. Roth IRAs differ slightly in that you put money in post-tax but can make tax-free withdrawals in retirement. For 2023, the contribution limit for these accounts is $6,500 (up from $6,000 in 2022). If you are 50 or older, you can contribute an extra $1,000 (so up to $7,500 for 2023).
5. Health insurance
If you are self-employed and paying for your own health insurance, you may be able to deduct your health insurance premiums. This includes medical, vision, dental, and qualifying long-term care insurance for you, your spouse, and any dependents under age 26. You can only take this deduction if neither you nor your spouse were able to participate in an employer-subsidized health plan. To claim this above-the-line deduction, your business must have also earned a net profit.
6. Vehicle expenses and business travel
Vehicle expenses can also be tax-deductible when used for business purposes. If you use your vehicle to drive to client meetings or deliver products, for example, you can deduct costs for fuel, maintenance, repairs, car insurance, and depreciation or lease payments.
Always keep meticulous records of your mileage and related expenses in case the IRS asks for them.
The same goes for business travel expenses. If you need to travel for your freelancing work, you can also deduct those travel expenses. Some examples of business travel costs are hotel costs, airfare, train fare, taxi costs, and baggage costs. You can also deduct up to 50% of your meals while traveling for business.
Note: For tax years 2021 and 2022, meals were temporarily 100% deductible. As of 2023, the deductible portion has reverted to 50%.
7. Other business expenses
Other ordinary and necessary business expenses that may be deductible include:
- Office supplies
- Business equipment (such as a laptop)
- Office furniture (like a desk or office chair)
- Internet expenses (including website hosting fees or email service provider costs)
The bottom line
As a freelance or gig worker, understanding and taking advantage of tax deductions can significantly reduce your tax liability. By claiming the deductions above, you can maximize your tax savings and keep more of your hard-earned money in your pocket.
To make the tax filing process even easier, consider using TaxAct Self-Employed. From tracking business expenses to calculating deductions, we can help you file your income tax return and take advantage of any potential tax savings. We also offer useful tools such as our tax bracket calculator and tax preparation checklists to help you determine how much tax you owe and get ready to file.