Ever heard someone refer to an expense as a “write-off” and had no idea what they meant?
Well, this guide is for you.
When it comes to being self-employed, tax deductions and write-offs are a key way to lower the amount of taxes you have to pay.
But what actually are tax deductions? Are they the same as a tax credit? What can be counted as a deduction?
If you’re feeling overwhelmed, don’t worry; you’re not alone.
We’re here to help. We’ve answered the most common questions about tax deductions and write-offs!
- Tax deduction and tax write-off definitions
- Tax Deductions Vs. Tax Credits
- How much are tax write-offs worth?
- How can tax write-offs affect my taxes?
- How to claim tax deductions
- Common Tax Deductions for the Self-Employed
- Is there anything that I can’t write off?
- Key Takeaways
Tax deduction and tax write-off definitions
First things first, a tax deduction and a tax write-off refer to the same thing!
A tax deduction, or tax write-off, lowers your taxable income and tax liability. A deduction usually is a qualified cost you incur during the tax year to subtract from your gross income to calculate your adjusted gross income.
As the IRS says, “Deductions can reduce the amount of your income before you calculate the tax you owe.”
Tax Deductions Vs. Tax Credits
Tax deductions/write-offs are not the same as a tax credit.
Let’s do that math!
Tax deductions lower your taxable income and, therefore, indirectly affect the amount you owe in taxes. Tax credits skip the middleman and directly reduce the amount of taxes you owe. So if you owed $2,000 and had a $1,000 tax credit, you would end up only having to pay $1,000. There are various tax credits available.
Consider the Earned Income Credit. According to the IRS, this credit “helps low- to moderate-income workers and families get a tax break. If you qualify, you can use the credit to reduce the taxes you owe – and maybe increase your refund.” The IRS can help you determine if you qualify for this tax credit here.
Other tax credits include Child and Dependent Care Credit, American Opportunity Tax Credit, and the Savers Tax Credit.
How much are tax write-offs worth?
Tax write-offs vary in how much they can save you, but what’s for sure is that they can add up to serious savings.
Let’s say you have tax write-offs that total $6,500—what the average Everlance user finds effortlessly—and you made $55,000 during that tax year as a self-employed person. The tax write-offs would mean that only $48,500 of your income was taxable, meaning you’d pay less in state and federal taxes. In short, tax deductions reduce how much taxes you will owe by reducing your taxable income. This means more money stays in your pocket.
Want to estimate your taxes? Visit our Tax Calculator.
How can tax write-offs affect my taxes?
Tax deductions and write-offs reduce your taxable income. They could even lower you into a different tax bracket, but regardless it will mean that you’ll owe less in taxes.
Let’s do the math!
Let’s say you have tax write-offs that total $6,500—what the average Everlance user finds effortlessly—and you made $55,000 during that tax year. The tax write-offs would mean that only $48,500 of your income was taxable, meaning you’d pay less in state and federal taxes. In short, tax deductions reduce how much taxes you will owe by reducing your taxable income. This means more money stays in your pocket.
Your tax situation is unique—just like you! Your effective tax rate will depend on your filing status and many other factors.
Want to estimate your taxes? Check out our Tax Calculator!
How to claim tax deductions
There are two ways to claim your deductions, either the standard deduction or itemizing your deductions. There are pros and cons to each approach.
Standard Deduction vs. Itemized Deductions
There are two approaches to deductions for your federal income tax return: the standard deduction or itemizing deductions. No matter what, deductions reduce your taxable income.
The standard deduction depends on various factors, including the year, your filing status, your age, etc.
The standard deduction is more straightforward and takes less time to claim, but it may mean you are paying more than you would if you itemized your qualified deductions. And if you itemize your deductions, you’ll need IRS-compliant proof—that’s where a mileage and expense tracker like Everlance comes in handy.
Should you itemize deductions or take the standard deduction?
This decision is easier than it may seem. Here is how to determine which method you should use:
- Figure out your standard deduction using the IRS’s tool and determine if you can take the standard deduction.
- Total your allowable itemized deductions.
- Compare! If your allowable itemized deductions are greater than the standard deduction (or if you can’t take the standard deduction), then you should itemize deductions. If your itemized deductions are lower, then you should take the standard deduction.
- TL;DR: Just pick whichever method will save you the most!
Still not sure? Visit the IRS’s discussion of this exact topic for more information.
Common Tax Deductions for the Self-Employed
Self-employed individuals can deduct their non-commuting business mileage. This mileage includes miles that you drive to your first delivery pickup, between deliveries, and back home at the end of the day.
This deduction is why it’s essential to use a mileage tracker. When using the Standard Mileage Rate, all you have to do is use Everlance to track your miles, and we automatically calculate the amount you can deduct.
Please note, you can’t deduct both gas and mileage at the same time! The IRS standard deduction rate is $.56 for every work mile in 2021. You can think of the Standard IRS Mileage Rate as the average cost to use your car for work purposes. This rate includes the cost of maintenance, petrol, car payments, car insurance, and depreciation.
Pro Tip: Using the mileage deduction usually means you can deduct more from your business income than you would if you had deducted all of your individual car expenses! Meaning you save more in taxes! You also don’t have to keep track of gas and maintenance receipts in addition to your mileage log.
Phone & Service
If you can’t do your job without a phone, lots of data, and some essential accessories, then this is a deduction to consider. For example, if you drive for work, a car charger and phone mount are necessary and deductible. But be careful—if you use this for work and personal, you can only deduct the “work percentage.”
For example, if you use your phone for personal 70% of the time and work 30% of the time, you’d deduct 30% of your phone and related expenses.
We understand it might be challenging to estimate how much of your phone usage is for work. We recommend going through your phone records for a typical month and look at how much of your data/phone calls occur during work hours and apply the average to the rest of the year.
You might be able to deduct your health insurance premiums. To do this as a self-employed person, you must have had a net profit reported on your Schedule C or Schedule F.
While employees often have access to their company’s private healthcare, most self-employed workers end up purchasing health insurance, dental, and long-term care premiums independently.
However, thanks to the Self-Employed Health Insurance Deduction, you can reduce your Adjusted Gross Income (AGI) by deducting the cost of your monthly health insurance payments.
It’s available to you if:
- You are a self-employed individual (e.g., Drive for Doordash full-time)
- You have a business profit
- You are ineligible to participate in an employer-subsidized health plan through yourself or a spouse.
If you meet these requirements, you can deduct the amount you pay for health insurance. However, the deduction cannot exceed the revenue generated from your business (when the revenue generated from a business activity exceeds the expenses, costs, and taxes involved in sustaining the company).
Here’s an example: Let’s say you make $4,000 from driving for Shipt this year, and you had $500 in business expenses. If you pay $3,600 per year for a health insurance plan for you and your family, then you can only deduct $3,500 of that $3,600. (Your AGI – your business expenses).
For detailed information on this deduction, visit the IRS’s publication on deductions.
Your work-related education expenses may be tax-deductible. If you are taking educational courses to be better in your work, these are tax write-offs. Remember to save your receipts for these costs—or, even easier, use Everlance to find your deductions in your bank records automatically.
Business Use of Internet & Home
As long as your income exceeds your expenses and you have a home office that you only use for work, you can deduct expenses related to your work use of your home. Those expenses could include telephone lines, the Internet, and other costs to do business. It’s essential to have documentation that can prove these work costs if the IRS requires you to document this.
With Everlance, you’ll be able to find every tax deduction that you deserve. Once you sync your bank account or credit card with Everlance, our app will automatically find your possible tax deductions.
Then, you’ll be able to review the list of expenses and remove the personal costs. Going forward, your expenses will populate in the app as cards. If you recognize a business expense, swipe right to claim it as a deduction. It's like tinder for your taxes.
At tax time, you can download an IRS-ready report. Kick up your feet and pat yourself on the back for becoming your accountant's new best friend. Using Everlance to track your tax deductions makes it easy come tax time.
How can I easily find my tax deductions?
It's really simple—find and use a deduction finder that you like!
For example, Everlance is the #1 mileage and expense tracker. With Everlance, you’ll quickly find tax deductions in three easy steps:
- Open or download the Everlance app. Start your seven-day free premium trial and sync your bank account or credit card with Everlance.
- Review your potential tax deductions. Review the list of expenses and remove the personal expenses. Going forward, your expenses will populate in the app as cards. If you recognize a business expense, swipe right to claim it as a deduction. It's like tinder for your taxes.
- Get an IRS-ready report. Kick up your feet and pat yourself on the back for becoming your accountant's new best friend. Using Everlance to track your tax deductions makes it easy come tax time.
Is there anything that I can’t write off?
It’s important to remember to deduct only allowable expenses. If you break the rules and evade taxes, there are serious consequences, like an audit, fees, and possibly jail time.
The general rule from the IRS is that “you cannot deduct personal, living, or family expenses.”
But keep this in mind: if you use something for business and personal purposes, divide the total cost between these and deduct only the business part.
For more information, visit the IRS’s discussion.
Understanding tax deductions and write-offs
- Tax deductions and write-offs refer to the same thing.
- Tax deductions/write-offs are different from tax credits.
- If you’re self-employed, tax deductions can easily save you money. Be sure to track all business expenses and mileage to maximize the money in your pocket.
- When considering the standard deduction vs. itemized deductions, do the math! Pick whichever option will save you the most.
- Only deduct allowable costs! When in doubt, consult your tax advisor.
Meet Everlance, the #1 mileage & expense tracker.
Everlance is the #1 app for tracking company mileage & expenses. With Everlance, you can automatically capture your car mileage and business expenses—which likely equal thousands of dollars of deductions. When preparing for taxes, download your mileage and expense records. Then, hand them over to your accountant or import them directly into your tax preparation software. Money saved! 🎉
Your tax situation is unique—just like you! Our Gig Guides represent generalized tax information. If you need help with your specific tax situation, please reach out to your tax advisor.