Independent Contractor Tax Deductions
As an independent contractor, you have alot of expenses. And unlike W-2 employees, you have to pay for all of your expenses out of pocket.
That can add up pretty quickly over a year’s time!
Considering most employees can write unreimbursed business expenses, it only seems fair that 1099 contractors would get the same treatment.
Well, the IRS agrees.
Independent contractors are self-employed individuals or a separate legal entity.
Specifically, an independent contractor is an entity (individual or business) contracted to provide services to another entity as a non-employee. If you are paid $600 or more from a customer, you should receive a Form 1099 MISC. This form shows the amount of income you received in a given tax year by a given customer. The IRS also gets a copy so it is really important you report the accurate income amount on your return or an IRS letter is sure to come your way. Check out Tax Mistakes to Avoid to learn more.
In addition to this, independent contractors don’t get the same level as protection as employees. Workers’ compensation, salary, insurance, paid time off are all benefits independent contractors don’t have.
As an independent contractor, you know all of these things by now.
Regardless of these facts, being an independent contractor can still be worthwhile.
One way the government eases the financial burdens of independent contractors is by having independent contractor tax deductions.
Below is a list of common independent contractor tax deductions.
- Business insurance
- Car and truck expenses
- Commissions and fees
- Contract labor
- Home office expenses
- Legal and professional fees
- Office expenses
- Rent or lease payments
- Repairs and maintenance
- Taxes and licenses
- Travel expenses
- Other expenses
You should always consult your CPA or tax accountant before claiming these deductions.
Any advertising and marketing costs are 100% tax deductible. This includes traditional and digital marketing expenses. Flyers, business cards, and trade show expenses too. Virtually anything with your business name and logo on it could be seen as advertising.
Business insurance is used to protect your business from loss due to lawsuits, damage, theft, vandalism, employee injuries and more. If you have any sort of business insurance, you can claim this as an independent contractor tax deduction.
Car and Truck Expenses
If you are an Uber or taxi driver, most, if not, all of your car expenses are independent contractor tax deductions. Expenses like gas, car insurance, tolls, parking fees, and maintenance are included.
A gray area exists when your car is also used for personal reasons. In which case, you have 2 ways of deducting expenses:
- Deduct the actual amount of car expenses such as insurance, gas, and maintenance OR
- Apply a standard rate to each business mile driven. You would have to keep a log of your business miles during the year.
In most instances, the second method has more tax favorable results. The standard mileage rate changes all of the time. For the tax year 2018, the rate was 53.5 cents per mile.
Commissions and Fees
Commissions and fees include any non-employee you pay that helps you generate revenue. Could be a salesperson or a third party that helps you connect with your customers.
Certain commissions, like those paid to Amazon or Uber are already taken out before they are paid out to you. So be sure not include those.
In the same way you perform contract labor for your customers, you might hire a contractor to help you.
For example, let’s say you operate a lawn care/gardening business but gardening is not your personal expertise. So you decide to contract the gardening side of your business. The wages you pay your gardening contractor is tax deductible.
Keep in mind, if you pay your contractor more than $600 during the year, you have to file a Form 1099-MISC.
If your business owns any long-term assets, there is a high likelihood you would have a depreciation expense.
Think of depreciation as the dollar amount you “used” in an asset.
Is a brand new couch bought today worth more or less compared to the same couch bought 3 years ago? It’s worth more! And the reason is depreciation.
Examples of business assets that can have depreciation expense are furniture, cars, and computers.
Depreciation is considered an expense for tax purposes and fully deductible.
Home Office Expenses
Do you ever work at home? Or perhaps you have a home-based business. In either case, if there is a dedicated workspace in your home, you could deduct a portion of your home expenses.
Not everywhere in your house is considered an office. So if you open your laptop while watching tv in your living room, your living room is not an office. Instead, if you have a room in your house, with a desk and computer, that is more aligned with what the IRS considers a home office.
To get to the actual deduction amount, you need to know the square footage of your home office and your home. A simple calculation will you help you know what percentage of your home is your home office. And you can apply this percentage to the expenses of your home, such as rent, utilities, insurance, and taxes.
Another method is deducting the direct expenses related to maintaining your home office.
The first method is generally the preferred approach for most contractors.
All types of business interest payments are independent contractor tax deductions. If you have a business loan or credit card, the interest portion of your payments is 100% deductible.
Make sure to only deduct the business portion of interest payments paid on mortgages and car notes that you also use personally. If only 20% of your business miles are for business than only 20% of your car note’s interest is deductible.
Legal and Professional Fees
At times, your business will require the services of a licensed professional. Fees paid to a lawyer, consultant or for small business accounting services are deductible.
Only fees paid for business purposes are deductible. Personal tax preparation services are not deductible for business purposes, while business tax preparation is.
For the most part, business meals are 50% deductible. So if you take a client out to eat or have a lunch meeting with a colleague, those expenses are 50% deductible.
The same is true for meals consumed while traveling. Because the IRS knows you have to eat (whether at home or while traveling, you can deduct 50% of travel meals. If you have family or friends traveling with you, their meals are not deductible.
Any general office expense such as cleaning or maintenance can be deducted. Don’t include expenses like rent or utilities because they have their own category (covered below). But any office expense that does not have its own separate category can be deducted under this classification.
Rent or Lease Payments
If you rent office space, computers, machinery or anything else for your business, those rent payments are considered to be independent contractor tax deductions.
Rent paid toward your home/home office is not included as apart of rent. That rent expense needs to be reported under “Home Office Expenses” or on Form 8829.
Repairs and Maintenance
Repairs and maintenance are any expenses paid toward the maintenance or refurbishment of your company’s property. If you have machines that need routine maintenance or maybe your office HVAC needs repairing, those expenses are independent contractor tax deductions.
There are certain exceptions.
- You cannot deduct the value of your time repairing or doing maintenance work
- Car repairs should be included as a part of car and truck expenses.
- Any major improvements to your company’s assets should be capitalized and depreciated over time.
Any supplies you used is tax deductible. Supplies include pens, cleaning products, paper, printer ink, and more.
The difference between supplies and office expense or equipment is that supplies cannot last beyond a year. If it does then it is not a supply and might need to be capitalized and depreciated instead.
Taxes and Licenses
Most taxes and business licenses are independent contractor deductions. Generally, all licenses and regulatory fees are fully deductible. This includes things like secretary of state fees, business licenses, etc.
Not all taxes you pay are deductible. The ones that are not are:
- Federal taxes
- Local sales taxes
- Self-employment tax
Travel expenses are generally deductible for independent contractors.
Travel expenses for your spouse and children are not deductible. Of course, unless they are traveling for business purposes too.
Travel expenses include airfare, baggage fees, lodging, transportation (ie cab fares), parking and tolls.
Specifically, to be considered a travel expense, the following criteria must be met:
- If your duties require you to be away from the general area of your tax home for a period substantially longer than an ordinary day’s work, and
- You need to get sleep or rest to meet the demands of your work while away.
Workspace utilities are tax deductible such ass internet, water, and electricity.
If you have a home office, the business portion of utilities is tax deductible but should be reported under Home Office Expenses.
Cellphone service can also be deductible if used for business purposes. If you use your cellphone for both personal and business use, only deduct the portion that is for business.
Wages you pay employee members of your team is tax deductible. Included in wages are salaries and bonuses.
Unlike with contract labor, you do not need to file a 1099-MISC for employee wages. Instead, you would need to file Form W-2 to report the wages paid to them.
Other expenses are any other business expenses that are ordinary, necessary and do not fall under any of the above categories.
Examples are bank charges, business gifts, and bad debt.
Independent contractor tax deductions can be hard to figure out on your own. Especially now, that tax laws are changing. Unfortunately, the IRS does not directly tell you what you should deduct. Instead, you have put on research hat and figure that out on your own.
What most independent contractors do is hire a tax accountant to do the research for them. Hiring a tax professional could literally save you thousands in taxes.
If you’re in the market for a tax accountant, consider the services at LYFE Accounting. Our professionals work with independent contractors every day to minimize their tax bill.