The benefits of being an independent contractor or self-employed are numerous. You have the freedom and flexibility to perform your work, and it's also a really good way to start your business. We covered this topic in-depth in one of our recent articles. On the other hand, costs can pile up quickly, so it's good to know which ones can be filed on a tax return. Let's dive right into it!
Disclaimer: This article is not to be considered tax advice. Always consult a tax advisor before taking any action.
Quick recap: What taxes do independent contractors pay?
Independent contractors (including self-employed and freelancers) are required to pay:
- Income taxes: a type of tax calculated based on the income generated by an individual or a business
- Self-employment taxes: taxes that consist of social security tax and Medicare tax.
Unlike full-time employees whose income, social security, and Medicare taxes are automatically deducted from their salaries, you need to deduct those from your generated income. The good news is that you can claim tax deductions on several things that are considered to be business operating costs.
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
Business tax deductions: A detailed breakdown
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, homeowner's land insurance- all given you have a dedicated space for business purposes.
How to calculate your home office tax deductions?
You can choose between two methods of calculating the home office tax write-offs. We suggest you run your costs through both of them and see which scenario has a lower tax bill outcome.
Standard method: You can calculate the home office deduction by determining the percentage of the square footage it takes out of your home's total area. This information should be filled in on the IRS' 8820 form.
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 space. The maximum tax deduction is $1,500 per year.
Regardless of the office space location, there are a few things you can claim a tax return for.
Office supplies: You can fully deduct office supplies such as pens, paper, post-its, and other stationery you're using daily.
Repairs and maintenance: Incidental repairs and maintenance of the office space and equipment you use for work are tax-deductible.
Utilities: Power, water, internet bills can be tax-deductible as well. Keep in mind that these can be deducted only if you are not working in a home office.
You can benefit from a tax deduction on all 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, or other promotional materials. If you are using services from a PR agency or a freelancer, you can deduct their fees as well.
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 marketing channels and platforms like Amazon or eBay.
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 tax return on their fees.
Again, if you pay them more than $600 within a tax year, fill in a Form 1099-NEC.
Legal, accounting, and tax professional services
If you are contracting people for professional services, such as tax advisors (in tax preparation for Schedule C), lawyers, or accountants, those fees are considered a deductible expense.
Cell phone bill
You're probably using your phone a lot as an independent contractor. If you have a dedicated cell phone for business purposes, you can just submit a tex deduction for it. If you use one cell phone for personal use and business use, you can deduct a portion of your monthly bill using the actual expenses method.
Any business owner needs to purchase specific equipment required to perform the work. Over time, this equipment's value depreciates.
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, if you are using a piece of equipment for more than a year, the value depreciation can be written off on your tax return.
You can deduct your business travel expenses as long as the travel is exclusively business-related. These include accommodation, meals, airfare, or other transportation costs that occur during your business trip. Make sure to keep a record of all the receipts as they will be used to reference business expenses tax returns.
If you bought a car or other vehicle under a business name, it is fully tax-deductible. However, if you are using 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 only for business purposes.
The IRS has a standard mileage rate of $0.57 per mile. Always keep all the receipts and add them when filing your Form 1099 MISC. Keep in mind that purchasing a car is not tax-deductible. The rules and rates change often, so make sure you stay up to date.