For independent contractors, tax deductions represent a major way to save on your taxes. Due to self-employment taxes, your tax bill can often come as quite a sticker shock, but ensuring you utilize the right deductions for your business, you can reduce that tax burden significantly. Keep reading to learn about a few tax deductions that independent contractors like you simply can’t afford to overlook.
Many independent contractors and first-time business owners do a great deal of their work from home. If you have a space in your home that is dedicated solely to your work, and it is your primary place of business, then you could qualify for a home office deduction. This allows you to write off many expenses associated with the upkeep of that portion of your home.
For example, you could deduct direct expenses like renovating that office space, as well as a portion of indirect expenses like insurance, utilities, property taxes, and mortgage interest. When it comes to indirect expenses, there are two ways you can calculate your deduction:
- Simplified method – Deduct $5 per square foot of your home office space, up to 300 square feet; this allows a maximum deduction of $1,500.
- Regular method – Calculate the percentage of the home that is dedicated solely to your work, then deduct that percentage of your indirect expenses.
Your home office deduction can also include office supplies, from computers and printers to pens and postage. As long as these supplies are used for business purposes in the same year you purchased them, they are deductible.
Continuing education is a common expectation in many fields, and in some cases, it may be tax deductible. If you paid to attend webinars or virtual conferences, or you purchased business-related texts or subscriptions to professional publications, these could be considered deductible educational expenses.
If you do any kind of travel for your business—whether that’s driving to various work sites or flying to a week-long conference—many of those expenses may be tax deductible. Let’s start with vehicle expenses: It’s important to track your mileage for all business-related travel, so you can properly claim a business vehicle deduction. The IRS’s standard deduction for vehicle mileage is 56 cents per mile, but you can’t just estimate your business mileage; you should have detailed records of where you were going, the odometer reading before and after the trip, and your total mileage. You can also deduct tolls and parking costs.
For other types of travel, almost all associated costs will be considered tax deductible. This would include your airfare, taxi or rideshare cost, hotel or lodging fees, and 50% of your meal costs. All of these are qualifying business expenses. So, keep your receipts and include those costs when you file your tax return.
One of the major drawbacks of being self-employed is that you don’t get employer-sponsored insurance. The good news is, 100% of your health insurance is deductible as a business expense for independent contractors—and that includes medical, dental, and vision premiums. Additionally, you can write off expenses like nonprescription medications, visits to a chiropractor not covered by your medical insurance, and even glasses.
Did you just start your business last year? Then don’t forget to deduct your startup costs. Getting a business off the ground can be expensive. You need to register a website domain, perform market research, start marketing campaigns, and so on. You can deduct all of these expenses, up to a maximum deduction of $5,000.
Please note that buying equipment does not qualify as a startup cost, which brings us to our next deduction.
Depreciation of Equipment
Equipment that you buy is going to depreciate in value in a few years. Because the equipment is considered a valuable business asset, the loss of value is considered a measurable loss to your business, which is tax deductible. The IRS allows you to deduct the depreciation of equipment’s worth on their tax returns each year, as it gradually declines.
Self-Employment Tax Deduction
We mentioned self-employment taxes a bit earlier. Because you are your own employer, you have to pay not only your own taxes, but the employer’s side of Social Security and Medicare taxes; that’s an additional tax of 15.3% on your net earnings. This can be a brutal blow to your income, but the good news is, the IRS allows you to write off half of that self-employment tax. Of course, you’re still left paying more in taxes than a W-2 employee, but this deduction can make a big difference.
If you’re an independent contractor, your taxes are far more complex than the average worker’s. It’s important that you ensure you’re getting all of the deductions you deserve, so you can maximize how much of your hard-earned money you get to keep. Contact Peter Witts CPA today to get the expert help you need.