Tax Planning for Self Employed Workers: 7 Essential Tips

Ah, the joys of self-employment – being your own boss, setting your own hours, doing what you like, and, oh yes, establishing a life-long bond with your accountant. Being self-employed also means being responsible for a wide range of critical tax-related duties.

And for many of the millions of self-employed Americans, that means tapping the tax expertise of a CPA or other tax pro. Going solo in business is one thing, but most business owners save time, money, and grief by letting a trained tax warrior fight their tax battles.

For new business owners, taxes are a good-news, bad-news proposition. While many tax traps can bite you, there are also attractive tax perks. Here are some tax recommendations for self-employed entrepreneurs from top tax pros.

1. Understand the self-employment (SE) tax

Self-employment tax is a federal tax that consists of Social Security and Medicare taxes. It is paid by self-employed individuals, including those who own their own business or work as independent contractors or freelancers. The self-employment tax rate is 15.3%, comprising 12.4% for Social Security and 2.9% for Medicare on net earnings. Self-employed individuals are responsible for paying their own taxes, unlike employees who have their income tax and payroll taxes withheld through their wages. There is an extra 0.9% Medicare tax for those whose income exceeds certain limits, particularly affecting joint filers.

The term “self-employment tax” is itself confusing. It doesn’t include all the other taxes a self-employed person has to pay. Instead, the phrase “self-employment tax” typically refers to just the Social Security tax and the Medicare tax withheld from the pay of most ordinary wage earners.

You can calculate self-employment tax (SE tax) yourself using Schedule SE (Form 1040). In contrast, Social Security and Medicare taxes of most wage earners are figured by their employers. Also note that you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. In contrast, wage earners cannot deduct Social Security and Medicare taxes.

2. Make quarterly estimated tax payments on time

Employees have taxes automatically deducted from paychecks. But if you’re flying solo, it’s likely that no one is withholding federal and state taxes from your income. You’ll need to pay self-employment taxes and make quarterly estimated tax payments on your own, using IRS Form 1040-ES to cover your federal income tax and self-employment tax liability.

You may have to make state estimated tax payments as well. The threshold for whether or not you need to make quarterly payments will vary from one state to another, so please check with your state’s Department of Revenue

3. Employ family members to save on taxes

Hiring a family member to work for your business can create tax savings for you – in effect, you shift some of your business income to your relative. But the IRS can question compensation to a family member if it’s unreasonable for the services actually performed. So be sure to pay a market rate for the services they’re giving you.

4. Set up a business retirement plan

With certain retirement plans, your business may get an immediate federal income tax deduction for funding the plan. And you can generally place pre-tax dollars into a retirement account to grow tax deferred until withdrawal. Types to choose from include a Keogh plan, Simplified Employee Pension (SEP), SIMPLE IRA, SIMPLE 401(k) and Individual 401(k).

5. Deduct health-care related expenses

You may be able to benefit from the self-employment health insurance deduction, which lets you deduct health insurance for yourself, your spouse and your dependents. This deduction is taken on the front of your federal Form 1040 when computing your adjusted gross income, so it’s available whether you itemize or not.

6. Take all the business tax deductions you can

There are a variety of business tax deductions you can take, from the Qualified Business Income deduction to expenses that you can deduct as well. Let’s walk through some of the common ones you should look into.

Take the Qualified Business Income deduction

Another deduction is the qualified business income (QBI) deduction, which allows self-employed individuals to deduct up to 20% of their qualified business income from their taxes. Don’t neglect this deduction if you qualify for it; the qualified business income deduction is available to independent contractors and pass-through entities, but not to C Corporations or salaried employees.

Types of Deductible Business Expenses

Business expenses are costs incurred by a business to generate revenue. They can be deducted from taxable income to reduce the amount of income tax owed. Common types of business expenses include:

• Home office expenses
• Travel expenses
• Equipment purchases
• Business use of a vehicle
• Health insurance premiums
• Retirement plan contributions
• Advertising and marketing expenses
• Professional fees
• Office supplies and postage

We’ll walk through some of these in greater detail below.

Deduct expenses for the vehicle you use for business

You can deduct business expenses for operating your car, truck, or van that you use for your business activities. Use either the standard IRS mileage allowance (67 cents per mile for 2024; increases to 70 for 2025), or your actual business-related vehicle expenses.

Some entrepreneurs find it helpful to use tracking software to keep their vehicle-related expenses all in one place and as streamlined as possible.

Home Office Deduction

The home office deduction allows self-employed individuals to deduct a portion of their rent or mortgage interest and utilities as a business expense. To qualify for the home office deduction, the space must be used regularly and exclusively for business purposes. The IRS offers a simplified method for calculating the home office deduction, which allows taxpayers to deduct $5 for every square foot that qualifies for the home office deduction.

How to Keep Track of Business Expenses for Deductions

Accurate record-keeping is necessary to claim business deductions. Self-employed individuals can use various methods to keep track of business expenses, including:

• Keeping a log or journal of expenses
• Using a spreadsheet or accounting software
• Saving receipts and invoices
• Categorizing expenses by type
• Reviewing and updating records regularly

7. Get your 1099 and W2s filed on time

You could be subject to late filing fees if you don’t file on time. That’s why employers (and among them, your own clients) are legally required to send you this information promptly; that way, you’ll have time to file your own at tax time. If you have employees of your own or you hire independent contractors as well, make sure you provide them with these forms, too.

Staying up-to-date with these filings helps you and those you work with stay compliant and get your taxes paid on time.

Conclusion

Taxes are notoriously complicated, but they don’t have to be insurmountable. With a little due diligence on your part, you can help streamline your tax filings and help maximize your refund. It’s also very helpful to chat with a qualified tax professional to get customized guidance for your unique tax scenario. That way, you’ll help set yourself up for success in the long term.

Content by SCORE.org
SCORE is a nonprofit association dedicated to helping small businesses get off the ground, grow and achieve their goals through education and mentorship.

Disclaimer: The content on this page is for information purposes only and does not constitute legal, tax, or accounting advice. If you have specific questions about any of these topics, seek the counsel of a licensed professional.