Small Business Tips

Can Self-Employed Take the Standard Deduction?

Linzi Martin

In most circumstances, self-employed and small business owners face a sizable tax bill by the end of the year. Between income taxes and self-employment taxes, you’ll quickly be looking for ways to lower your taxable income. A good start might be learning about the types of write-offs you can take. And luckily, self-employed individuals have more options than most.

The question is: can self-employed, independent contractors, and freelancers take the standard deduction? MileIQ has got your answer and more.

What is the standard deduction?

According to the IRS, the standard deduction is a “specific dollar amount that reduces the amount of income on which you’re taxed”. It is a write-off that every American can take, but the amount varies with your filing status. For 2022, the standard deduction is worth:

  • For married filing jointly: $25,900 (up $800 from last year)
  • For single taxpayers and spouses filing separately: $12,950
  • For Heads of Households: $19,400

After the Tax Cuts and Jobs Act, Congress proposed that nearly 87% of taxpayers took the standard deduction in 2019. That number has likely increased in recent years as it’s become more logical to take the standard deduction versus itemizing expenses, such as charitable donations, medical costs, personal property taxes and mortgage interest.

Can I use standard deduction if self-employed?

Yes! In fact, it’s probably the best way to file. Self-employed can claim the standard deduction on Form 1040, Line 40. The best part — the IRS lets taxpayers take the standard deduction with no strings attached. You’ll not only save time, but avoid the potential for tax mistakes on your tax return. With that in mind, the standard deduction is a set amount. So there are times when personal itemized expenses could end up being more. On top of that, if you are blind or over the age of 65, you may qualify for a higher standard deduction. These are all things to consider when deciding between the standard deduction or itemized expenses.

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How does the standard deduction affect your tax return?

Though most taxpayers will find the standard deduction covers a lot, there are times when you are unable to take the standard deduction. The following bullet points detail the main reason the IRS will not permit the standard deduction:

  • A married individual filing as married filing separately and one spouse itemizes deductions.
  • You are a nonresident alien or dual-status alien during that tax year.
  • Taxpayer files a tax return for a span of less than 12 months due to a change in his or her annual accounting period.
  • Taxpayer is tied to an estate or trust, common trust fund or partnership.

Despite these scenarios, the majority of taxpayers are eligible for the standard deduction and itemized ductions. Your tax professional or tax software program will configure rather quickly which deduction is best for your filing status.

What business expenses can I deduct?

The good news is the standard deduction does not impact you claiming business expenses. So, if you’re a small business owner, you can take the standard deduction for your personal income and still deduct qualifying business expenses.

Here are some examples of common business expenses that self-employed deduct:

Car-related expenses

As a 1099 worker, you have the ability to deduct vehicle expenses on your tax return. This includes gas, insurance, vehicle depreciation, and more by using the actual expense method. The other option is to track mileage using the standard mileage rate. Both options have their pros and cons and will differ annually, but generally speaking the standard mileage deduction is best for self-employed or business owners who drive daily. Plus, with a mileage tracking app, you don’t have to worry about gas receipts or travel invoices.

Continued education

Freelancers and other self-employed people are often mastering their craft. Which means, enrolling in education courses is a common thing. Fortunately, this is another business expense that is tax-deductible. For example, if a real estate agent wants to earn their broker’s license, they will need to take a course and pass examinations to move forward in their career.

Home office expenses

The self-employed can typically work from anywhere, but many choose to conduct business right at home. You may be eligible to take a home office deduction on the condition that you spend a majority of your time working from home, meeting with clients, or storing inventory at your place of residence. Provided that you meet IRS criteria for home office deduction, you may deduct rent and other legitimate expenses.

Want to learn more about self-employment? The team at MileIQ breaks down How to Get a Mortgage When You’re Self-Employed.

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