Employees typically have their taxes deducted automatically, but as an independent contractor, you have to compute your taxes on your own. A major benefit of this arrangement is that you can claim deductions before filing your taxes. If you are looking to transition to working for yourself, you’re going to want to keep track of your actual expenses and business startup costs.
Popular tax deductions for independent contractors include:
- The home office deduction.
- Self-employment tax deduction.
- Business purchases.
- Actual car expenses.
- The qualified business income deduction.
However, you need to know the deductions you qualify for and claim, as the IRS won’t help you deduct them automatically.
Here are 19 tax deductions available for independent contractors:
- Property and Equipment Depreciation.
- Educational Costs.
- Home Office Costs.
- Work Snacks Costs.
- Car-related Expenditure.
- Business Travel Costs.
- Health Insurance Expenditure.
- Cell Phone Expenses.
- Business Insurance Costs.
- Retirement Contributions.
- Cost of Child Care.
- Bank-Related Expenses.
- General Startup Costs.
- Cleaning Expenses.
- Professional and Consulting Charges.
- Advertising Expenses.
- Self-employment Tax Deductions.
- QBI Deductions.
- Cost of Tax Advice.
The rest of the article will detail each of these tax deductions you can potentially claim. This will help you determine how many of them are applicable in your situation to simplify deductions for you.
1. Property and Equipment Depreciation
Independent contractors have to purchase property and equipment for business. These items lose value over time. You’re allowed to write off the depreciation value of such business equipment if you intend to use them for more than a year. You’re also entitled to deduct the cost of repairs to business equipment.
2. Educational Costs
If you have to continue your education to increase your chances of growing your business or landing new clients, the costs are tax-deductible. For example, suppose you’ve spent money on relevant business-related publications, virtual conferences, webinars, books, online courses, etc. In that case, you can claim them as potential deductibles when it’s time to file your taxes. Even a course on how to make money on Fiverr would qualify.
3. Home Office Costs
If you accumulate significant expenses in your home office, you can claim deductions on some of them as long as you use the space solely for work. Additionally, your home office should be your primary place of business for you to qualify for tax deductions in this area. So, you can’t claim tax deductions if the space doubles as your office and an extra bedroom or if you have a dedicated office elsewhere which is your principal place of work.
The amount of deduction comes to the size of the office in relation to the rest of the house. If the office makes up 30% of your house, you can deduct 30% off indirect expenses such as utility costs, home repairs, and insurance.
You’re also allowed to write off the same percentage from your mortgage interest and property taxes if you own the home. Additionally, you can claim deductions for direct expenses related to the office, such as renovations, paint jobs, and so on.
Even if you are freelancing as a Pinterest manager, you can also include the cost of office supplies as a part of your home office deductions.
Such office supplies include:
- work-related software
These can be deducted on your Schedule C as long as they have served your business in the year under review. However, there is a limit to how much you can deduct in total here.
The full details on deductions that apply to your home office are mentioned in the official document. The maximum write-off in this category currently is approximately $1,500. As property taxes and mortgage interest rates rise, this can help reduce your business taxes and taxable income on your schedule c.
4. Work Snacks Costs
It may sound strange, but you can deduct the cost of providing snacks for your employees or yourself while working, as long as you can prove that they needed the food to get the job done.
Full meals (for employees only) can also be deductible if they have legitimate reasons to eat while at work. Most foods (with some exceptions) fall into the 50% deductible category. Foods available to the public, such as coffee and snacks provided to clients during meetings or holiday party foods for your employees, are often 100% deductible.
5. Car-Related Expenditure
If your work as an independent contractor requires you to make excessive use of your car, the vehicle can qualify as your office or an extension of it. This means you can claim deductions on car mileage and other car expenses. The total deductions can amount to a decent sum as the IRS currently allows a 56 cent deduction per mile. That said, the deduction rates are updated every year, so make sure to check back.
You can also deduct parking and toll expenses as an independent contractor. The costs can add up to reasonable sums if you spend a lot of time in meetings or outdoors when working on a project. This is common if you work in freelance writing. If you keep all your receipts, you can deduct them when filing your taxes.
However, unlike what you’d get when using your home as an office, you can’t deduct all or part of your car payments. The IRS doesn’t have provisions for a business-only vehicle used by independent contractors. You can potentially deduct some expenses if you have such a vehicle, but you will have to undergo more scrutiny, and there’s no guidance on what qualifies and what doesn’t.
Mileage deductions approved by the IRS may still come under scrutiny later, so you should keep track of your travel calendar and always use a mileage calculator app to support any deductions you file.
6. Business Travel Costs
If you regularly travel for business meetings or attend relevant conferences, you can deduct most of these expenses accrued during the trip as business expenses. Expenditures like taxi or ridesharing costs, cost of accommodation, meals, and airfare are commonly deducted. You can deduct up to 50% of the total cost.
Even when you stay on the trip beyond the business commitments, you can include the travel expenses incurred for those days in your deductions. Many self-employed people who work remotely and travel do so because some of it is a deductible expense. You only have to ensure that the days you take off for personal reasons while on the trip don’t exceed the total business days.
So, if you have a five-day business trip to a new country, you can extend the entire trip to seven or eight days. When it’s time to file taxes, you can deduct up to 50% of the total expenses for the whole trip.
7. Health Insurance Expenditure
When filing taxes as an independent contractor, you can include 100% of your health insurance premiums as tax-deductible expenses. Health insurance expenses are tax-deductible. You’re allowed to include your dental, eye, and general medical expenses on your 1099. Including health insurance costs is a popular way to reduce your self-employment tax bill.
You can also include expenses such as your glasses, visits to your chiropractor, the cost of recommended glasses, and nonprescription drugs. If you’re married, your spouse may also be able to enjoy some of these deductions.
8. Cell Phone Expenses
Communicating with your client is one of the crucial skills you need to be a freelancer. As such, you’ll need cell phone coverage available at all times.
Do you use the same phone and internet for both personal and business use? You can write off a portion of the monthly phone and internet bill as a tax deduction. You’ll need to determine the percentage of your phone and internet usage that qualifies as business use and the portion that qualifies as personal. There has to be verifiable proof for your calculation. Once it’s all squared off, you can deduct that percentage when filing your taxes.
9. Business Insurance Costs
You need business insurance to protect yourself from unexpected expenses related to accidents in the workplace or other costly mistakes.
Independent contractors need comprehensive policies to cover for loss of funds if an unhappy customer files a claim. They also need to show their policy before applying for a contract with certain clients or business partners.
The cost of insurance premiums can add up to significant sums, which is why some contractors skimp on policies, only covering the bare minimum. However, there’s no need for that – all business insurance premiums are tax-deductible, and you can include them when filing your 1099.
10. Retirement Contributions
Retirement plan costs are another tax-deductible business expense. If you make regular contributions to an independent retirement account (IRA), you can claim a tax deduction on the contributions. However, there are some clauses you should be aware of here:
- If you or your spouse also contributes to an employee-sponsored retirement plan like a 403(b) or 401(k), you may have to significantly reduce the deduction or eliminate it completely.
- The deduction is only available to you if you’ve not exceeded your Modified Adjusted Gross Income (MAGI).
11. Cost of Child Care
Even organizations that hire for an entry-level remote job want a quiet setting for their 1099 employees. We have all seen kids strutting into the background of mom’s zoom meeting unannounced.
As an independent contractor, you can offer your employees up to $5,000 in dependent-care benefits. If your partner is one of your employees, the sum can be used for child care for your children. These benefits aren’t included in their wages, so you can deduct them at tax time.
Not many people know that the independent care benefits are tax-free for the employee, even when they’re your spouse.
12. Bank-Related Expenses
As an independent contractor, you can deduct interest on loans taken to fund your business while filing taxes. Keep in mind that if you took out the loan for both business and personal use, you will have to track the percentage that went to your business and only deduct the appropriate percentage from the loan interest.
You’re also allowed to deduct interest and annual fees on a business credit card. Personal cards used solely for business expenses also qualify for these deductions.
Similarly, all banking charges tied to your business are deductible. So, if you paid for a lost card or a replacement check, you can take the cost out at tax time. The same goes for your monthly charges. Depending on your type of business and transaction volumes, the total sum can reach hundreds of dollars.
13. General Startup Costs
Business startup costs such as incorporation fees and lease payments are deductible. You can also claim the costs of business permits, business licenses, and tax preparation fees for planning.
You can claim deductible business expenses incurred while starting your business as long as you set up within the same tax year. You can claim up to $5,000 in expenses here. Expenses you can deduct include the cost of staff training, market research, transportation while trying to find an office space, the cost of registering a website domain, etc.
If your business is a corporation or LLC, your maximum for deductions increases to $5,000. Keep in mind that equipment and vehicles are not included in startup costs. In subsequent years, you can deduct their depreciation value under the property and equipment depreciation category.
14. Cleaning Expenses
The cost of cleaning your home or office space is deductible. There are no limits on the type of company you can use for the job. It could be a janitor, maid service, or a cleaning company. You may also pay a relative to get the job done.
However, you need to ensure the compensation you’ll pay them is reasonable for the work. It has to match the rates for cleaning jobs for businesses the size of yours.
You can hire your children or nephews and nieces for the role. However, you’ll need to pay attention to what the rules say here. Children under 18 years of age are exempted from Social Security tax. Additionally, those below 21 won’t qualify for federal unemployment tax.
One reason why hiring your relative for this role is a good idea is that you can also contribute to an IRA or Roth IRA on their behalf based on the wages you’re paying them. They also won’t owe income tax on any salary you pay them if they don’t have excessive unearned income.
15. Professional and Consulting Charges
As a business owner, you’ll occasionally need external help from experts in different areas. For instance, you may need to consult with a lawyer when you have legal concerns that need addressing. You may enlist the help of an accountant when looking to balance your books or an HR firm to sort staffing issues. Fees paid by self-employed individuals and small business owners for legal and professional services can be included on your schedule c as a deduction.
Even if you are self-employed and work for Amazon from home, your tax return consultations may qualify. As long as these consultations are directly related to your business, you can write them off.
16. Advertising Expenses
If you spend money advertising your business through sales and marketing purposes, you can enjoy more deductions. The expenses include physical and digital advertising costs so that you can deduct expenses on LinkedIn or Facebook ads, business cards, flyers, radio or TV commercials, billboards, and so on. They’re all grouped the same under advertising expenses.
Even if your business plan is to only make money on Upwork, any advertising done for your business is deductible.
17. Self-Employment Tax Deductions
As an independent contractor, you are required to pay both the employee and employer obligations for your Medicare and Social Security taxes. The total will amount to a 15.3% tax on your net income, a rate that is unfair to self-employed people.
The IRS understands that fact, so you’re allowed to deduct 50% of the self-employment tax. The deduction won’t reduce the self-employment tax you have to pay, but it can reduce your overall income tax. Social Security and Medicare charges are among the most widely used tax deductions on net earnings on federal income taxes.
18. QBI Deductions
The qualified business income (QBI) deduction is one of the common tax deductions for independent contractors. It ensures that a portion of their business income is deductible. You’re allowed to deduct up to 20% of your business income when filing your taxes. However, there are caveats. To qualify for this deduction, your total taxable income has to be under $163,300 for individuals (or $326,600 for married couples looking to file jointly).
19. Cost of Tax Advice
As you’ve seen thus far in this list, there are lots of benefits you can claim as an independent contractor. You may not have the skills or knowledge to put it all together. A qualified tax advisor can prove very valuable. They’ll help you perfect your income tax deduction filings.
With so many platforms offering tax filing education, it may seem like a good idea to go it alone and save money. However, professionals already have a tried and tested strategy that allows them to cover all your deductions in the least possible time without missing anything. If you work in the highest-paid freelance jobs, consider consulting with an accountant.
Since you can deduct the fees paid as a business expense, there’s no reason not to hire one and get all the deductions you’re qualified for.
What Are the Maximum Tax Deductions for Independent Contractors?
The maximum tax deductions for independent contractors will vary on a case-by-case basis. The upper limits will vary depending on the type of business and the individual’s tax situation.
The best way to confirm the limits is to speak to a qualified tax advisor experienced in filing tax returns for independent contractors. You can find one online or speak to your current financial advisor for recommendations. If you choose to go the online route, check and verify their credentials and experience level.
What is the Difference Between Tax Credit and Deductions?
Tax credits and deductions reduce your total tax bill, but the approach used to arrive at the final sum varies depending on which you’re talking about.
Tax deductions reduce how much of your income is exposed to taxes, while tax credits are subtracted directly from the taxes you owe after the tax rate has been applied.
Overall, you’ll save money with both of them, but if the tax deductions and tax credits amount to the same sum, the credits will save you more money – sometimes up to 30% more.
Using two independent contractors in the 25% tax bracket with a $100,000 income is an example. Mr. A has tax deductions totaling $20,000, while Mr. B has tax credits totaling $20,000. Mr. A will have to pay $20,000 in taxes (25% of $80,000), while Mr. B will only pay $5,000 in taxes (25% of $100,000 minus $20,000 credit).
Can You File Missed Deductions from a Previous Tax Year?
You can’t file missed deductions from a previous tax year. It’s your responsibility to ensure your deductions are all up to date and accounted for while filing your returns for any given year.
All changes to the deductions or additions have to be completed before you submit your 1099.
What Documents Are Required To File Deductions?
Documents required to file deductions include all receipts, pay stubs, tickets, bank statements, and other such documents that prove the business expenses you’ve deducted. The IRS may also require extra documentation for some deductions.
Essentially, you will need to ensure you can prove every deduction you’re claiming if you’re called up to defend any of them.
What is the best way for self-employed individuals to reduce their tax bill?
The best way for self-employed individuals to reduce their tax bill is to take advantage of all the deductions you’re entitled to. Consider the following to reduce your net income:
- Transportation costs
- Business-related education expenses
- Entertainment costs
- Business credit card interest
- Cell phone bill
- Health Insurance premiums
- Workers compensation insurance
The more deductions claimed, the lower your taxable income will be, reducing your overall tax bill.