Common Self Employed Business Expenses
The following list of expenses and deductions is intended to serve as a general
guideline for business planning purposes. All expenses and deductions should be
documented with third party proof, such as receipts. It is typical and common for the
IRS to determine the validity of expenses and deductions on a case-by-case basis
with consideration given to individual circumstances. This list is not intended to be an
authoritative and all-inclusive list, but instead to act as a general guideline. Complete
information can be viewed on the Internal Revenue Service web site: www.irs.gov
• Advertising – Expenses for business promotion.
• Bad debts – This is usually for accrual-based companies. Bad debt from
professional services (not personal loans) are deductible after they have been
determined to be uncollectible. To be determined as “bad,” serious effort would
have to have been made to collect the debt. Examples are turning the debt over to a
collection agency, suing the debtor, etc.
• Commissions and fees – Fees such as commissions paid are deductible only if
they are included in gross revenues.
• Contact Labor - If more than $600 is paid to an individual in a year, a Form 1099-
MISC must be issued to that individual.
• Insurance (other than Health) – Insurance premiums such as professional liability
insurance are deductible.
• Health Insurance – Health insurance is deductible as an adjustment to gross
income to a self employed contractor at a rate of 60% of costs. All other medical
expenses are deductible as personal expenses.
• Legal and Professional Services – Expenses related to professional reasons,
such as legal, accounting, tax preparation and planning fees are deductible.
• Taxes and Licenses – Expenses related to professional and/or business
reasons are deductible. If you collect sales tax, you would count the amount collected
in the gross receipts, and deduct the sales tax remitted in this category.
• Business Travel Expenses – Travel expenses on overnight business trips while
“away from home” are deductible. The “away from home” test is satisfied when your
business trip lasts longer than a regular working day which requires time off to sleep
(not just to eat or rest.) Expenses include airfare, taxi fares, hotel, tips paid,
telephone, laundry, etc. Documentation is required.
• Business Meals and Entertainment – Bona fide meals and entertainment
expenses are deductible at a rate of 50%. There are restrictive tests that must be
applied for the deductions to be allowed. They will be allowed if they are “ordinary
and necessary to your business,” and either “directly related to the active conduct of
your business” or “directly preceding or following a substantial and bona fide business
discussion on a subject associated with the active conduct of your business.”
• Uniforms / Special Clothing – The expense of uniforms or special clothing (and
their repair and cleaning) are allowed only if 1) they are required to perform / keep
your job, and 2) if they are not suitable for wear when not working.
• Retirement Plans – There are three types of retirement plans available to the self
employed contractor: 1) a Keogh plan, 2) Simplified Employee pension plan (SEP),
and 3) SIMPLE IRA. The Keogh plan is the most complex in its formulas and
maintenance, and may require separate annual information returns. With the SEP,
contributions must be based on a written allocation formula, but contributions can be
up to the lesser of 25% of compensation or $41,000 (in 2005). The simplest plan is
the SIMPLE IRA, which a contribution of $10,000 (in 2005) can be made of your
account, along with a “matching” contribution of up to 3% of your net earnings. Before
consideration is made as to the best type of retirement plan, due diligence, research,
and full discussion should be performed required.
On Estimated Tax Payments...
As a self employed professional, all income related taxes (Federal Income, Social
Security, and Medicare) are the responsibility, and must be paid, by the self
employed. Generally, these estimated tax payments are made quarterly. For 2010,
the due dates are: April 15, 2010; June 15, 2010; September 15, 2010; and January
17, 2011.
