Taking the leap from traditional employment to self-employment is an exciting milestone, but it also comes with a unique set of financial responsibilities—especially when it comes to taxes. Unlike W-2 employees who have taxes automatically withheld from their paychecks, self-employed professionals face a more complex tax landscape that can feel daunting at first.
However, mastering tax deductions isn’t just about staying compliant—it’s a powerful strategy for boosting your bottom line. Every dollar you save through legitimate deductions is money you can redirect toward growing your business, investing in yourself, or building the future you envision.
By learning how to navigate these opportunities, you can transform your financial outlook and make the most of your self-employed journey.
Maximizing Self-Employment Tax Deductions
If you’re self-employed and operating as a sole proprietor, there are numerous tax deductions available to help lower your taxable income and keep more money in your pocket. These deductions are designed to account for the expenses associated with running a business and can significantly reduce your tax bill, giving you more resources to reinvest in your business or personal goals.
Here are some of the key tax deductions available to self-employed sole proprietors.
#1: Start-Up Costs Deduction
Launching a new business often requires upfront investments before you officially start operations. These expenses might include market research, travel, registration fees, and more—all essential for laying the groundwork for your business.
The good news is that many of these start-up costs are tax-deductible in the year your business begins operations, but there are limits. As a sole proprietor, you can deduct up to $5,000 in start-up expenses, provided your total costs don’t exceed $50,000. If your start-up expenses surpass that threshold, the deduction begins to phase out.
Any start-up costs that exceed the initial deduction limit aren’t lost, though—they can be amortized and deducted over a 15-year period. This ensures you still benefit from the tax savings, just spread out over time.
To claim this deduction, you’ll report it as an “other expense” on Schedule C of Form 1040. By properly leveraging this deduction, you can potentially reduce your tax burden during those critical first years of business growth.
#2: Home Office Deduction
If you use a portion of your home exclusively and regularly for business, you may be eligible for the home office deduction—a valuable way to reduce your taxable income. This deduction allows you to claim a portion of your housing expenses, such as rent or mortgage interest, utilities, property taxes, homeowners insurance, and maintenance costs, based on the percentage of your home used for business purposes.
To qualify, your home office must meet specific requirements. First, you must use it exclusively for business (no personal use). It must also serve as your principal place of business, meaning it’s where you conduct the majority of your work or meet clients.
The IRS offers two ways to calculate the deduction:
- Simplified Method. Deduct $5 per square foot of your home office, up to a maximum of 300 square feet (a $1,500 deduction).
- Actual Expense Method. Calculate the exact percentage of your home used for business and apply it to your total housing costs.
While the home office deduction can provide significant tax savings, it’s also known to be a red flag for the IRS and may increase your chances of being audited. To reduce the risk, it’s essential to be conservative and precise when claiming this deduction. Make sure your home office meets all eligibility criteria, and keep detailed records, such as photos, diagrams, and receipts, to substantiate your claim.
#3: Health Insurance Deduction
For self-employed individuals, the cost of health insurance premiums can be a significant expense. In fact, the Kaiser Family Foundation reports that the average monthly premium for an individual benchmark plan on the ACA Marketplace in 2024 was $477—a significant cost for anyone managing their own coverage.
Fortunately, you may be able to deduct these costs on your taxes. The health insurance deduction allows you to reduce your taxable income by claiming the premiums you pay for yourself, your spouse, your dependents, and even children under 27, regardless of whether they are dependents on your tax return.
Unlike many other deductions, the health insurance deduction is considered an “above-the-line” deduction, which means it reduces your adjusted gross income (AGI) and can provide additional tax savings by lowering your overall taxable income. However, this deduction is limited by your net self-employment income, so you can’t deduct more than your business’s profit.
#4: Self-Employment Tax Deduction
One of the financial realities of being self-employed is that you’re responsible for paying the full self-employment tax, which covers both the employer and employee portions of Social Security and Medicare taxes—a combined rate of 15.3%. While this can feel like a steep burden, the IRS offers some relief in the form of the self-employment tax deduction, allowing you to deduct 50% of your self-employment tax from your taxable income.
This deduction is considered an “above-the-line” deduction, meaning it reduces your adjusted gross income (AGI), which can lower your overall tax liability. It’s important to note that this deduction doesn’t affect the amount of self-employment tax you owe, but it does help soften the blow by reducing the income subject to federal income taxes.
To claim this deduction, you’ll need to calculate your self-employment tax using Schedule SE and then report the deductible portion on your Form 1040.
#5: Qualified Business Income Deduction
The Qualified Business Income (QBI) Deduction, introduced by the Tax Cuts and Jobs Act, is a significant tax-saving opportunity for many self-employed individuals and small business owners.
This deduction allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI) from a sole proprietorship, partnership, S corporation, or LLC. QBI generally includes net income from your business, excluding items like capital gains, dividends, and interest.
To qualify, your total taxable income must fall below certain thresholds. For 2024, the limit is $191,950 for single filers and $383,900 for joint filers. If your income exceeds these amounts, eligibility and the deduction amount may be reduced or eliminated, depending on the type of business and other factors.
This deduction is calculated on Form 8995 or 8995-A and claimed on your personal tax return. It’s essential to keep detailed financial records and separate personal and business expenses to ensure accurate reporting.
TrueNorth Wealth Is Here to Help
Navigating taxes as a self-employed professional can feel daunting, but understanding and taking advantage of available deductions can significantly reduce your tax liability and maximize your earnings. With the right strategies, you can keep more of what you earn and build a solid foundation for long-term financial success.
At TrueNorth Wealth, our team of fiduciary CFP® professionals specializes in simplifying complex tax laws and crafting proactive strategies tailored to your unique goals. We’ll work with you to develop a comprehensive financial plan that not only minimizes your tax burden but also empowers you to grow and preserve your wealth.
TrueNorth Wealth is among the top Wealth Management firms in Utah and Idaho, with offices in Salt Lake City, Logan, St. George, and Boise. At TrueNorth Wealth, we focus on helping our clients build long-term wealth while maximizing the enjoyment they receive from their money. We do this by pairing our clients with a dedicated CFP® professional backed by an incredible team.
For our team at TrueNorth, it’s about so much more than money. It’s about serving families all across Utah and helping them achieve freedom and flexibility in their lives. To learn more or schedule a free strategy session, visit our website at TrueNorth Wealth or call (801) 316-1875.