Top 10 Write-Offs for Independent Contractors
There are plenty of tax benefits for 1099 independent contractors, but to pay the smallest amount of tax, you need to know as much as possible about write-offs, including what they are and which ones you can claim on your returns.
Top 10 Write-Offs for Independent Contractors
Are you newly in business for yourself as an independent contractor? An independent contractor is a person or company that provides goods or services to another entity under a verbal agreement or specified contract. It's essential to know what tax deductions you qualify for to keep the correct records for when it is time to file your itemized deductions.
Before looking at the list of possible tax write-offs for independent contractors, it’s important to have a solid overall understanding of this specific status and its related tax liabilities.
What Is An Independent Contractor?
For a solid answer to that question, it helps to look at how an independent contractor is different from an employee. Broadly speaking, they are defined as a person or business that provides goods or services to another entity under a verbal agreement or specified contract. For more information on how an independent contractor is different than work-for-hire, check out this blog to learn more.
Examples of independent contractors include:
- Truck drivers
- Tutors/online teachers
- Life coaches
It can get tricky, though. All of these people could just as easily be employees. So, how can you tell if they are or aren’t?
Generally, the Internal Revenue Service (IRS) looks at the amounts of behavioral and financial control as well as the type of relationship a person has with a company.
In the case of truck drivers, you can often look at who owns the vehicle. If it’s the company, that driver is an employee. However, if the driver owns it, which is where you get the expression “owner, operator,” they’re an independent contractor. A significant difference is that employees are provided with what they need to work. In many cases, employees are also trained by their company. A contractor has to supply their own tools and supplies, and they receive no training before they start working. It would be the same for the landscaper. You would need to ask yourself, “Who owns the lawnmower, and who’s paying for the gas to run it?”
What about the writer? Someone who works in the writers’ room on a TV is likely an employee because they are supervised by someone at the production company, and the production company sets their hours. With an independent contractor, there’s no oversight in terms of how the work is done, only an agreement on what will be produced and by when.
What Taxes Do Independent Contractors Pay?
An important difference between employees and independent contractors is the types of taxes they pay.
Both pay local taxes, state income taxes, and federal income taxes, and for both, the amount of tax is a percentage of their taxable incomes. However, a full-time employee typically splits Social Security and Medicare taxes with their employer. Because an independent contractor, by definition, doesn't have an employer, they have to pay the self-employment tax, which is a combination of all their Social Security and Medicare tax liabilities.
It’s not only the type; it’s also the time. With an employee, the company takes out money from every paycheck to cover various taxes. But with an independent contractor, the company is not responsible for withholding anything. The contractor needs to take care of all of it themselves. The classic and all-too-common mistake a lot of new contractors make is failing to put aside money to cover the required quarterly estimated taxes payments.
Another critical difference is that the two use different forms. Employees use the W-2 form. Independent contractors use a 1099 form, which is why they’re often called 1099 contractors.
What Is a Write-Off?
A write-off is when you claim tax deductions on the money spent as an independent contractor on eligible expenses.
For example, the truck driver example from earlier can write off expenses related to their truck, while the photographer can write off expenses related to their camera equipment. Both of them could write off the money they spent advertising their services.
That makes it easy to see the value of write-offs when you’re working as an independent contractor and the importance to lean on professional tax services to take advantage of each opportunity.
The more you can write off, the less you have to pay in taxes. The smaller your tax liability, the larger your net income.
What Are the Best Deductions for Independent Contractors?
The IRS does not step in to correct your return should you fail to claim any deductions you deserve. It’s up to you to know what you can write off as the cost of doing business. In order to deduct the most and reduce your tax burden while staying compliant, it becomes very helpful to methodically track and categorize expenses throughout the year. Your deductions should include all necessary and ordinary expenses associated with your work. Some might be fairly obvious, while others are just as valid but a bit harder to see. While there are many tax benefits to being an independent contractor, here are our suggestions for the all-time top 10 tax write-offs for independent contractors.
1. Occupational Operating Expenses
The costs of advertising yourself, your services, or your products fall into this category. Web hosting fees and the cost of internet services are also operating expenses. If you work from home, you can have a shared internet account for both home and business use and deduct a portion of the monthly cost for business purposes, or you can have a separate business account. At Decimal, we recommend a separate business account if possible so you can avoid the challenges of allocating between personal and business use. For more information on that, check out our bookkeeping basics guide. The same applies to expenses that cross between personal and business use, like a phone line. Business cards are another potential write-off that falls under occupational operating expenses.
Looking at all the available operating expenses that can be deducted, there are many possibilities. As your business grows and each area of expenses starts to get more complicated, you’ll be leaving money on the table if you fail to capitalize on these write-offs to reduce tax expenses.
2. Supplies and Materials
Supplies and materials definitely get a spot as one of our top write-offs for independent contractors. They might be smaller, but there are potentially a lot of them.
In fact, almost any items you need to conduct business can be written off. Items like a computer, camera, printer, or other office machinery, used on the job are tax deductible, and they come with special depreciation elections. Even smaller items like paper, pens, and ink are deductible. It’s a bit of an industry secret that any books, magazines, and newspapers related to your business are also deductible. Even greeting cards sent to clients can be a deduction.
3. Home Office
For an office in your home to be considered a qualified deduction, it must be used solely for business. It cannot also be used as a spare bedroom for out-of-town guests. The way it is deducted is based on its size relative to the rest of the house. For example, if your office makes up 15% of the overall square footage, you may be able to deduct 15% of each utility, such as gas and electric, as office expenses. You may also be able to deduct a portion of your mortgage interest, homeowner's insurance, repairs, and painting. If you rent your home, you may also write off a portion of your rent. An alternative calculation is available, known as the simplified home office deduction. The deduction is $5 for every square foot of your home office, up to $1,500 per year.
This second optional method requires no additional record-keeping, which means it can be a less lucrative but more appealing option. Depending on how much time you can invest in future record-keeping and the reliability of your current records, it could make more sense to take the simplified route.
4. Snacks and Coffee
Here’s some food for thought: A little-known tax write-off often overlooked is the cost of providing yourself and any employees with snacks while working – if needed while working. Meals for you are not included in this category. However, if there is a business reason for having any of your employees eat at work, their meals can be deducted. For tax years beginning in 2018, all food is 50% deductible unless it falls into a certain category. To be considered 100% deductible, the expense must be made available to the general public (if you have coffee and snacks that would be given out if you meet with clients) or a social or recreational activity for the benefit of the employees (a holiday party or a summer outing), for example.
5. Business Entertainment
There are lots of good reasons people prefer to avoid mixing business with pleasure and some of them are related to taxes. As a general rule, almost none of your business entertainment can be deducted for tax purposes. However, you may be able to get a tax deduction for some of the entertainment if there was, for example, food included in the price of an entertainment ticket. To ensure you get the deduction, make sure you have an itemized list of what is included in the ticket price as proof of the deduction. When in doubt, it’s best to ask a tax expert if something can be written off instead of rolling the dice - after all, the IRS definitely won’t care how great the entertainment was.
Travel is another category that is heavily scrutinized, but it is still a great way to keep more of your money come tax time next year. Hotels, airfare, and 50% of meals can be written off for business trips. You can even extend your trip for sheer pleasure as long as the number of days spent on business is larger than the number spent just for pleasure. Local travel is discussed further under car-related expenses. Just keep in mind that travel and deductions related to your vehicle are items that may be scrutinized or audited by the IRS – so keeping track of your travel in your calendar and using a mileage calculator app (and taking a screenshot of the calculation for your records), for example, may be helpful to support any tax deductions.
7. Child Care
You can offer your employees up to $5,000 in dependent-care benefits. If your spouse is your employee, that $5,000 can be used for child care for your own children. These benefits are excluded from wages, so they are deductible for you as an independent contractor. The dependent care benefits are tax-free for the employee, even if the employee is your spouse.
8. Cleaning Services
Whether you have a home office or rent office space, having it cleaned is deductible. A cleaning company, maid service, or janitor can be used. If you have a relative interested in earning a wage, you can pay her or him to clean. You must be sure to pay them reasonable compensation for the work done. There is also the possibility of hiring young adults to work in your business – but check the rules! Children under 18 are exempt from Social Security tax. They also are not subject to federal unemployment tax until they turn 21. Another benefit of hiring a relative is that you can make a contribution to an IRA or a Roth IRA for them based on the wages you're paying them. Unless the person you hired has a lot of unearned income, she or he will not owe income tax on the wages you pay them.
9. Car Related Expenses
Depending on how much record-keeping you like to do, this can be a big deduction. Many choose to use the standard mileage rate as it is the easier method, but it may be a lower deduction. If, instead, you use the actual expense method, it requires more individual bookkeeping but may allow for higher deductions. Using this method, you deduct the actual costs incurred each year operating your car for work, plus you use the tax code schedule for depreciation and repairs. Your deductible costs include gas and oil, license fees, repairs and maintenance, insurance, and car wash costs. If you opt to go for the actual cost method, having the capability to automatically process business expenses from a card will drastically reduce the effort required to take advantage of these deductions.
Whether you use the standard mileage rate or the expense method, tolls and parking can also be deducted. Just keep in mind that transportation write-offs are often audited by the IRS, so keep very detailed records. If the car is also used for personal use, you must keep track of the percentage it is used for business versus personal use when calculating expenses.
10. Medical Plans
As an independent contractor, your health insurance is deductible. Other medical expenses, such as acupuncture, chiropractor appointments, eyeglasses, and nonprescription medications not covered by your health plan also potentially may be written off. Depending on the plan, an HSA is a great option to save for future medical expenses and it is deductible as well. For single individuals, the max contribution is $3,550, or $7,100 if you are married or have other dependents. If you know of medical procedures coming up that might be costly, taking advantage of the HSA will stretch your money further than paying directly.
And now that you know the right write-off to focus on, you now need to look at how to make sure you get them.
Do I need receipts for 1099 write-offs?
It’s sort of like Schrödinger's receipts when it comes to write-offs. At the start, the answer is simultaneously sort of both a soft yes and no. Then later, it’s either a hard yes or a hard no.
Here’s why: You don’t need to submit receipts to claim write-offs on your taxes. Just fill in the forms with the right numbers. But you do need the receipts if you get audited. For older filings, the IRS can only go back six years.
Even then, the definition of “receipt” is fairly broad. Basically, you just need to show three things for business-related purchases:
- What you bought.
- When you bought it.
- How much it cost.
And it doesn’t have to be on paper. The IRS acknowledges that the old days of people keeping piles of paper receipts stuffed in a shoe box are long gone. Record keeping has gone digital, so you can submit digital receipts with your returns. In cases where you don’t have an actual receipt, you can always use credit card and bank statements.
But be careful with cash purchases, though. There’s something called the Cohan, which means you don’t need a receipt for cash purchases as long as they are reasonable and ordinary. But for anything over $75, keep the paper receipt.
Retirement Plan Contribution Considerations
There are many options when it comes to retirement planning. Self-employed may have the opportunity to set up and contribute to a retirement plan, and the contributions may be fully deductible. There are many different investment vehicles ranging from a SEP-IRA, SIMPLE IRA, or a solo 401(k). Contributions vary based on the vehicle you choose, and the IRS adjusts the maximum allowable contribution annually.
Write-Offs for Independent Contractors: Final Thoughts
There are lots of tax benefits to being an independent contractor–make sure to do your own research when estimating your future tax burden. Proper tax planning with a professional is the safest way to reduce your tax liability while ensuring you comply with applicable tax codes. Also, make sure you keep detailed records of any possible write-offs. Most importantly, be sure to hire, or, at the very least, consult a tax professional familiar with all laws associated with preparing taxes for independent contractors. While utilizing a tax preparer may seem like an added expense, keep in mind that you can write off what you pay for their assistance on the business portion of your taxes.
If you’re having trouble choosing a tax partner, Decimal can jump in and assist with your tax needs as well as any bookkeeping required to get you there. Whether you want to improve your approach to tax season or improve another aspect of your financial operations, Decimal is here for you. Talk to us today for a free consultation and see how Decimal can help!