Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products, including home, life, auto, and commercial, and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, mainly in the insuranc...

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UPDATED: Oct 21, 2021

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Important facts to know...

  • A self-employed person works for himself or herself and is not an employee of another person or organization
  • When you’re self-employed, you pay for your own expenses and can deduct these costs from your taxes
  • Auto insurance is tax-deductible for the self-employed
  • You can deduct the percentage of your auto insurance premiums that corresponds to your work-related driving
  • Not all vehicles qualify for tax deductions

A self-employed person works for himself or herself, generally providing some form of service. They are not an employee of another person or organization. Rather than receiving a salary or hourly wage, their income comes directly from the customers or businesses with which they contract.

Self-employed people set their own hours and dictate the terms of their work.

Being self-employed comes with many benefits. Autonomy is a big one. People who work for themselves don’t have bosses setting their hours or telling them what they can and can’t do.

There’s also the potential to earn exactly what you’re worth. An employee earns a set salary determined by their employer. A self-employed person can charge whatever the market will bear for their labor.

But there are also some drawbacks. When you’re self-employed, you don’t have a guaranteed paycheck. If work dries up for a week or a month, you might not get paid. You also have to take care of your own health insurance and retirement funding. The cost of insurance alone could be enough to deter someone from becoming self-employed.

Self-employed people also file their taxes differently. Since they pay their own expenses, they’re eligible for many more deductions.

Some deductions can also be related to your car. You can talk to a tax professional about the best ways to deduct part of your car payment or even your registration fee. In some cases, you could also deduct the cost of car insurance. To maximize your deductions, your car would have to be limited to business use only. Especially if it’s a mixed-use car such as one you use for both personal purposes and your business, a standard mileage rate may apply. The following sections describe how you can deduct your insurance premiums from your taxes when you’re self-employed.

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What’s the difference between an employee and self-employed worker?

For tax purposes, it’s important to know if you’re classified as an employee or as self-employed. The easiest way to determine this is to look at your tax forms.

If you receive a W-2 from your employer, then you are an employee. They’ll deduct taxes from your paychecks and take care of certain expenses that you may accrue for business reasons. If you work for a company, but they give you a Form 1099 at tax time and not a W-2, this means you’re an independent contractor, not an employee. They will not take care of taxes for you. So you’ll have to pay the related taxes at the end of the year. If you’ve tracked your actual expenses throughout the year with or without a tax professional, you could take advantage of the tax deduction. Though this does not include any personal expense such as a coffee that you grabbed on the way to a job.

The IRS treats independent contractors as self-employed for tax purposes.

Your employee status has several implications when you file taxes. They are as follows:

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How are payroll taxes different from income taxes?

Payroll taxes are different from income taxes. Your payroll taxes are used to fund Social Security and Medicare, programs from which you benefit upon retirement.

The more you pay into these programs during your working years, the higher your Social Security checks when you’re older. The later you start taking social security payments, the more you’ll get per month. Unfortunately, this is because the government is betting you won’t live much longer. So they’ll pay less overall.

As of 2016, payroll taxes amount to 15.3 percent of your income. But they’re capped at $118,500. Any income you earn above this amount is not subject to payroll taxes.

When you’re an employee, you only have to pay half of your payroll taxes or 7.65 percent. Your employer covers the other half. But when you’re self-employed, you’re responsible for the entire 15.3 percent.

You can, however, deduct half your payroll tax expenses when filing your federal income taxes.

What are the expenses that are typically covered?

Employers take care of routine office expenses on behalf of their employees. If you’re an employee, chances are, your employer provides you with the following:

  • Desk
  • Phone
  • Computer
  • Pens and paper

Sometimes you’ll even see employees being provided with a vehicle for business. When you’re self-employed, you have to pay for these things on your own, and so any purchase related to what you do could be considered a business expense. Because of this, the IRS allows you to deduct such expenses when you do your taxes as long as you can reasonably say they’re being used for business purposes. If you include items on your tax form that you use for personal reasons, you may be headed for legal trouble, so it’s best to be an honest taxpayer.

Your employer will also generally supply insurance via a specific insurance company. They will usually offer a few different insurance policies for you. However, when you’re self-employed, you end up having to find your own insurance, and the types of coverage that were once offered now have to come out of your pocket. The actual cost may go down, but it all depends on the company you choose and what insurance products you end up needing.

Are there any labor laws?

Labor laws also treat employees differently from the self-employed and independent contractors. For instance, the law mandates that your employer pay you time-and-a-half for hours worked in excess of 40 per week.

  • It establishes a minimum wage that you must be paid per hour.
  • It sets restrictions on how many hours teens can work.
  • It bans discrimination in hiring practices.

You have fewer protections when you’re self-employed. No minimum wage exists. So if you work for yourself in sales, you can go weeks without a paycheck if you don’t sell anything. In some sales industries, this is more common than others. For example, many realtors may only make a couple sales each year.

But the law does protect you from being treated like an employee and not paid like one. Let’s say you work for a company as an independent contractor. The company can’t force you to work certain hours, take part in business-related endeavors that aren’t outlined in your contract, or abide by employee guidelines.

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What do you need to know about deducting your auto insurance premiums?

You can deduct your auto insurance premiums from your taxable income in many scenarios. If you’re self-employed or an independent contractor and you use your vehicle for work purposes, at least part of your insurance premium is tax-deductible.

Even if you’re an employee, you might be able to deduct your insurance if you drive for work and your employer doesn’t reimburse you. You would have to keep track of your mileage, and the mileage rate may balance out part of your insurance premium, or you could save towards your insurance deductible.

How do these deductions work?

When you file your taxes each year, you’re required to report all the income you make to the IRS. The amount you owe in taxes depends on your income. Different income tiers correspond with different tax rates. Whether you’re a sole proprietor or in some kind of partnership,

The more money you make, not only do you pay more in taxes, but you pay a higher percentage of your income in taxes.

The good news is, you can deduct many things from your total income to arrive at your taxable income. So, for instance, if you make $100,000 in a year, that doesn’t mean you have to pay taxes on the entire amount.

After deductions, you might end up only paying taxes on, say, $80,000.

Auto insurance is one such deduction. If you drive for business-related reasons, and don’t otherwise get reimbursed, you can deduct your insurance premiums from your total income but you can only deduct a certain percentage of your insurance expense.

This percentage corresponds to the percentage of total miles driven that are work-related.

Are there any real world examples?

Let’s pretend you own a mobile notary business. You travel to customers’ homes and places of business to notarize important documents for mortgages, business transactions, and so forth. You only have one vehicle, which you drive both for work and for personal use.

In a given tax year, you put 30,000 total miles on your car. Of these miles, 15,000 were work-related, and the other 15,000 were from personal driving.

Since 50 percent of your driving was for work, the IRS, then, allows you to deduct 50 percent of your car expenses, including auto insurance.

In this situation, you can deduct the following:

  • Half your repair bills
  • Half your gas
  • Half your oil change costs
  • Half your registration fee
  • Half your insurance premiums

Suppose you have full coverage auto insurance with premiums that total $150 per month. That’s $1,800 per year. You can claim a car insurance expense deduction of $900 on your taxes.

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Are there any employees who are able to be reimbursed?

If you’re an employee and your company reimburses you for part of your work-related travel expenses, you have to subtract what your employer pays from the deduction you claim. Just like when you’re buying office supplies – you’re purchasing something on behalf of your company. Even if what you’re purchasing is gas for your vehicle.

Consider the above scenario again. What if, rather than owning a mobile notary business, you worked as a mobile notary for a company?

You drove the same number of business miles and paid the same for auto insurance. But at the end of the year, your employer gave you a $500 travel reimbursement.

In this scenario, you’d have to deduct the $500 your employer gave you from the $900 deduction you calculated. You would still be able to claim the remaining $400 as a deduction. Keep in mind, your employer will not do this for any personal time spent in your vehicle. As an employee, make sure you have a clear understanding of what is considered unreimbursed employee expenses.

What is the difference between standard deduction vs. itemized deduction?

If you’re not inclined to keep up with all your receipts that relate to your car expenses, you have an easier option. You can take the standard per-mile deduction for vehicle expenses. For the tax year 2016, this amount was 53.5 cents per mile.

The standard deduction is determined by a yearly study that estimates the total costs of owning and driving a vehicle for work, including paying for car insurance.

When you elect the standard deduction, you cannot deduct anything else related to your vehicle.

Let’s return to the above scenario. You’re a mobile notary who drove 15,000 miles for work. If the year was 2016 and you took the standard deduction, you could deduct $8,025 in car expenses.

The other option is to itemize your vehicle deduction. This option requires that you keep up with your receipts. You don’t have to submit them with your taxes. But if you ever get audited and can’t produce them, the IRS will probably revoke this deduction and send you a bill.

The IRS allows you to calculate both ways and go with the method that gives you the largest deduction. You should take advantage of this option. Sometimes the difference between the standard and itemized deduction is small, yet other times it’s substantial.

Which miles are deductible?

When you calculate the miles you drive for work, the IRS requires you to exclude your first and last ride of the day. Returning once again to the mobile notary example, suppose you visit six clients in a workday.

Your morning drive from home to your first client’s house, as well as your evening drive from your last client’s house back home, do not count as work-related miles.

This sounds like a nebulous distinction. But the IRS considers these miles your “commute” and does not allow you to deduct them.

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Are there any vehicles that do not qualify?

The IRS only lets you deduct miles driven in four-wheeled vehicles designed for public road use. If you drive, for instance, a motorcycle or scooter for work, you cannot deduct any portion of your insurance costs from your taxes.

Other exclusions include moving vans and vehicles that weigh over 6,000 pounds. If you have any questions about whether your vehicle qualifies, you should read the tax code carefully before claiming a deduction.

Should you comparison shop for an auto insurance policy?

There are so many car insurance companies and policies available that you owe it to yourself to compare several quotes and find someone to answer questions you may have. You can find answers online or by going through customer service.

A good rule of thumb is to look at three or four options before making a decision.

This gives you a good frame of reference on which policy offers the best deal. This way, you’re able to form a budget, and you should do so by finding out what sort of auto insurance expenses you’ll be able to afford. You can make your decision with confidence and not worry about having left a better deal on the table.

Not to mention, you should comparison shop for any number of policies that you may need. Using online tools for informational purposes will help you no matter what sort of coverage you need. It’s a great way to cut down on your insurance cost.

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