Tax Deductions for Independent Contractors & Self-Employed in 2022
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If you're an independent contractor or self-employed workers, you've probably realized that you make more tax payments than most people, since you pay the employer's share of FICA tax on top of the employee's share. However, one benefit of self-employment is that you can make use of deductions to reduce how much tax you pay.
A deduction is a qualifying business expense that can be used to lower your taxable income. By lowering your taxable income, the tax rate applies to a lower figure, which results in a smaller tax bill. Knowing which costs can and can't be claimed as a deduction will help keep your tax bill to a minimum. Let's dive right into it!
Disclaimer: This article is informational and so should not be considered tax advice. Consult with a tax advisor or ask an accountant or CPA for help.
Quick recap: What taxes do independent contractors pay?
Independent contractors (including self-employed and freelancers) are required to pay:
- Income taxes: the tax that everyone pays, calculated based on how much you earned
- Self-employment taxes: taxes that consist of social security tax and Medicare tax. The current rate is 15.3% applied on your net earnings.
Unlike full-time employees whose income, social security, and Medicare taxes are automatically deducted from their salaries, you need to pay these taxes from your generated self-employment income. The good news is that you can claim tax deductions on several things that are considered to be business operating costs.
Personal vs business expenses: what to keep in mind
Because the line between personal and professional life can overlap a lot for independent contractors, making a clean separation between personal and business expenses is especially important. Make sure to avoid deducting personal, living, or family expenses. An easy trick to help keep track of business expenses is to dedicate a single credit card or bank account for business transactions.
For expenses where you use something partly for business and partly for personal use, you can deduct the proportion of the cost that is used for business. This might be done on a usage or a time basis. For example, if you use a laptop for business use 80% of the time and for personal use 20% of the time, only 80% of the laptop cost could be deductible.
Claiming deductions for items with mixed personal and business use will require careful record-keeping. Collect call records, usage logs, GPS logs, and other forms of evidence to prove a legitimate business use.
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Business tax deductions: A detailed breakdown
Here are some of the most common tax breaks for contractors:
Home office expenses
Independent contractors and many self-employed often work from their home offices. As this is considered a place of business, you could write off a portion of your mortgage interest, rent, real estate or property taxes, security system, and homeowner's land insurance expenses related to a dedicated space you keep for for business purposes.
How to calculate your home office deduction?
You can choose between two methods of calculating the home office tax write-offs. Run your costs through both of them and use whatever scenario gives you a higher deduction you can claim.
Standard method: You can calculate the home office deduction by determining the percentage of the square footage the office occupies out of your home's total area. To claim this deduction, complete IRS Form 8829 (Expenses for Business Use of Your Home) and attach it to your Schedule C.
Simplified method: If your home office space is under 300 square feet, you can use the IRS's simplified calculation. Rather than detailing all expenses, you can claim a standard deduction of $5 per square foot of the home office part of your home. The maximum tax deduction is $1,500 per year.
Record home office expenses on Line 30 of your Schedule C.
Further reading: IRS Publication 587 (2020), Business Use of Your Home
Office supplies: You can fully deduct costs of office supplies such as pens, paper, sticky notes, and other stationery used to run your business. You can only claim expenses for supplies you used up during the year (that means you can't stock up on paper clips on December 31). Note that if you use office supplies to make or ship a product, add those costs to Cost of Goods Sold instead.
Record office supply expenses on Line 18 of your Schedule C.
Repairs and maintenance: Incidental repairs and maintenance of the office space and equipment you use for work are tax-deductible. Don't use this for claiming repair and maintenance expenses for your home office - claim them on the home office expense line instead.
Record repair and maintenance expenses on Line 21 of your Schedule C.
Utilities: Power, water, and internet bills can be tax-deductible. Don't use this for claiming utility expenses for your home office - claim them on the home office expense line instead.
Record utility expenses on Line 25 of your Schedule C.
You can benefit from a tax deduction on reasonable advertising costs, both online and offline. Some of the activities include running Facebook Ads, Google Ads, trade show promotions, as well as printing business cards, flyers, branded swag, or other promotional materials. If you are using services from a PR agency or a freelancer, you can deduct their fees as well. Political advertising is not eligible.
Record advertising expenses on Line 8 of your Schedule C.
Commissions and fees
All commissions paid to non-employees for sales and marketing purposes are tax-deductible. These include services of sales reps or fees charged by marketplace channels and platforms like Amazon, Etsy, or eBay.
Keep in mind that if you pay a contractor more than $600 within a tax year, you will need to file a Form 1099-NEC.
Record commission and fees on Line 10 of your Schedule C.
If you hire independent contractors yourself, such as a designer to create a brochure or a web developer to build a website, you can claim a deduction on their fees.
Again, if you pay a contractor more than $600 in a tax year, fill in a Form 1099-NEC.
Record contract labor expenses on Line 11 of your Schedule C.
Legal, accounting, and tax professional services
If you hire people for professional services, such as tax advisors, lawyers, or accountants, those fees are considered a deductible expense. For example, if you pay someone to help prepare and file your taxes, you can deduct the cost associated with preparing the Schedule C (but not your personal return).
Record legal and professional service expenses on Line 17 of your Schedule C.
Cell phone bill
If you have a dedicated cell phone for business purposes, you can deduct the cost of it. If you use a cell phone for both personal and business use, you can deduct the portion of time you use it for business purposes from your monthly bill.
Record cell phone expenses under Part V (Other Expenses) of your Schedule C.
Any business owner needs to purchase specific equipment required to perform the work. Over time, this equipment's value decreases.
For example, if you bought a laptop or a printer two years ago, its value now is lower than when you bought it. According to the IRS, once you use a piece of equipment for more than a year, the value of the depreciation can be written off on your tax return.
Depreciation is a tricky topic, so don't hesitate to ask an accountant or CPA for help.
Record depreciation on Line 13 of your Schedule C.
Further reading: Publication 946 (2020), How To Depreciate Property
You can deduct business-related travel expenses. These include accommodation, meals, airfare, or other transportation costs like Uber or Lyft that occur during your business trip. A trip is defined as a period away from the area where you normally work. There are additional rules for travel outside the US and for trips by cruise ship.
Record travel expenses on Line 24 of your Schedule C.
Further reading: Publication 463 (2020), Travel, Gift, and Car Expenses
If you bought a car or other vehicle under a business name for business purposes, you can deduct the full cost at once without having to depreciate it over many years by using the Section 179 deduction. However, if you use a car for both personal use and business use, you will need to apply the actual expenses method. You can then deduct a portion of the car expenses, mileage, tolls, and parking expenses used for business purposes.
For a simplified deduction, the IRS allows a standard mileage rate of $0.56 per mile for 2021. You must use this method of deduction starting from the first year you use the car for your business (in other words, you can't switch from actual expenses method to the standard mileage method).
Record car and truck expenses on Line 9 of your Schedule C.
Further reading: Publication 463 (2020), Travel, Gift, and Car Expenses
Business insurance premiums are tax-deductible. Those include related expenses like general liability, theft, fire, and workers' compensation insurance.
Record business insurance expenses on Line 15 of your Schedule C.
As an independent contractor, your own health insurance can be tax-deductible unless
- You are eligible to participate in another employer's plan (your spouse's, for example) and choose not to
- If you are self-employed but have another job
You cannot deduct the entirety of your health insurance premiums and are only eligible for the amount that's less than the income you generate through business operations. You can use the IRS's Worksheet 6-A to calculate your deduction.
Record self-employed health insurance expenses on Line 16 of your Schedule C.
Further reading: Self-Employed Health Insurance Deduction (IRS Publication 535).
Retirement plan costs for employees
For small business owners in particular, if you have employees or employer-sponsored plans such as 401(k) or SIMPLE-IRA, you can claim a tax deduction on these costs. Keep in mind that contributions to your own SEP or IRA retirement account are not tax-deductible, but they can be reported on your Schedule 1.
Record pension contribution expenses on Line 19 of your Schedule C.
Business licenses and taxes
You can deduct any business licenses, certifications, and regulatory taxes that are directly connected to your business operations. If there are any incorporation fees or small business licenses you need to operate, these qualify for a tax write-off as well.
Record business license and tax expenses on Line 23 of your Schedule C.
Business setup and startup costs
If you started a new business in the tax year, you can deduct up to $5,000 in costs. Usual initial costs can be doing market research, advertising, business launch activities, or hiring a consultant.
The amount you can deduct will be reduced for every dollar in startup costs that exceed $50,000. You can amortize (spread out) larger amounts over several years if needed.
Record start-up expenses under Part V (Other Expenses) of your Schedule C.
Mortgage interest and some other types of interest such as credit card, equipment loans, and lines of credits are deductible. You generally can't deduct any interest that you pay before the year it's actually due however.
Record interest expenses under Line 16 of your Schedule C.
Any independent contractor understands the benefits of continuing their professional education and development. The good news is that webinars, business books, and professional publication subscriptions can be tax-deductible. If you're a student, you may be able to also claim an Education Credit on your tuition.
Record education expenses on Part V (Other Expenses) of your Schedule C.
Further reading: Topic No. 513 Work-Related Education Expenses
Keep in mind: These taxes are not deductible
- Federal income taxes, including self-employment tax
- Personal use property taxes
- Sales taxes from buyers of your goods or services
Record-keeping for your deductions
Keep records such as receipts, invoices, and credit card statements to prove that you actually had the expenses you claim as itemized deductions. You should keep these documents for at least three years. Some tax preparation services can store these digitally for you, or you can scan and backup them yourself.
Other ways to reduce your tax bill
Once you've claimed all your deductions, don't forget to look for any personal and business tax credits you may qualify for. Tax credits directly reduce the amount of tax you must pay (deductions on the other hand, apply to taxable income). A popular credit to claim is the Earned Income Tax Credit, available to taxpayers with low to moderate income.
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