When you autonomously begin a business, you are known as an independent contractor so you may be unsure about the benefit of tax deductions for independent contractors.
As an independent contractor, you can determine the course of your career, as well as dictate your own schedule. This can certainly be invigorating, and may also be the reasons behind beginning your own business to start with.
However, as an independent contractor, you will be responsible for deducting taxes from your revenue. Instead of having your taxes withdrawn from your paycheck like the regular full-time employee, you will be categorized as a 1099 employee.
Fortunately, you will not be required to pay taxes on each dollar that you earn. Instead, as an independent contractor, you will pay taxes on the income that you earned minus the expenses it took to run your business. You will file your taxes annually on a 1099 form.
When tax day arrives, you will have the ability to claim various deductions upon filing. Ultimately, these 1099 independent contractor deductions decrease the amount that you’ll be responsible for paying in taxes as someone who is self-employed.
So, what exactly can you “write off” or claim as deductions on your taxes? In this article, we’ll examine ten different types of independent contractor tax deductions.
Since the tax needs of businesses vary, it is wise to speak with a qualified licensed tax professional. The advice contained within this article is not meant to take the place of the advice of a licensed tax professional.
1. Your Home Office or Shop
Depending on the nature of your business, you may have considerable expenses related to your home office. Your home may serve as your office space, a photography studio, storage for construction or electrical equipment, or maybe something different entirely.
Is your home office space utilized primarily for work? If this is the case, then you’ll have several options when determining your independent contractor tax deductions within this category.
Direct expenses to think about would include renovations or maintenance repairs, and indirect expenses would include items such as property taxes, insurance, and utilities.
What kind of tax deduction can you take for your home office? One of the simplest calculations provided by the IRS is that of $5 per square foot, not exceeding 300 square feet. This means that a maximum of $1,500 could be deducted.
2. Educational expenses
When expanding your home business and gaining new clients, continuing education is an indispensable component.
Even though additional courses can be rather pricey, educational expenses are considered tax-deductible. Potential deductions related to continuing education often include things such as professional publication subscriptions, webinars, and business-related periodicals or books. These are all items that can potentially be written off when filing your taxes.
3. Depreciation of property and equipment
As is the case with most independent contractors, you most likely have purchased equipment or property to use for your business. These items tend to lose value over time, which is known as depreciation. For instance, a laptop computer purchased four years ago is worth less now than when originally purchased.
If a purchase that you made for your business lasts longer than a year, according to the IRS you can write off the depreciation when filing your taxes. Any repairs or maintenance done on business property or equipment may possibly be deducted as well.
4. Vehicle expenses
One of the largest and most-utilized tax deductions for independent contractors is the mileage and vehicle expenses. Entrepreneurs often use their vehicle as a second office, as they spend a large portion of their time traveling for their business.
While the regulations for calculating mileage rate is updated each year, it’s customarily around 57 cents per mile. Be sure you’re current on the IRS standard mileage rate for tax deductions when determining your business expenses.
Additionally, parking and toll expenses are also considered tax-deductible in most instances. For those independent contractors that are always on-the-go, these expenses can greatly accumulate. As with other business expenses, it is important to keep all receipts so that they can be added to your 1099 tax form.
A frequently asked tax question is whether an independent contractor can write off their car payment, and unfortunately, the answer to that is no. Even if a vehicle is purchased solely for business-related purposes, while some expenses may be deducted, rarely can the cost of the vehicle be written off.
5. Business travel
Do you, as a self-employed business contractor, attend business-related conferences or meet with out-of-state clients? Airfare, hotel expenses, and approximately 50% of meal expenses can be deducted as business expenses when it comes to any business-related trips.
There may be instances where you’d like to include a couple of days of leisure while on your business-related trip. In this case, you want to ensure that the number of days of leisure is not greater than the number of work-related days.
For instance, suppose you fly from Florida to California for a three-day business conference, you may decide to squeeze in two days of sight-seeing. Accommodations, as well as 50% of your meal expenses, may be deducted for those two extra days of leisure.
6. Cell phone
Do you use your cell phone for both business and personal use? You’re able to deduct a portion of your cell phone bill. Just as with your home office, you will need to calculate what percentage of your usage is for personal use and what percentage is for business use. You are then able to write off that percentage from your monthly bill when filing your 1099 form.
7. Health insurance
Another tax-deductible expense that you are able to include on your 1099, as an independent contractor, is the full cost of your health insurance. Besides the cost of your health insurance premiums, you are also able to write off medical expenses such as nonprescription medications, visits to a chiropractor, and glasses or contacts. Look a little further and you may find benefits for your spouse also.
8. Business insurance
In order to protect your business from potential mistakes or accidents, you may find it necessary to purchase business insurance. For instance, professional liability insurance will cover any expenses associated with making a costly mistake or missing a deadline.
Oftentimes, a client might request proof of liability insurance prior to signing a contract. This business-related expense can be included as well in your 1099 tax deductions.
9. Tax advice
While there are many benefits to being an independent contractor, a qualified tax professional can assist you in maximizing your income tax deductions when filing your 1099.
Although hiring a tax professional may seem to be an added expense, the assistance that they provide will save you a great deal of time, and you can also deduct their services as a business-related expense.
Finally, advertising costs incurred for your business are also tax-deductible. Advertising expenses might include a website, mailed flyers, billboards, TV commercials, Google ads, or paid Facebook ads. Even advertising for business-sponsored charity events can be tax-deductible as well.
Your Bottom Line
Whether you prepare your own taxes or have a tax preparation service do it for you, it certainly benefits you financially to pay only the required taxes on your revenue. Independent contractors should learn as much as possible about deductible business expenses so that they are not considered as revenue.
Mitigating your business risks to a highly-rated commercial insurance company should remain a top priority and the good news is, you can deduct your premiums each and every year.
Here is What We Recommend for independent contractors:
General Liability: Contractors General Liability will be the foundation of protection for your business. The coverage will respond if you or your employees are found liable for bodily injury, property damage, or have a products/completed operations complaint. The coverage also covers defense costs for your business to respond to any lawsuits brought by a third party.
Workers’ Comp: Many states will require contractors to provide workers’ compensation coverage for their workers before they can begin a project. Accidents will happen at the job site that can result in an employee becoming injured and missing work. Your workers’ compensation coverage will provide financial assistance for medical expenses and lost wages.
Surety Bonds: It’s very likely that your state will require you to be licensed before you can begin operations. Most states and customers will require contractors to offer a license or surety bond before you are allowed to bid on a job or begin working.
Commercial Auto: Typically, most contractors will have light and heavy vehicles that require commercial auto insurance to make certain their vehicles can be repaired or replaced in the event of an accident, vandalism, or theft.
Tool Coverage: Also known as Inland Marine Insurance, this policy will provide for reimbursement for expenses to repair or replace tools and equipment. Your tools represent an important part of your livelihood, so we always encourage carpentry contractors to consider this valuable coverage.
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