Being your own business comes with perks like flexibility, independence and personal control—benefits that inspire many entrepreneurs to carve their own paths. But self-employment also brings new challenges, especially when it comes to taxes.
Unlike traditional employees, entrepreneurs shoulder full responsibility for their tax obligations, which can feel overwhelming at first. However, understanding how taxes work for small business owners and knowing which deductions apply can significantly ease this responsibility.
Why Tax Deductions Matter
Tax deductions reduce your taxable income, allowing you to save money legally. By identifying expenses tied to your business operations, you can take control of your finances and optimize cash flow.
What Is the Self-Employment Tax?
The self-employment tax is a federal tax covering Social Security and Medicare obligations. While traditional employees split these costs with their employers, self-employed individuals pay the full 15.3% rate, which includes:
- 12.4% for Social Security (up to the annual limit)
- 2.9% for Medicare, with an additional 0.9% for high earners exceeding certain thresholds ($200,000 for single filers; $250,000 for married couples filing jointly).
Breaking Down Self-Employment Tax
Business taxes are broken into two categories:
Pass-Through Taxation
Most new businesses are taxed as pass-through entities, meaning profits and losses are passed through to the owner’s individual tax returns. The business itself doesn’t pay income tax.
By default, the following entities are considered pass-through entities:
- Sole proprietorships
- Partnerships
- LLCs (unless select corporate taxation)
Double Taxation
Some businesses, typically corporations, face double taxation. This means a business pays income taxes on its profits, and the owners pay personal taxes on dividends or profit distributions.
Double taxation typically applies to:
- Traditional corporations (C-corps)
- LLCs that elect to be taxed as corporations
Who Must Pay Self-Employment Tax?
If you earn $400 or more in net self-employment income, you’re required to file and pay this tax. While the rate may seem steep, there’s a silver lining: you can deduct 50% of your self-employment tax from your taxable income, reducing your overall tax burden.
How Your Business Structure Impacts Taxes
Your business's legal structure directly affects your tax liability, filing requirements, and deduction opportunities. Choosing the right structure is critical to aligning with your financial goals and tax strategies. Here’s a quick breakdown:
Sole Proprietorship
This is the simplest structure, where you and your business are treated as a single entity. You report business income and expenses on your personal tax return, but you’re responsible for self-employment tax on all profits.
Limited Liability Company (LLC)
LLCs offer flexibility. By default single-member LLCs are taxed like sole proprietorship, while multi-member LLCs are treated like partnerships. LLCs can also elect corporation taxation for additional options.
Partnerships
Partnerships pass income, deductions and tax obligations to individual partners. Each partner pays self-employment tax on their share of the profits. Partnerships must file an informational tax return and issue Form K-1 to all partners. This process can get complicated for entrepreneurs, so consulting a CPA or tax advisor is recommended.
S Corporations
An S corporation allows you to pay yourself a “reasonable salary,” which is subject to payroll taxes. Distributions, however, are not, offering significant tax savings for higher-income businesses.
8 Essential Tax Deductions for Entrepreneurs
Strategic use of tax deductions can significantly reduce your taxable income. Here are eight key deductions entrepreneurs should consider:
1. Home Office Deduction
If you regularly use part of your home exclusively for business use, you may deduct a portion of home office expenses, such as rent, utilities, insurance and even property maintenance costs. The deduction is based on the square footage of your office space relative to your home and is available whether you rent or own.
You can calculate this deduction in two ways:+
- Regular method: Determine the percentage of your home used as an office by dividing the office space’s square footage by your home’s square footage. Then, multiply this ratio by eligible home expenses. You can fully deduct direct business expenses. Itemize these deductions on IRS Form 8829.
- Simplified method: Use the IRS-set rate (currently up to $5 per square foot of home office space, with a $1,500 maximum) applied to the office space. This method requires no itemized expenses and is reported on Schedule C. You cannot deduct depreciation or claim additional home-related itemized deductions.
2. Health Insurance Premiums
If you’re self-employed and are not eligible for a spouse’s employer-sponsored health plan, you can deduct premiums paid for your health, dental and qualified long-term care (LTC) insurance. This deduction also applies to premiums paid for your spouse, dependents and children under age 27—even if not claimed as dependents.
This is an “above-the-line” deduction, meaning you don’t need to itemize to claim it. It directly reduces your adjusted gross income, providing additional savings.
3. Vehicle Expenses
Use your vehicle for business expenses? You can deduct either business travel-related mileage or actual car expenses such as fuel, maintenance and repairs. Keep detailed records to meet IRS guidelines. Choose one of these calculation methods:
- Standard Mileage Rate: The IRS sets up a standard mileage rate each year. For 2025, deduct $0.70 per mile, plus tolls and parking fees. For example, an 1,800-mile business trip allows you to deduct $1,260, in addition to eligible parking fees and tolls.
- Actual expense method: Calculate the total business-related driving for the year. Multiply this amount by your total cost expenses, including gas, oil changes, registration fees, insurance, depreciation and repairs.
4. Startup Expenses
Launching a new venture comes with costs, and the IRS allows entrepreneurs and sole proprietors to deduct up to $5,000 in start-up costs in their first year. Eligible expenses include business registrations, permits, market research, travel to start a business and advertising fees. Expenses beyond that are treated as capital expenses, which you can amortize over 15 years.
Pro Tip: If you establish a corporation, you may also deduct up to $5,000 in “organizational costs” such as fees for temporary directors, state incorporation and legal services.
5. Retirement Contributions
Contributing to a qualified retirement plan provides valuable tax write-offs for self-employed entrepreneurs, helping you prepare for the future while reducing current taxable income. Eligible plans include SEP IRAs, Solo 401(k)s and SIMPLE IRAs, each with specific annual contribution limits:
- Solo 401(k): In 2025, you may contribute up to $23,000, plus a $7,500 catch-up contribution if you’re age 50 or older. Total contributions, including self-employer matching, cannot exceed $70,000.
- SIMPLE IRAs: Contribute up to $16,500. Catch-up contributions vary by age and plan type, ranging from $3,500 to $5,250.
- SEP IRAs: As both employee and employer, you may contribute up to 20% of your net income or $70,000, whichever is less. SEPs do not permit catch-up contributions.
6. Self-Employment Tax Deduction
As noted earlier, self-employed people pay the entire 15.3% self-employment tax. The good news is, you can deduct half of this amount from your taxable income—an automatic benefit for eligible small business owners.
Calculate and report this deduction on Schedule SE, then claim it on Schedule 1 of Form 1040. This deduction lowers your adjusted gross income and helps offset your Social Security and Medicare payments.
7. Continuing Education
Investing in professional development not only enhances your skills but also can reduce your tax bill. You can deduct the cost of attending conferences, workshops or courses directly related to your business.
To qualify the education must:
- Be required to maintain your current role, salary or professional status
- Improve or maintain skills necessary for your business
Qualified deductions include:
- Tuition, books, supplies and lab fees
- Transportation and travel costs for qualifying education events
- Other associated expenses, such as research or training materials
You may also deduct any ordinary and necessary expenses for education costs incurred for your employees.
8. Qualified Business Income (QBI) Deduction
The QBI deduction, also known as Section 199A, allows owners of eligible pass-through businesses to deduct up to 20% of their qualified business income, gains, deductions and losses. It applies whether or not you itemize deductions and can mean substantial savings—though certain income limits and qualifications apply:
For 2025, you’ll receive the full 20% deduction if your taxable income is:
- Up to $197,300 for single filers
- Up to $394,600 for joint filers
The deduction phases out at:
- $247,300 for single filers
- $494,600 for joint filers
The QBI deduction is one of the most powerful tools for lowering taxes on self-employment income, as long as you stay within these thresholds.
Maximizing these deductions requires meticulous recordkeeping. Be sure to save receipts, invoices and statements to support your claims if audited by the IRS.
Optimize Your Tax Strategy
Navigating taxes as a self-employed individual can feel complicated, but it doesn’t have to be. By understanding your business structure and leveraging smart deductions, you can reduce your tax burden and boost your bottom line.
At LTax, we specialize in proactive tax planning for entrepreneurs. Let us help you build a tax strategy tailored to your unique needs. Call us at 561.453.1441 to schedule your consultation today!
Limited Exceptions to the New Rule
The Treasury Department will allow exceptions for specific cases. Waivers may be granted for:
- Individuals without access to U.S. banking services
- Certain emergency payments where an electronic transfer would cause undue hardship (i.e., FEMA disaster relief payments)
- National security or law enforcement needs
- Individuals with documented impairments, those in remote areas, or Social Security recipients age 90+
To apply for a waiver, call the Treasury Electronic Payment Solution Waiver Line at 1-855-290-1545 or complete FMS Form 1201W. Waivers are reviewed individually and are not automatically approved.
Scams to Watch For
Unfortunately, major transitions like this one can create opportunities for fraud. Be cautious and watch for red flags, such as:
- Unsolicited calls, emails, or texts asking for banking information or Social Security numbers
- Threats claiming your benefits will stop unless you act immediately
- Phishing attempts for login credentials
Remember, federal agencies will never contact you unexpectedly for personal or financial information. Only update your information through official government websites or verified phone numbers. If you’re unsure, contact the agency directly.
Looking Ahead
The end of IRS paper checks is part of a broader shift to digital payments across federal agencies. While many taxpayers won’t notice a change, those previously depended on paper checks should act immediately to avoid interruptions.
If you have questions about how this transition may affect you or a loved one, contact an LTax Team Member. We are here to help you review your options and make the switch smoothly.
LEGAL OR TAX: The information herein is not legal, such as trust or estate planning, advice, or tax advice. Any such information is provided for illustrative purposes only and must not be relied upon without the benefit of the advice of your lawyer and/or tax professional. Lido specifically disclaims any liability from any reliance on such information. Lido is not a legal service provider or tax professional and does not offer legal or tax advice. Should you desire to obtain tax or legal services or advice, you must enter into your own, independent engagement agreement with a licensed attorney or tax professional.