Self‑Employed Tax Deductions: What to Know Your First Tax Season

If this is your first year working for yourself or picking up gig work, tax season comes with a new set of rules. Since an employer is not withholding taxes from your pay, you’re likely responsible for both the employee and employer share of Social Security and Medicare taxes, and deadlines work differently than you may be used to. Knowing what to expect makes it easier to stay on top of it.

You're not alone. According to a SurePayroll survey of 2,000 adults, 69 percent of people are actively seeking ways to earn extra income, and 32 percent say the economy has made them more interested in launching a side hustle. The 2025 Small Business Profile report from the U.S. Small Business Association reports that solopreneurs operate more than 29 million businesses.  

The path you’re on is one that more people are taking. Navigating it starts with understanding what the tax code asks of you, and what it may offer in return.

Although the rules may feel unfamiliar at first, they also offer ways to lower your taxable income, so you can keep more of what you earn.

This guide on tax deductions for the self-employed highlights the deductions that most commonly apply to self-employed small business owners, what records to keep, and the first-year mistakes to avoid.

Staying organized throughout the year is one of the most effective ways to reduce stress at tax time. Solutions like SurePayroll® By Paychex can help you document earnings, taxes, and payments as you go — so things don’t get lost before you need them.

For additional information read our post on 7 Ways to Make Tax Season Easier.  

Note: This article is for informational purposes only and should not be considered tax advice. A qualified tax professional can provide guidance tailored to your situation.

Why Self-Employment Taxes Work Differently (and Feel Harder Your First Year)

When you work for yourself, your relationship with taxes changes in two ways: how much you owe, and when you pay it. Instead of taxes being withheld from each paycheck, you're responsible for tracking income, setting aside funds, and paying the IRS directly.

Employee vs. Self‑Employed: How Taxes Work

The most significant change is self-employment tax. Employees split Social Security and Medicare (FICA) taxes with their employer. When you work for yourself, you cover both contributions— a combined rate of 15.3 percent of net earnings. You’re also responsible for paying your state and federal income taxes. That reality can make your first tax season feel more expensive than expected.

Timing is another adjustment. Without an employer withholding taxes throughout the year, many self-employed individuals may need to make quarterly estimated tax payments. Missing them can result in penalties — a requirement that catches many first-year filers off guard.

That said, the tax code does include provisions that may work in your favor. The IRS allows you to deduct half of your self-employment tax when calculating your adjusted gross income (AGI). This above-the-line deduction reduces your income before your total tax is calculated, which helps offset some of the additional burden that comes with working for yourself.

Tax laws can also shift year to year, and recent legislation has introduced or restored certain above-the-line deductions. Keeping up with those changes on your own is difficult — which is why working with a tax professional can help you apply deductions correctly and avoid leaving money on the table.

First-Year Self-Employed? Start Here: What to Do Before You Think About Deductions

You may be wondering whether this advice applies to you. Many people who earn income through apps or short-term contracts don’t initially think of themselves as business owners, freelancers, or contractors. But if you receive payments without tax withholding, you are responsible for reporting that income and tracking related business expenses.

If this is your first tax season working for yourself, finding every possible self-employment tax deduction may not be the best strategy. Understanding the basics and staying organized may serve you better. You can set yourself up for success by learning what applies to you and building simple habits that can help prevent surprises later.

Start by understanding how the IRS classifies your work. You are likely considered self-employed if you earn income as a sole proprietor, single-member LLC owner, independent contractor, freelancer, or gig worker. Even if you think of your earnings from rideshare driving or grocery delivery as side gig money, the IRS generally treats that income as business income — which means you are responsible for reporting it and paying applicable business taxes.  

If you earned $600 or more from a single client or platform, you may receive a 1099-NEC or another 1099 form documenting that income. Not receiving one doesn't eliminate your reporting obligation; you're still required to report all self-employment income, regardless of whether a form arrives.

Read more: Independent Contractor vs Employee: What Small Business Owners Need to Know

Another early step is figuring out whether you owe self-employment tax. If your net earnings from self-employment are $400 or more for the year, you are typically required to pay self-employment tax. Without taxes being withheld, many people don’t realize this applies until they prepare their tax return.

Deadlines are also different when you work for yourself. Rather than settling up once a year, many self-employed individuals may need to make quarterly estimated tax payments to the IRS — generally due in April, June, September, and January. Missing these deadlines can result in penalties, even if you pay your full tax bill by the annual filing date. Getting familiar with this schedule early is one of the more practical steps you can take in your first year.

Just as important, start organizing records of your expenses and income as soon as possible – ideally from day one. Good recordkeeping can help reduce stress at tax time and make it easier to report what you’ve earned and spent accurately. Helpful approaches include:

• Using a dedicated business bank or payment account

• Saving digital copies of receipts and invoices

• Tracking mileage as you drive, not months later

• Downloading earnings summaries from gig or marketplace platforms

If you begin paying yourself through payroll, hire help, or work with subcontractors, organized reports become even more valuable. Small business payroll systems such as SurePayroll can help you document wages, taxes, and payments throughout the year — so you're not piecing things together when deadlines arrive.

Common Tax Deductions Self-Employed Business Owners Should Know

Once you understand how your income is classified and how to keep good records, the next step is recognizing which expenses may reduce your taxable income as a small business owner.

Rather than trying to claim every possible tax deduction for the self-employed, it helps to understand the categories that commonly apply, so you can identify what fits your situation.

H3: Common Self‑Employed Deductions by Category

Costs of Doing Business (Day-to-Day Operations)

Ordinary and necessary expenses required to run your business are generally deductible. These might include:

• Office supplies and equipment used for your work

• Software subscriptions and online tools

• Advertising, website costs, and marketing services

• Professional services such as legal, accounting, or consulting support

If an expense helps you operate or grow your business, it may qualify.

Workspace & Utilities

If you work from home, you may qualify for the home office deduction. To be eligible, space must be used regularly and exclusively for business. There are two ways to calculate the deduction:

• Simplified method: $5 per square foot, up to 300 square feet

• Regular method: deduct a percentage of actual expenses such as rent, mortgage interest, utilities, insurance, and maintenance

You may also be able to write off the business portion of your cell phone and internet costs.

Business Travel, Mileage, and Transportation

Transportation costs are easy tax deductions for the self-employed to overlook, especially if you don’t track business miles as you go.  

If you use your vehicle for business, you can deduct mileage using the IRS standard mileage rate or actual vehicle expenses. You’ll need to keep a mileage log to do this. Business-related travel expenses such as airfare, lodging, and transportation may also be deductible when travel is necessary for your work.

Health, Retirement, and Personal-Benefit Expenses

When you work for yourself, you’re also responsible for the benefits that employers typically provide. Some of these costs could reduce your taxable income, including:

• Premiums for self-employed health insurance

• Contributions to retirement plans such as a SIMPLE IRA, SEP IRA, or a Solo 401(k) -- designed for self-employed individuals and each offering potential tax advantages.

These deductions can lower your taxable income and help support your long-term financial security.

Self-Employment Tax

Self-employed individuals can deduct half of their self-employment tax when calculating adjusted gross income. Because this deduction reduces your income before your total tax is calculated, it helps offset some of the additional tax burden that comes with working for yourself.

First-Year Mistakes That Cost Self-Employed People Money

Many first-time business owners may assume their biggest tax risk is missing deductions. The more common problem is not realizing if you qualify for them or not keeping the records needed to claim them.

Common First‑Year Tax Mistakes

Understanding a few common pitfalls can help you avoid unnecessary taxes, penalties, and lost savings.

• Mixing personal and business expenses: Using one account for everything makes it difficult to track deductible costs and can create confusion if you are ever asked to document expenses.  

• Not tracking mileage from day one: If you drive for work, whether you’re meeting clients, running business errands, or making deliveries, mileage can be a valuable deduction. Reconstructing mileage later is difficult, so tracking trips as they occur can help you receive your full benefit.

• Overlooking the home office deduction: If you meet the IRS requirements by using a space regularly and exclusively for business, you might qualify. Understanding the requirements can help you claim this deduction.

• Forgetting quarterly estimated tax payments: Because taxes are not withheld from self-employment income, most self-employed people must make quarterly estimated payments. Missing these deadlines can result in penalties and unexpected tax bills.

• Missing start-up cost write-offs: Expenses incurred before opening your business, such as equipment, licensing, or professional fees, are often deductible. Keeping records of these early costs can reduce your taxable income in your first year.

• Under-documenting gig or marketplace income: Income earned through platforms such as rideshare apps, online marketplaces, or freelance platforms is still taxable and must be reported.  

Year‑One Deductions You Might Not Realize You Qualify For

Your first year in business comes with new responsibilities. It could also offer tax benefits that don’t apply in later years.  

• Start-up costs: Did you incur costs before opening your business such as market research, training, branding, or equipment purchases? If so, you might be able to deduct up to $5,000 for those start-up costs in your first year, with additional costs amortized over time. Individual taxpayers can use “other expenses” Schedule C of IRS Form 1040 to claim start-up cost deduction.

• Organizational costs: If you formed a legal business entity, expenses such as filing fees, legal services, and state registration costs could qualify as organizational expenses. You may be able to deduct some of these costs in your first year.

How to Keep Better Records So Next Tax Season Is Easier

Good recordkeeping helps you understand how your business is performing, reduces stress at tax time, and allows you to claim the deductions you’re entitled to. A few simple habits can make the process manageable throughout the year.

According to SurePayroll research, gathering the necessary information is the most stressful part of the tax process for 40% of adults. One solution: organize as you go.

Track income consistently: Keep records of all payments you receive, whether from clients, marketplaces, or payment apps. Download platform earnings summaries and save invoices or payment confirmations, so your records match the income you report to the IRS.

Document expenses as they occur: Waiting until the end of the year makes it easy to miss deductible expenses. Saving receipts, noting business purposes, and categorizing expenses regularly makes it much easier to report your expenses accurately and prevent deductions from slipping through the cracks.

Know when to consult a tax professional: As your business grows, questions might arise about estimated taxes, entity structure, retirement contributions, or tax law changes. A qualified tax pro can help you make informed decisions and avoid costly mistakes. In fact, SurePayroll research found that 79 percent of CPAs have referred their clients to an online payroll service as a way to centralize important tax prep documents and save time and stress.

Use tools that simplify documentation: If you begin paying yourself through payroll, hire employees, or work with subcontractors, organized reports can streamline tax preparation. Payroll systems generate documentation of wages, taxes, and payments throughout the year, which can help support accurate reporting.

Checklist: What to Save for Your Taxes Each Year

Income records

✓ Client invoices and payment confirmations

✓ 1099 forms and platform earnings summaries

✓ Bank and payment processor statements

Expense documentation

✓ Receipts for supplies, equipment, and services

✓ Mileage logs and travel records

✓ Home office expense records

✓ Phone and internet bills (business-use portion)

Business records

✓ Business bank and credit card statements

✓ Payroll and subcontractor payment reports

✓ Licensing, insurance, and registration documents

Planning documents

✓ Estimated tax payment confirmations

✓ Retirement contribution records

✓ Health insurance premium statements

When Payroll Helps — Even if You’re Self-Employed

Many first-year small business owners assume payroll only applies to larger companies. It can become relevant sooner than expected. When it does, having the right setup can make recordkeeping and tax reporting easier.  

If you elect to have your business taxed as an S corporation, you may need to pay yourself a reasonable salary through payroll. Payroll reports document wages, tax withholdings, and employer tax payments, which can simplify your year-end reporting and provide documentation that may support certain tax deductions.

Payroll is important when you hire employees or begin working with independent contractors. Hiring even one employee creates payroll tax responsibilities, and organized payment records support accurate reporting and required tax forms.

When payroll applies, clear wage and tax documentation help keep your records accurate and organized. Services built for very small businesses can help handle reporting automatically as you grow. SurePayroll is designed specifically for small employers and single owner organizations and helps generate documentation needed for tax preparation.

Learn more about how SurePayroll helps self-employed business owners.