Choosing the Itemized vs Standard Deduction as a Self-Employed Person

Federal income tax is the largest tax burden for most Americans, but there are many ways to reduce it. Choosing an itemized vs standard deduction is often your most important tax decision.

Itemized vs standard deduction for the self-employed

Before you calculate your income tax liability, you have a variety of deductions to reduce your taxable income. If you made $100,000 in 2023, you would have to pay over $14,000 in federal income tax. But if you have $20,000 in deductions, your taxable income would drop to $80,000. You would then save almost $5,000 in federal taxes.

When it comes to reducing your taxable income, your first option is to choose the standard deduction. This is a simple, no-questions-asked way to remove up to $29,200 from your income tax liability as of 2024.

If you don’t take the standard deduction, you can compile all eligible tax-deductible costs, such as mortgage interest or business expenses. This process is time-consuming and requires you to substantiate your claimed deductions, but it may save you thousands of dollars.

Claiming the standard deduction and self-employment tax deduction

Unlike most deductions, you can combine the self-employment tax deduction and standard deduction. Self-employment income is subject to a 15.3% self-employment tax to cover Social Security and Medicare contributions, which is twice what wage-earners pay. However, the self-employment tax deduction allows you to write off half of it from your taxable income.

If the self-employment tax deduction was only available via an itemized deduction, then it would be rare for self-employed people to choose a standard deduction. This means that standard deductions are viable even if you report income on the IRS Form 1099.

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Choosing between the itemized and standard deductions

There’s no inherent advantage in either approach to filing your taxes for a self-employed person, such as a sole proprietor. Standard deductions will be preferable if your itemized deduction is smaller, and vice versa. If your expenses or filing status change, you can switch between the two approaches year by year. Choosing the right way to file comes down to determining just how much you can save through each deduction.

Standard deduction amounts in 2024

Whether you’re someone’s employee or self-employed, the standard deduction amounts for 2024 are the same. There are three deduction amounts available depending on your filing status:

• $14,600: single or married filing separately
• $21,900: head of household
• $29,200: married filing jointly or qualifying surviving spouse

Generally speaking, there are a few types of self-employed people who should probably choose a standard deduction. Low-income single filers, moderate-income heads of households, and those without a mortgage will usually save more with a standardized deduction. But ultimately, you’ll need to track and calculate your itemizable expenses to know for sure.

Common 1099 itemized deductions

Choosing an itemized deduction will require you to track and tally each of the expenses you want to claim. The IRS will scrutinize your reports, so you need to have a strong paper trail proving your claims. The exact standard of proof necessary will vary from one expense to another.

If you’re self-employed or an independent contractor, itemized deductions you might be able to use include:

• Interest on a mortgage
• Home office expenses
• Business-related motor vehicle expenses
• Health and business insurance deduction 
• Startup costs, advertising, and other business expenses

Mortgage interest and home-related deductions

If you have an outstanding $500,000 home loan with 4.5% annual interest, you would pay over $20,000 in annual interest. In this scenario, you could include all the interest you paid as a deductible expense, removing $20,000 from your taxable income.

A sizable mortgage is often enough to warrant itemizing. Self-employed people with home offices can also claim some home expenses as deductible. Eligible expenses include a portion of your utilities and other household costs.

Business vehicle expense deductions

The IRS offers a standard $0.67 per mile deduction in 2024 for every eligible mile of business-related travel, but you may also claim actual expenses for your car, such as depreciation. After determining how much of your driving is for business, you can deduct that fraction of your expenses.

Either approach requires you to track your miles accurately and separate business from non-business travel. Driversnote can help with this; our platform makes tracking, classifying, and reporting your travel simple.

Choose the right deductions

The savings from a well-filed tax return can make all the difference for your small business. But knowing the deductions you’re eligible for is only half the process; you also need to document your expenses before you can file an itemized deduction. Ultimately, the best deduction for your business will depend on your family status and business-related expenses.