Independent contractors can find tax season to be stressful. It’s easy to feel overwhelmed with all the paperwork, deadlines, and forms. But here’s some good news: The tax write-offs available to independent contractors can reduce their tax liability. The catch? It's not always easy to know which expenses qualify.
We’ve put together a comprehensive checklist of the most common and valuable write-off rules for independent contractors to help you navigate this. We’ll break them down like they’re easy to understand and applicable to your everyday business operations.
Home Office Deduction: A game changer for contractors
Home office deduction is one of the greatest tax write-offs for independent contractors. If you use part of your home exclusively for business, you can deduct expenses associated with that part of your home. That means a part of your rent or mortgage, utilities, internet, and home maintenance costs.
For example, if you rent an apartment and use one room as your office and nothing but your office, then you can claim 15% of your rent as a business expense. The bigger your deduction, the more accurate your space calculation.
It is important to remember that regular and exclusive use for business activities must be provided in your home office space. Unless that area in your living room is dedicated solely to work, a desk isn’t going to do you any good.
This deduction is critical because it directly affects your financial outcome. If you use business tax preparation services, you can claim this deduction, making sure you maximize all eligible expenses.
Equipment and Supplies: The Tools of Your Trade
As an independent contractor, you probably require some tools or equipment to do your job. All of these business expenses are deductible — whether it’s a laptop, camera, phone, or specialized software. What if an item’s cost is high and will be used for several years? Depreciation comes in that.
For example, a $3,000 camera is bought by a freelance photographer. But since it is going to last several years, they can depreciate the cost (deduct the cost over time). If, however, they purchase an office chair for $300, it’s likely an immediate deduction.
You can deduct the full cost of smaller items such as pens, paper, and other office supplies in the year you buy them. The IRS allows you to claim the full amount of these as "consumables".
Accounting for contractors requires tracking and reporting all work-related costs and these expenses are essential. Outsourcing accounting services for small businesses also help you with these expenses and makes it easier.
Travel and Meals: How to Deduct Business Trips
If you’re an independent contractor, you might travel for business, whether to meet clients, attend conferences, or work from another location. The good news is that you can deduct airfare, hotel stays, car rental, and meals.
But there are limits. Business travel expenses must be business related and if you combine business with pleasure you can only deduct the portion attributable to the business. For example, a freelance consultant travels to New York to meet clients. They can deduct their airfare, hotel, and meals related to the business meetings. However, if they then decide to take a weekend vacation after the meetings, those vacation expenses are not deductible.
Business tax preparation services are just what you need in this situation. A professional will assist you in making sure you allocate personal and business expenses correctly to maximize your deductions for the travel portion of your trip. Read more at Independent Contractor Write-Off Rules: Simplifying Tax Season.
Outsourcing and Hiring Help: Deducting Subcontractor Fees
As your business grows you might need some extra hands on deck. No matter if it’s a virtual assistant, a subcontractor, or another freelancer, the money you pay to have these services done is deductible as a business expense.
For example, a designer creates graphics for a freelance content writer’s website. This designer’s services are fully deductible, as they are necessary expenses for the business. Keep in mind that the IRS might ask for documentation to prove your deductions so make sure you keep track of who you’ve hired and the services rendered.
This also relates to accounting for contractors, as you’ll have to classify these expenses. Outsourcing accounting services for small businesses could help keep everything organized.
Education and Training: Keep Learning and Save
When you’re an independent contractor, investing in your skills and knowledge is a great way to keep your business competitive. It’s not uncommon for the costs of attending workshops, online courses, or conferences to be written off.
For example, a web developer freelancer takes an online course to learn a new programming language. The cost of the course, plus any material or fee associated with it, is deductible because it is useful in furthering the business purpose of the taxpayer. It is important to note that it must be related to your current business activities. If your course doesn’t help you switch careers or go into an entirely new field, it might not qualify. Read more at Common Tax Write-Offs for Independent Contractors in 2024.
Insurance Premiums: Protecting Your Business
While insurance may seem like an unnecessary expense, it’s important to protect your business, especially if you are in a high-risk industry. The good news is that many types of insurance premiums are deductible including health insurance, professional liability insurance, and business interruption insurance.
For example, an insurance company insures a freelance photographer against lawsuits. This premium is a deductible business expense. A self-employed writer paying for their health insurance premiums can also deduct these from their taxes.
Business tax preparation services can help clarify what types of insurance are deductible since you may not know which types of insurance are deductible.
Marketing and Advertising: Save on Your Taxes, Grow Your Business
The IRS knows that marketing is important to growing your business. If you’re spending money on ads on social media, Google, or paying a person to design your logo, these costs are tax deductible.
For example, Facebook ads are run by a freelance copywriter to promote their services. It’s a business expense and can be deducted from their income at tax time. This is true of printing business cards, creating promotional materials, and sending out email campaigns.
As an independent contractor, you need to know how to categorize these expenses. Outsourcing accounting services for small businesses make sure you’re handling these write-offs correctly.
Vehicle Expenses: Deducting Your Commute (With Limits)
If you use your car for business, you can deduct some of the vehicle-related expenses. Mileage, fuel, maintenance, and parking fees are all included. There are two methods for claiming car expenses:
Standard mileage rate: You keep a record of the miles you drive for business and multiply that by the IRS’s annual standard rate.
Actual expense method: The percentage of business use is deducted from the actual costs of operating your vehicle, including gas, repairs, insurance, and registration fees.
For example, a freelancer drives from their car to meet clients. If they drove more than 1,000 miles for business purposes in the year, they can choose to use the standard mileage rate to calculate their deduction or they can deduct the actual costs of gas, repairs, and insurance.
Accounting for contractors requires properly documenting these expenses, and working with business tax preparation services can help you get the most out of your vehicle deductions. Read more at Maximize Your Returns with Expert Business Tax Preparation Services.
Retirement Contributions: Reduce Taxes and Save for the Future
If you’re an independent contractor, it’s up to you to set up your retirement plans. Fortunately, contributions to a Solo 401(k) or SEP IRA are tax deductible. The lower your taxable income, the more you contribute.
For example, a freelance designer contributes $5,000 to his SEP IRA. It cuts their taxable income by $5,000, which means that they pay less in taxes.
Stay Organized: Track Every Deduction
To maximize your deductions, it’s important to keep very good records of your expenses throughout the year. If you use software like QuickBooks or hire business tax preparation services, stay organized so you don’t miss out on any potential write-offs.
For example, all business expenses of a freelance video editor are tracked using accounting software. If they have clear records of every deduction, from the cost of editing software to the mileage driven to client meetings, they know that come tax time they have every deduction they’re entitled to. Read more at How Regular Financial Recording Keeps Your Business Running Smoothly.
Conclusion: Careful Planning Can Maximize Your Deductions
If you keep track of your expenses, you don’t have to be stressed when it comes to navigating the write-off rules for independent contractors. There are tons of ways to reduce your tax burden from home office costs to equipment purchases, travel expenses, and insurance. However, it is important to understand the rules and make sure your deductions are legit.
If you need help with your taxes and maximizing your deductions, 406 Consulting can help you get through the taxation maze. If you need further assistance, reach out to us today.
