If you’re an independent contractor, your tax situation is different from the typical employee. As a bonus, there are many perks to being your boss, but understanding write-off rules for independent contractors is essential to keeping your business profitable and avoiding unwelcome surprises come tax season.
Let’s break down everything you need to know about write-offs, what they can save you money on, and what to keep in mind as you prepare for tax season.
What Qualifies as a Write-Off
To maximize your deductions, you’ll want to know what qualifies. In general, you can write off anything that’s “ordinary and necessary” for your business. Here’s a breakdown:
Supplies and Equipment: Many of these items, from your computer to office furniture to your tools of the trade, are deductible. Keep track of the cost and make certain the equipment is used for business purposes.
Home Office Expenses: If you work from home, you can write off part of your home’s expenses, including rent or mortgage, utilities, and internet. It does not have to be a separate room, but the space must be used exclusively for business, according to the IRS.
Travel and Meals: Did you go on a business trip? Not only can flights, accommodations, and even meals be written off, but you can even deduct the cost of your personal cell phone, business cards, and transportation to and from your meetings. However, note that only half of meals (50%) are deductible, so keep your receipts.
Records: The Importance of Keeping Them
In order to claim these deductions, you must keep meticulous records. The reason why tax prep professionals are pushing their clients to track receipts, invoices, and payment records all year long is because they know it is important. In the digital age, a shoebox full of receipts is still a headache for you and your accountant.
Outsourcingaccounting for contractorsor using accounting software to track expenses, categorize them correctly, and scan receipts in case you need them. This task is made more efficient and less prone to error by cloud-based platforms. Read more at How Regular Financial Recording Keeps Your Business Running Smoothly.
Benefits of Professional Help
If you’re one of the many people who feel like managing your write offs is a full-time job, you are not alone. For many independent contractors, working with professionals who specialize in accounting for contractors and taxes for the self-employed is a big plus. They can also help you make sure you’re deducting all eligible expenses to lower your taxable income.
They will also assist you in working your way through write-offs, especially if your expenses are a combination of the above, such as your car or home office. Outsourced finance and accounting professionals provide you with tips on how to divide personal and business use and get the most out of your deductions.
Car Expenses: A Special Case
Regarding mixed-use items, there is your car. If you use your vehicle for business and personal purposes, the business portion of your car costs can be written off. This is one of the most common and lucrative deductions if you are an independent contractor.
There are two main ways to calculate car expenses:
Standard Mileage Rate: You keep track of the amount of miles driven for business and multiply that by the IRS’s standard mileage rate (which changes each year). The rate includes gas, maintenance, insurance, and depreciation.
Actual Expense Method: This is a method by which the actual costs of running your vehicle, including gas, repairs, insurance, and depreciation can be deducted. To do that, you’ll have to divide the total expenses by the percentage of business vs. personal use.
The write offs rules for independent contractors can help you decide which method to choose based on your business activities and car expenses. Read more at Independent Contractor Write-Off Rules: Simplifying Tax Season.
Health Insurance and Self Employment Tax
Self-employment taxes are also something to consider for independent contractors. These cover social security and medicare contributions. Compared to traditional employees, independent contractors pay the full 15.3% of this tax.
The good news? Self-employment tax can be deducted from your income tax return. Also, if you’re paying for your health insurance, you may be able to deduct your premiums. That includes medical, dental, and long-term care insurance for yourself, your spouse, and your dependents. Read more at Common Tax Write-Offs for Independent Contractors in 2024.
Retirement Contributions: A Smart Write-Off
Thinking long-term? Saving money on taxes now and building wealth for later is why you should contribute to a retirement plan. Self-employed individuals can take advantage of several tax-deferred retirement plans. These contributions help reduce your taxable income and build a strong base for your future. Don’t pass up on these opportunities to grow your retirement savings with the help of outsourced finance and accounting.
Depreciation: A Handy Tool for Expensive Purchases
If you buy a lot of business assets, such as machinery or vehicles, you can’t write off the entire cost in one year. Instead, you can take depreciation to deduct the cost of the asset over the years. In other words, it's useful if something like a laptop or a vehicle has a high purchase price and will be used for many years. Read more at Depreciation Strategies for Construction Assets: What You Need to Know.
You can write off the item under a standard schedule or take advantage of Section 179, which allows you to write off the entire cost of qualifying equipment in the year of purchase (to a limit).
Avoiding Common Write-Off Mistakes
Mistakes with write-offs can cost you dearly, so it’s essential to be mindful of common errors:
Mixing Personal and Business Expenses: Separate your personal and business finances. The mixing of them up could lead to disallowed deductions.
Overestimating Deductions: Don’t overvalue things such as office supplies or equipment. Make sure you have receipts for everything.
Missing Out on Minor Write-Offs: Small expenses can add up. Often overlooked are things like business-related subscriptions, continuing education, or professional memberships.
Conclusion
If you understand and follow the write-off rules for independent contractors, it can save you thousands of dollars on your tax bill, increase your deductions, and help you avoid an unnecessary audit. The trick is to have good records, stay on top of your deductions, and get help when needed.
With 406 Consulting, we focus on helping independent contractors get everything they can out of tax season, so you can be confident you’re paying the least amount of taxes possible and that you’re not stressing out about it. If you need help navigating the tax season, reach out today and we will assist you!
