Are you an independent contractor or another type of self-employed worker? If so, you can make use of tax deductions to reduce how much tax you pay to the IRS.
A deduction is a qualifying business expense that self-employed workers can use to lower their taxable income. By lowering your taxable income, the tax rate applies to a lower figure, which results in a smaller tax bill. Knowing which costs you can claim as a deduction will help minimize your tax bill.
Disclaimer: This article is for informational purposes and should not be considered tax advice. Consult with a tax advisor or ask an accountant or CPA for help.
Quick recap: What taxes do independent contractors pay in the US?
In the US, self-employed workers (such as independent contractors and freelancers) must pay:
- Income taxes: the tax that everyone pays, calculated based on how much business income you earned
- Self-employment taxes: taxes that consist of social security tax and Medicare tax. The current rate is 15.3% applied to your net earnings.
Unlike full-time employees whose income, social security, and Medicare taxes are automatically deducted from their salaries, self-employed workers must pay these taxes from their generated self-employment income. The good news is that you can claim tax deductions on several expenses that are considered to be business operating costs—one of the biggest benefits of self-employment.
Personal vs. business expenses: What to keep in mind
Because the line between personal and professional life can overlap for independent contractors, making a clean separation between personal and business expenses is especially important.
Make sure to avoid deducting personal, living, or family expenses. An easy trick to help keep track of business expenses is to dedicate a single credit card or bank account for business transactions.
For expenses where you use something partly for business and partly for personal use, you can deduct the proportion of the cost you use for business based on usage or time. For example, if you use a cell phone for business use 80% of the time and for personal use 20% of the time, 80% of the phone cost could be deductible for tax purposes.
Claiming deductions for items with mixed personal and business use will require careful record-keeping. Collect call records, usage logs, GPS logs, and other evidence to prove legitimate business use.
Business tax deductions: A detailed breakdown
Here are some of the most common tax breaks for contractors:
Home office expenses
Independent contractors and many self-employed people often work from their home offices. As this is considered a place of business, you can write off a portion of your mortgage interest, rent, real estate or property taxes, security system, and homeowner’s land insurance expenses related to a dedicated space you keep for business purposes.
How to calculate your home office deduction?
There are two methods of calculating the home office tax write-offs. Run your costs through both and use whatever scenario gives you a higher deduction you can claim.
Standard method: You can calculate the home office deduction by determining the percentage of the office’s square footage out of your home’s total area. To claim this deduction, complete IRS Form 8829 (Expenses for Business Use of Your Home) and attach it to your Schedule C.
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 part of your home. The maximum tax deduction under the simplified method is $1,500 per year.
Record home office expenses on Line 30 of your Schedule C.
To learn more about making deductions based on your home’s business use, read IRS Publication 587 (2021), Business Use of Your Home.
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Office expenses
Office supplies: You can fully deduct the costs of office supplies such as pens, paper, sticky notes, and other stationery used to run your business. You can only claim expenses for supplies you used up during the year (that means you can’t stock up on paper clips on December 31). If you use office supplies to make or ship a product, add those costs to the Cost of Goods Sold instead.
Record office supply expenses on Line 18 of your Schedule C.
Repairs and maintenance: Incidental repairs and maintenance of the office space and equipment you use for work are tax-deductible. Don’t use this for claiming repair and maintenance expenses for your home office - claim them on the home office expense line instead.
Record repair and maintenance expenses on Line 21 of your Schedule C.
Utilities: Power, water, and internet bills can be tax-deductible. Utility expenses for a home office don’t go here, though—claim them on the home office expense line instead.
Record utility expenses on Line 25 of your Schedule C.
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Advertising costs
You can benefit from a 100% tax deduction on reasonable online and offline advertising costs. Advertising activities include running Facebook or Google Ads, selling at trade show promotions, or printing business cards, flyers, branded swag, and other promotional materials. You can deduct fees associated with using a PR agency or freelancer services. Political advertising is not eligible.
Record advertising expenses on Line 8 of your Schedule C.
Commissions and fees
All commissions paid to non-employees for sales and marketing purposes are tax-deductible. These include services of sales reps or seller fees charged by marketplace channels and platforms like Amazon, Etsy, or eBay.
Remember that if you receive more than $600 within a tax year, your client must file a Form 1099-NEC.
Record commission and fees on Line 10 of your Schedule C.
Contract labor
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 deduction on their fees.
Again, if you pay a contractor more than $600 in a tax year, complete Form 1099-NEC.
Record contract labor expenses on Line 11 of your Schedule C.
Legal, accounting, and tax professional services
If you use professional services such as tax advisors, lawyers, or accountants, the associated fees are considered deductible expenses. For example, if you pay someone to help prepare and file your taxes, you can deduct the cost of preparing Schedule C (but not your personal return).
Record legal and professional service expenses on Line 17 of your Schedule C.
Cell phone bill
If you have a dedicated cell phone for business purposes, you can deduct the cost of it. If you use a cell phone for personal and business use, you can deduct a portion of the time you use it for business purposes from your monthly bill.
Record cell phone expenses under Part V (Other Expenses) of your Schedule C.
Equipment depreciation
You might have purchased specific equipment required to perform the work. Over time, this equipment’s value will decrease due to wear, tear, and obsolescence.
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, once you use a piece of equipment for more than a year, you can write off the value of the depreciation on your tax return.
Depreciation is tricky, so don’t hesitate to ask an accountant or certified public accountant (CPA) for help.
Record depreciation on Line 13 of your Schedule C.
To learn more about what deductions you can make on depreciated property, read Publication 946 (2021), How To Depreciate Property.
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Travel expenses
You can deduct business-related travel expenses. These include accommodation, meals, airfare, or other transportation costs like Uber or Lyft that occur during your business trip. A trip is defined as a period away from the area where you usually work. There are additional rules for business travel outside the US and for trips by cruise ship.
Record travel expenses on Line 24 of your Schedule C.
Read Publication 463 (2021), Travel, Gift, and Car Expenses, to learn more about deducting car expenses.
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Meals
You can also deduct 50% of the meals purchased while traveling away from home or conducting business. Examples of business meals include those purchased on a business trip, consumed with clients at a business lunch or dinner, consumed while attending a conference or provided to customers as part of a public promotional event such as a grand opening.
Car expenses
Suppose you bought a car or other vehicle under a business name for business purposes. In that case, you can deduct the full cost at once without having to depreciate it over many years by using the Section 179 deduction. However, if you use a car for personal and business use, you must apply the actual expenses method. You can then deduct a portion of the car expenses, mileage, tolls, and parking expenses used for business purposes.
For a simplified deduction, the IRS allows a standard mileage rate of $0.585 per mile for 2022. You must use this deduction method starting from the first year you use the car for your business (in other words, you can’t switch from the actual expenses method to the standard mileage method).
Record car and truck expenses on Line 9 of your Schedule C.
To learn more on deducting car expenses, read Publication 463 (2021), Travel, Gift, and Car Expenses.
Business insurance
Business insurance premiums are tax-deductible. These include related expenses like general liability, theft, fire, and workers’ compensation insurance.
Record business insurance expenses on Line 15 of your Schedule C.
Health insurance
As an independent contractor, your health insurance premiums (medical and dental) for yourself, your spouse, and your dependents can be tax-deductible unless
- You are eligible to participate in another employer’s plan (your spouse’s, for example) and choose not to
- If you are self-employed but have another job with an employer-paid insurance plan
Use the IRS’s Worksheet 6-A to calculate your deduction.
Record self-employed health insurance expenses on Line 17 of your Schedule 1.
To learn more about deducting health insurance costs as a self-employed worker, read Self-Employed Health Insurance Deduction (IRS Publication 535).
Retirement plan costs for employees
For small business owners in particular, if you have employees or employer-sponsored plans such as a 401(k) or SIMPLE-IRA, you can claim a tax deduction on these costs. Remember that your SEP or IRA retirement account contributions are not tax-deductible, but you can report them on your Schedule 1.
Record pension contribution expenses on Line 19 of your Schedule C.
Business licenses and taxes
You can deduct any business licenses, certifications, and regulatory taxes that are directly connected to your business operations. If there are any incorporation fees or small business licenses you need to operate, these qualify for a tax write-off as well.
Self-employment tax deduction: You can claim half of the self-employment tax you pay on your self-employment income. First, complete Schedule SE, then record one-half of your calculated tax on Line 15 of your Schedule 1.
Record business license and tax expenses on Line 23 of your Schedule C.
Note that these taxes are NOT deductible:
- Federal income taxes
- Personal use property taxes
- Sales taxes from buyers of your goods or services
Business setup and startup costs
If you started a new business in the tax year, you could deduct up to $5,000 in setup costs. Initial costs include market research, advertising, business launch activities, or hiring a consultant.
The amount you can deduct will be reduced for every dollar in startup costs that exceed $50,000. If needed, you can amortize (spread out) larger amounts over several years.
Record startup expenses under Part V (Other Expenses) of your Schedule C.
Interest expenses
Mortgage interest and other types of interest, such as credit cards, equipment loans, and lines of credit, are deductible. However, you generally can’t deduct any interest you prepay before the year it’s due.
Record interest expenses under Line 16 of your Schedule C.
Education expenses
As an independent contractor, you know that continuing your professional education and development can bring many benefits. Fortunately, you can deduct educational expenses such as webinars, business books, and professional publication subscriptions from your taxes. Additionally, you may be eligible to claim an Education Credit on your tuition expenses if you are a student.
Record education expenses on Part V (Other Expenses) of your Schedule C.
To learn more about deducting educational expenses, read Topic No. 513 Work-Related Education Expenses.
Practice good record-keeping
Keep records such as receipts, invoices, and credit card statements to prove that you actually had the expenses you claim as itemized deductions. You should keep these documents for at least three years. Some tax preparation services can store these digitally for you, or you can scan and back up them yourself.
Other ways to reduce your tax bill
Once you’ve claimed all your business deductions, don’t forget to look for any personal and business tax credits you may qualify for. Tax credits directly reduce the amount of tax you must pay (deductions, on the other hand, apply to taxable income). A popular credit to claim is the Earned Income Tax Credit, available to taxpayers with low to moderate income.
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