13 Tax Deductions For Independent Contractors
As an independent contractor, your bottom line is important. That’s why it’s so vital to make the most of the many available independent contractor tax deductions. When used correctly, these deductions can make a huge impact on your tax liability, saving you hundreds or thousands of dollars when it’s time to file your tax return. In this guide, we’ll go over the top tax deductions for independent contractors.
- Independent contractors are required to pay self-employment tax.
- Contractors can apply many tax deductions to help lower their federal income tax liability.
- With some best practices and planning throughout the year, tax deductions can be simple and efficient.
- Accounting software can help contractors easily track expenses.
Table of Contents
- What Taxes Do Independent Contractors Have to Pay?
- 13 Independent Contractor Tax Deductions
- Tips for Efficient Tax Deductions
- Use FreshBooks to Prepare Your Taxes Easier
- Frequently Asked Questions
What Taxes Do Independent Contractors Have to Pay?
As an independent contractor, you’re responsible for paying employment taxes. Employment taxes include both the employee and employer portions of your Social Security and Medicare taxes. Adding the income tax, these make up the taxes which you’re obligated to pay as an independent contractor.
Unlike employees, who have their taxes withheld from their paychecks and usually won’t need to pay them when they file, you’re responsible for paying your share of tax during the year as part of your estimated payments or at the latest when you file your federal return. Currently, the employment tax is set at 15.3% of your net earnings.
In addition to filing a personal income tax return, independent contractors generally have to file using Schedule C, “Profit or Loss From Business.” This form is used to report income and deductible expenses to the IRS.
If you are a contractor with a business structured as a corporation or partnership, the tax filing process might also include a separate business tax return.
13 Independent Contractor Tax Deductions
Ready to save more money this tax season? Read on for our comprehensive independent contractor tax deductions list.
1. Self-Employment Tax Deduction
As mentioned, independent contractors are responsible for paying self-employment tax, which sits at 15.3% of net earnings and contributes to Medicare and Social Security. Thankfully, the employer portion of this tax (50%) is tax-deductible, meaning that you’ll ultimately recoup 50% of this expense thanks to the self-employment tax deduction.
2. Home Office Expenses
If you do some or all of your work out of a home office, you can claim that portion of your home as a tax-deductible expense. The IRS simplified option method allows you to claim $5 per square foot of your home used for office space, up to a maximum of 300 square feet or $1500. If you only use the office space part-time, you can still deduct it at a prorated percentage based on the amount of time you work there throughout the year. You can also deduct home office expenses like utilities and rent based on a percentage of space used.
3. Travel Expenses
Many contractors need to travel frequently for work, often leading to mounting expenses. Fortunately, many common travel expenses are tax-deductible, provided you can prove they are considered ‘usual and necessary’ for your work according to the IRS. Be sure to track expenses related to mileage and fuel on your work vehicle, plane tickets, taxi fare, hotels, meals, and tips.
4. Advertising and Marketing Costs
Independent contractors frequently invest in advertising and marketing to drum up new leads and grow their business. These are filed under other expenses, meaning you can claim them as a tax deduction if you can once again prove that they’re usual and necessary for businesses in your industry.
5. Legal and Accounting Services
If you rely on lawyers or accountants to help you do your best work throughout the year, remember to deduct their fees when filing your independent contractor tax return. Once again, the only stipulation is that they’re considered usual and necessary for your business by the IRS.
6. Business Internet and Cell Phone Bills
If you have a dedicated service plan for internet and/or mobile for your business, you can deduct the bill from your taxes as a necessary business expense. Provided they’re used exclusively for business, 100% of these costs can be deducted from your tax burden. Otherwise, you would prorate the cost between your business and personal use.
7. Insurance Costs
If the IRS recognizes business insurance as a normal expense for your industry niche, you’re able to completely deduct the costs of it from your federal tax return. Most businesses do need business insurance and pay for it regardless, so claiming this expense is highly recommended. The insurance costs usually include your general liability, errors and omissions, cyber, and business property insurance.
8. Business Entertainment
Business meals from restaurants can be deducted from up to 50% from your taxes for that year. Additionally, expenses for hosting events and staff party costs are 100% deductible. You can do the same for any costs associated with hosting business meetings and conferences, as the IRS considers these as entertainment expenses as well.
9. Educational Expenses
Did you pay fees to attend a conference in your field, a continuing education seminar, or another kind of educational course to improve your skills in your industry? These fees (including registration, travel, and lodging) can be deducted from your taxes as an independent contractor.
10. Health Insurance Premiums
If you pay for your own health insurance (which you likely do as an independent contractor), you can deduct the cost of your premiums from your annual tax return. This is because health insurance is covered as a medical expense, which is also tax-deductible. You can also deduct your dental insurance premiums.
11. Tax Advice Fees
As with deductions for hiring lawyers and accountants, you can also deduct the fees you pay to tax advisors who help you with tax strategy throughout the year. Be advised that tax prep services aren’t deductible, since your Schedule C is considered part of your individual tax return (not a business return).
12. Car Expenses
If you own a vehicle that’s used for business purposes, you’re able to make significant deductions on your tax bill. Mileage, fuel, depreciation, tires, repairs, insurance premiums, and registration fees can all be deducted from your taxable income, provided you carefully track these expenses throughout the year. Alternatively, you can take the standard mileage deduction rate ($0.655 per mile in 2023).
13. Retirement Plan Contributions
If you’re an independent contractor that contributes to their own 401(k) retirement plan or Self-Employed Pension (SEP), you can deduct part or all of your contributions from your federal income taxes—depending on the type of arrangement you have in place.
If you’re an independent contractor who has employees and you have Simple IRAs for them, you can also write off your contributions to their plans. This is a great way to attract and keep quality employees while also placing yourself at a slight tax advantage.
It’s clear to see why tax prep can be such a big job with so many tax deductions. Independent contractor businesses can make the tax preparation process simpler with a tool like FreshBooks accounting. Check out our guide below.
Tips for Efficient Tax Deductions
As an independent contractor, every dollar counts. Here are a few of our top tips to maximize deductions on your taxable income this year and finish up tax season with more money leftover:
- Maintain an organized filing system for receipts
- Track all expenses throughout the year using accounting software
- Don’t forget to keep your receipts when paying vendors and paying travel costs
- Don’t neglect small expenses like office supplies
- Work with a tax expert for more in-depth help with deductions
Use FreshBooks to Prepare Your Taxes Easier
When done correctly, tax deductions can make a significant difference for independent contractors. Depending on your exact business and situation, the potential savings can quickly jump into the thousands, meaning a lot more saved money when tax time comes. Ultimately, efficient tax write-offs for independent contractors all come down to knowledge, organization, and planning.
If you’re looking for an easy way to track expenses year-round and save more money, try FreshBooks accounting software. It’s a smart way to quickly capture every single deduction, saving time and money alike for busy contractors. Try FreshBooks free today!
If you have more questions about making the most of your tax write-offs as a contractor or small business, read our guide on small business tax deductions.
FAQs About Tax Deductions for Independent Contractors
Do you have more questions about tax write-offs and business expenses for independent contractors? Here are answers to some common questions on the topic:
Can I deduct mileage for business-related travel as an independent contractor?
Yes, if you use your own vehicle for work, you can deduct mileage from your taxes. Track your vehicle expenses throughout the year to determine if you’re better off itemizing these deductions or taking the standard mileage rate ($.0655/mile). Alternatively, you can deduct the actual car expenses like fuel, repairs, depreciation, insurance, and registration fees for your business-related travel.
Do you pay more in taxes as an independent contractor?
Yes, you will likely pay more in taxes as an independent contractor. Although you’re able to deduct 50% of your income tax from your final annual tax return, your income tax is calculated on the net amount before that deduction is considered, meaning you’ll be paying taxes at a higher rate.
Can you write off meals as an independent contractor?
Independent contractors can write off 50% of the costs of meals from restaurants as a business expense, whether they’re paid for during necessary travel for business purposes, provided to staff, or purchased as a business meal.
Can you deduct gas on taxes?
Yes—as with mileage, you can also deduct gas expenses from your vehicle, provided you use it for work—as long as you’re using the actual expensing method on your return. If you use the standard mileage deduction, gas is not separately deductible. Be sure to track fuel expenses along with your work-related mileage throughout the year to take advantage of this major tax write-off.
Can you write off car insurance for business?
Yes, you can write off car insurance on your vehicle as a self-employment tax deduction as long as it’s used to carry out your work (and is considered a usual and necessary expense by the IRS). This only applies if you’re using the actual expensing method—it isn’t deductible for those who take the standard mileage rate. Car insurance premiums can be a big expense, so it’s highly recommended to take advantage of this deduction at tax time.
About the author
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .