Self-Employment Tax Credits and Deductions

There are many self-employment tax credits that you can leverage to reduce your tax burden. Each year, you can claim half of what you pay in Social Security and Medicare as an income tax deduction. But more importantly, 2024 is the final tax year for self-employed people to claim certain COVID benefits. If you haven’t claimed these and other credits and deductions, you may be leaving tens of thousands of dollars on the table.

What is the self-employment tax?

Self-employment tax is how individuals who work for themselves meet their Social Security and Medicare obligations. It covers individual and payroll taxes, with 12.4% of your income going to Social Security while 2.4% contributes to Medicare as of 2023. Exemptions from self-employment tax are rare, but paying it qualifies you for an income tax deduction.

Qualifying for the self-employed tax credits

Freelancers, gig workers, small business owners, and others who pay self-employment tax are eligible for the self-employment tax deduction. To qualify, you need to file Form 1040 and Schedule SE. From there, you can deduct from your income tax liability.

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Form 7202 and the COVID Tax Credit (SETC)

Tax credits for COVID victims have been available since Congress passed the Families First Coronavirus Response Act and the American Rescue Plan Act. These credits cover up to $511 per day in sick and family leave for COVID-related downtime, including treatment, childcare, or vaccination. Depending on your circumstances, these credits could add up to $32,220.

Despite the pandemic being over, it’s still not too late to qualify for the COVID tax credit. Even if you overlooked the credit in 2022, you can amend your past return to qualify for the credits now. However, the deadline is fast approaching. Fill out and submit form 7202 before April 15th, 2025, to apply for the self-employed COVID tax credit.

The Earned Income Tax Credit (EITC)

If you’re a self-employed worker with an income below the EITC income threshold, you qualify for EITC. In 2023, the credit provided $600 to those without children and over $7,000 to those with 3+ children. This can drastically reduce your tax burden or result in a significant tax refund.
Utilizing the self-employment tax credit and various deductions can save you thousands on your tax bill. However, determining the exact value of each deduction can be complex. Talking to a tax professional is the best way to get a grip on tax laws and find out just how much you can save.

Other tax breaks and deductions

The self-employment earned income credit and COVID credit aren’t all that's available. There are many other deductions and tax breaks for self-employed people.

Business-related tax deductions

Even if you don’t consider yourself a business owner, the law does. As such, you’re eligible for deductions for traditional business expenses. 

• Home office use: If you use part of your home as an office, you can deduct a proportionate share of certain home expenses.
• Startup costs: You can deduct up to $5,000 of your business startup costs from your taxable income. 
• Interest: If you financed your business with a loan, you can deduct the interest from your taxable income.

Insurance deductions

• Retirement plan contributions: Many types of retirement contributions are deductible from your taxes.
• Health insurance premiums: If you don’t have health insurance through an employer or a spouse’s employer, you can deduct your insurance costs from your taxes.
• Business insurance: Business-related insurance expenses are deductible for self-employed individuals.

Expense-related deductions

• Education: Business-related education and training expenses are deductible. 
• Meals: As long as you avoid excessively glamorous meals, you can deduct 50% of business meal expenses.
• Business travel: Deduct travel expenses related to business. Read more about small business travel expenses in our dedicated article.
• Vehicle use: Deduct mileage or actual expenses for using your vehicle for business purposes. See how to in our guide on self-employed mileage deductions.

Foreign earned income exclusion (FEIE)

Self-employed digital nomads and expats may qualify for FEIE. There are several criteria to pass, such as having a foreign tax home on account of legal residency or physical presence. But if you pass these criteria, you can exclude six-figure sums from your income tax figures. 2023, you could exclude $120,000 from your income taxes via the Foreign Earned Income Exclusion.

Keep in mind, however, that this exclusion only covers income taxes. If you made $100,000 in self-employment income and nothing else, you could exclude all of it with FEIE. But this wouldn’t affect your self-employment tax burden, which would still amount to $15,300.

How much self-employment tax is deductible?

Self-employed individuals can deduct half of their self-employment tax when calculating their adjusted gross income. This deduction, although not a credit, reduces your taxable income.
If you earned $80,000 in 2023, you would pay $12,240 in self-employment tax. But then, you could deduct $6,120 from your income tax liability. This deduction would reduce your tax burden by more than $1,000.

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