Video: Self-Employment Tax Deductions on Cell Phones

Hello, I’m Jill from TurboTax with important news for self-employed taxpayers.

In comparison to taxpayers who earn income from employment, the self-employed have more opportunities to deduct expenses that relate to their work. This is because the IRS treats sole proprietors and independent contractors as businesses rather than employees—which allows them to deduct all business expenses, including the cost of cell phones.

Calculating your tax deduction when you use cell phones strictly for business purposes couldn’t be simpler. When you don’t use the phones for personal purposes, the deduction covers the entire cost of the phone and all fees you pay to your cell phone provider. However, a little more math is necessary if you use the phones to make personal calls. Since the IRS never allows you to deduct the expense of personal phone calls, you need to allocate your cell phone expense between nondeductible personal use and deductible business use.

There are various ways you can allocate cell phone costs, but regardless of the method you use, it must reflect your actual use of the cell phones.

Let’s use a simple example to illustrate how this works. Suppose you purchase a cell phone for $200 and sign a service contract for unlimited calling at a cost of $1000 per year. If you receive itemized statements from the phone company that provides the duration of each call you make, you can base the allocation on the total minutes you use the cell phone for business purposes.

For example, if you calculate that 60 percent of the minutes you use during the year relate to business calls, your cell phone deduction is equal to 60 percent of the annual expense. In this case, when reporting your self-employment income and expenses on Schedule C or C-EZ, you can include $120 for the cost of the phone and $600 for the annual contract. However, if your cell phone company doesn’t send you itemized statements each month, you still need to allocate the expense, but it may be reasonable to base the allocation on your estimate of business and personal use of the cell phones during the year.

If you are self employed, TurboTax Home & Business is specifically designed to help you get all the business-related deductions and credits you deserve.