The 14 Key Freelance Business Deductions for Your 2025 Return

Every year, freelancers unintentionally hand the IRS more money than they need to simply because they overlook deductions they’re fully entitled to claim. This breakdown of the 14 key business deductions to be aware of is designed to help you avoid revenue-boosting blind spots on your freelance business tax return before you file.

It’s easy to miss expenses that qualify as business deductions because the tax code is complex and constantly shifting. This is why it is important to be aware of changes that may affect your freelance return and work with a tax professional  who can help you identify additional opportunities to reduce your taxable income and maximize any refund you may be entitled to.

As a reminder, if your freelance business entity is an S-Corp, Partnership, Limited Liability Partnership or Multi-member Limited Liability Company your return is due on March 15, 2026. For C-corporations the deadline is April 15, 2026. 

Here are the key freelance business deductions to be aware of, including updates from the One Big Beautiful Bill Act (OBBBA) legislation from 2025.

1) Home office expenses

Deducting your home office remains one of the most reliable business deductions available to freelancers. While you do not need a separate office in your home to claim a deduction, you do need a clearly defined workspace that you use regularly and exclusively for business. 

There are two ways to calculate the home office deduction:

1. Claim the standard office deduction is $1500 which is a topline deduction on your return.
2. Alternatively, you can take the deduction by calculating the actual square footage that is used exclusively for business in your home and multiplying it by $5.00 per square foot (up to 300 square feet) as well as deducting a proportional amount. 

2) Health insurance premiums

Freelancers often overlook the health insurance deduction even though it can offset a significant portion of annual expenses. If you pay for your own coverage and are not eligible for employer‑sponsored insurance, you may be able to deduct 100 percent of your premiums. 

This includes medical, dental, and long‑term care coverage for you, your spouse, and your dependents such as premiums for medical, dental, and long‑term care insurance provided you have a net profit for the year and are not eligible for an employer-subsidized plan. 

3) Professional development

Freelancers invest heavily in staying current, and the bill continues to support deductions for training that maintains or improves skills in your existing line of work. The key is that education must relate directly to the services you already provide. When it does, these costs are recognized as legitimate business expenses.

• Courses, workshops, and certifications tied to your current services
• Books, online programs, and industry publications
• Conferences and seminars that support skill development

Professional development may increase your earning potential significantly and it may also reduce your tax bill if the cost of the course/written materials, etc., qualify for these deductions. 

4) Software and subscriptions

Digital tools are essential to running a freelance business, and the bill maintains clear deductibility for software and subscription services. These recurring charges may seem small, but they add up quickly over the course of a year.

• Software subscriptions and cloud storage
• Design tools, accounting platforms, and project management systems
• Email marketing services and paid newsletters
• Documentation of business purpose for mixed‑use tools

Tracking these expenses ensures your tax return reflects the actual cost of keeping your business operational. Subscriptions can be deducted immediately in the year paid. One-time, long-term software purchases might need to be depreciated over 36 months if they last more than one year.

5) Phone and internet expenses

For phone and internet services, you can deduct the business portion. The expectation is a reasonable estimate supported by your usage patterns. You can generally deduct:

• A percentage of your phone bill based on business use.
• A percentage of your internet bill based on business use.

Be sure that you have documentation of your business activities conducted through these services such as your meeting calendar, activities requiring internet to run your business and itemized phone bills. 

These services are essential to client communication, and deducting the business portion is both allowed and expected.

6) Business meals

Business meals remain deductible at 50 percent when they are directly tied to your work. The rules emphasize that documentation is a must which means that you must keep itemized receipts and state the client name, business purpose for the meeting over which you ate the meal and the date on which it occurred. 

You can also deduct your own meals when traveling for work as long as the food is purchased at an eating establishment rather than a convenience store or grocery store. 

7) Mileage and transportation

Even if you only make short trips for work, tracking your mileage throughout the year can add up to significant deductions. You can deduct mileage (The 2025 tax year mileage rate deduction is 70 cents per mile) and transportation costs for business activities such as:

• Mileage for client meetings, conferences, and project work. 
• Parking fees, tolls, and ride share costs for business travel.
• Short trips for supplies, shipping, or errands.

Whether you use the standard mileage rate or actual expenses, consistency matters in tracking your mileage so consider using an app to track it accurately and make it easier to have the data at hand when you need it for filing your return.

8) Equipment and depreciation

Freelancer business owners often remember to deduct major purchases but overlook smaller tools that are essential to their work. Under the One Big Beautiful Bill Act (OBBBA) 100% bonus depreciation for qualifying assets placed in service after January 19, 2025. While bonus depreciation has no limit, the OBBBA also enhanced Section 179 deductions, allowing up to $2.5 million in immediate expensing for 2025, with a phase-out starting if purchases exceed $4 million. 

Some examples of items considered necessary business assets include:

• Laptops, cameras, microphones, and lighting equipment.
• Office chairs, desks, and ergonomic accessories.
• Printers, scanners, and related tools.
• Vehicles that exceed 50% business use and are greater than 6,000 pounds. Heavy SUVs and trucks are eligible for up to $31,300 and cars are eligible for up to $20,200 in the first year. 

Recognizing these items as business assets helps you reflect the true investment required to deliver your services and may equal substantial tax deductions.

9) Bank fees and payment processing costs

Payment platforms make it easy to get paid, but the associated fees reduce your income, however you can offset some of this with deductions for these costs such as:

• Payment processing fees from PayPal, Stripe, or Square 
• Monthly bank charges for business accounts
• Credit card interest on business purchases
• Fees tied to business transactions

These small amounts accumulate over time and deducting them ensures your taxable income reflects your actual earnings. Be sure to track these expenses and if available, use the statements and tax documentation provided by these platforms. 

Please note that these fees are tax-deductible only if they are incurred for business purposes, acting as an "ordinary and necessary" cost of operation, incurred in business accounts. Maintenance fees, wire transfer fees, overdraft fees, and returned item fees are generally deductible. Please maintain detailed records of all banking fees to support your deductions. Please keep detailed records, such as transaction reports from your PayPal account, for at least three years to support the deductions in case of an audit.

10) Business-related insurance

Professional Liability Insurance premiums for coverage such as errors and omissions, business property insurance, and cybersecurity safeguards for your business are deductible. 

11) Expanded SALT Deduction Cap

The state and local tax (SALT) deduction cap has been increased from $10,000 to $40,000 for the 2025 tax year. This cap will increase by 1% annually by 2029 before reverting to its previous limit in 2030. However, this benefit is phased out for higher-income taxpayers, so not all freelancers will be able to take full advantage. For 2025, the full deduction is available for those with a modified adjusted gross income (MAGI) under $500,000. It phases out completely at $600,000 or more, where it reverts to a $10,000 limit.

The cap is reduced by 30% of the amount by which the taxpayer's modified adjusted gross income exceeds a threshold amount. That threshold amount is $500,000 for 2025, with a one percent increase each year through 2029. 

For those in high-tax states, this change could provide meaningful relief, but it is critical to also be aware of how the potential state-level workarounds mentioned below might impact you.

12) State-Level SALT Workaround for Businesses

In response to the SALT deduction cap noted above, several states have implemented workarounds to help businesses mitigate its impact. For example, New York State has introduced the Pass-Through Entity Tax (PTET), which allows businesses to pay state taxes at the entity level rather than the individual level. PTET allows partnerships and S-corps to pay state taxes at the entity level, which are fully deductible on federal returns.

This workaround enables businesses to bypass the SALT cap and potentially reduce their overall tax burden. The new federal bill has no impact on these state-level workarounds. However, freelancers operating pass-through entities should always monitor the specific developments related to SALT in the states where they do business closely.

13) Tip and Overtime Income Deductions

Two new deductions have been introduced for 2025 tax year that may benefit freelancers working in service-based industries:

1. The tip income deduction allows up to $25,000 in tip income to be deducted from taxable income without itemizing if married and filing a married filing jointly (MFJ) return, whereas the allowable deduction for a single person is up to $12,500. This is specifically beneficial for workers in occupations where tipping is standard (e.g., food service, hospitality, transportation).
2. This deduction phases out at $150,000 in income for single taxpayers, and at $300,000 for those who are married filing jointly. 
3. The overtime deduction permits employees (non-exempt, paid overtime employees based on the Fair Labor Standards Act (FLAS) who receive Form W-2) who receive overtime pay to deduct up to $12,500 annually for single filers, ($25,000 annually for married filing jointly), with a phaseout for those with a modified adjusted gross income (MAGI) over $150,000 for single filers ($300,000 for married filing joint filers).This deduction is not available to freelancers. Independent contractors, freelancers, and gig workers are generally considered self-employed, not W-2 employees, and are therefore not eligible for this specific deduction. Freelancers are responsible for 15.3% in self-employment taxes (Social Security and Medicare) on all income, including any "extra" hours worked. 

Those who receive Form W-2 as non-exempt employees and have qualified overtime pay (the "half" in "time-and-a-half") from their federal taxable income.  

This overtime deduction has Income limits and Phase-out begins as follows: the dededuction begins to phase out if your Modified Adjusted Gross Income (MAGI) exceeds $150,000 (single) or $300,000 (married filing jointly).

• Only the "premium" portion of overtime (the extra half of "time-and-a-half" pay) is deductible. If you earn $20/hr and $30/hr for overtime, only the $10/hr premium is deductible. While this reduces federal income tax, payroll taxes (Social Security and Medicare) still apply to all overtime earnings. While it is a deduction from income tax, overtime pay is still subject to payroll taxes (FICA). Qualified overtime will be listed in Box 14 of the W-2 with the code "FLSA OT Prem" starting in 2025. 

Overtime wages continue to be subject to federal income tax, Social Security, and Medicare taxes, just like regular wages. However, under the new federal “No Tax on Overtime” provisions, certain taxpayers may now qualify for a deduction on a portion of their overtime earnings. This deduction applies only to qualifying overtime wages and only for taxpayers who fall within specific income thresholds.

Amounts earned above those thresholds will continue to be taxed as usual. Overtime is not fully tax-free. Social Security and Medicare taxes still apply to all overtime earnings.

There is no special overtime tax rate; overtime continues to be taxed as ordinary income within your existing tax bracket so be sure to retain any documentation related to reporting of wages, including overtime. If you notice any discrepancies in your pay stubs or year-end documents, contact your employer (if you also have a W-2 position) and/or clients (if you receive a 1099) promptly to correct them.

These deductions are applicable to all tip and overtime income from 2025 and the provision is currently set to expire after 2028 so freelancers in eligible business industries should take advantage of them while they last.

Alternative for Freelancers

While freelancers cannot use the "No Tax on Overtime" deduction, they can still reduce their tax liability through other methods that we discuss in the 14 points, such as: 

• Business Expenses: Deduct legitimate business expenses, such as software, hardware, or home office costs, to lower taxable income.
• QBI Deduction: Eligible self-employed individuals may deduct up to 20% of their Qualified Business Income (QBI).
• Self-Employment Tax Deduction: You can deduct 50% of your self-employment tax when calculating your federal income tax. 

For 2025, employers are not required to break out overtime separately on W-2s, so you may need to use paystubs to calculate your eligible amount. 

14) Qualified Business Income (QBI) Deduction 

The OBBB made permanent the extension of the 20% Qualified Business Income (QBI) deduction (Section 199A deduction) for pass-through income. If you operate as a sole proprietor, LLC, or S-corporation, you can continue to deduct up to 20% of your qualified business income, plus 20 percent of qualified real estate investment trust (REIT) dividends and qualified publicly traded partnership (PTP) income subject to income thresholds and business type. Income earned through a C corporation or by providing services as an employee is not eligible for the deduction. What qualifies as a trade or business, is specified in the instructions for Form 8995-A or Form 8995.

The deduction is available regardless of whether taxpayer itemizes on Schedule A or takes the standard deduction. There are two parts to this deduction: 

(1) QBI component – equal to 20% of QBI from a domestic business operated as a sole proprietorship or through a partnership, S corporation, trust or estate. It is subject to limitation, depending on taxable income which may include the type of trade or business, the amount of W-2 wages paid by the qualified trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business. It may be reduced by the patron reduction if the taxpayer is a patron of an agricultural or horticultural cooperative.

(2) REIT/PTP component – equal to 20% of qualified REIT dividends and qualified PTP income and Is not limited by W-2 wages or UBIA of qualified property. Depending on taxable income, the amount of PTP income that qualifies may be limited depending on the type of the PTP’s trade or business. The deduction is limited to the lesser of the QBI component plus the REIT/PTP component or 20 percent of the taxpayers’ taxable income minus net capital gain.

QBI is the net amount of qualified items of income, gain, deduction, and loss from any qualified trade or business, including income from partnerships, S corporations, sole proprietorships, and certain trusts. This includes the deductible part of self-employment tax, self-employed health-insurance, and deductions for contributions to qualified retirement plans such as SEP, SIMPLE and qualified plan deductions, just to list a few of items that are included in the calculation.

QBI does not include items that are: not property includable in taxable income, investments such as capital gains or losses, interest income that is not properly allocable to a trade or business, wage income, income that is not effectively connected with the conduct of business within the US, commodities transactions or foreign currency gains or losses, certain dividends and payments in lieu of dividends, income/loss or deductions from notional principal contracts, annuities (unless received in connection with the trade or business), amounts received as reasonable compensation from an S corporation, amounts received as guaranteed payments from a partnership, payments received by a partner for services other than in a capacity as a partner, qualified REIT dividends, and PTP income.

A safe harbor is available to individuals and owners of passthrough entities who seek to claim the deduction under section 199A with respect to a rental real estate enterprise. Under the safe harbor a rental real estate enterprise will be treated as a trade or business for purposes of the QBI deduction if certain criteria are met. For more information on the safe harbor, see News Release IR-2019-158

An interest in rental real estate that does not meet the requirements of the safe harbor may still be treated as a trade or business for purposes of the QBI deduction if it otherwise is a section 162 trade or business.

In addition, the rental or licensing of tangible or intangible property that does not rise to the level of a section 162 trade or business is nevertheless treated as a qualified trade or business for purposes of section 199A if the rental or licensing of property is to a commonly controlled trade or business operated by the individual or a passthrough entity as provided in Treas. Reg. § 1.199A-1(b)(14).

The QBI deduction has been a major benefit for freelancers since its introduction in 2018, and its permanence adds much-needed stability to long-term freelance business tax planning. 

Mitigate Your Tax Burden with Maximum Business Deductions

The key to maximizing your deductions is awareness and documentation. When you understand what qualifies and keep good records throughout the year, tax season becomes less stressful and more rewarding. 

A tax professional who understands the freelance landscape can also help you uncover deductions you may not realize you’re entitled to. With the right guidance and a little extra attention to detail, you can make sure you’re keeping more of what you earn and paying the IRS only what you legitimately owe.

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