As an independent contractor, you are a business of one.
This gives you the freedom to make your own schedule and chart your career path. That can be exhilarating and one of the reasons you chose to build your own business in the first place.
But unlike a full-time employee, whose taxes are deducted automatically from their paycheck, it's your job as a 1099 employee to deduct your own taxes from your earnings.
Luckily, you don't pay taxes on every single dollar you earn. As a self-employed contractor, you have a 1099 form and pay taxes on the amount you earned minus the costs of running your business.
You can claim numerous deductions when you file your taxes on tax day. Your 1099 independent contractor deductions lower the amount you'll ultimately have to pay in taxes as a self-employed contractor.
"Not keeping good track of their business expenses is one of the biggest mistakes a freelancer can make,” says Matthieu Silberstein, a VP at Lili, a banking app designed for freelancers. “You can save hundreds – if not thousands – of dollars by separating and writing off purchases you make for your business."
Tax deductions vs. tax credits
Before we get into the deductions, it’s important to understand the difference between deductions and credits.
- Tax deductions. A tax deduction lowers how much of your income is taxable. How much a tax deduction saves you depends on your federal income tax bracket.
- Tax credits: A tax credit directly decreases the amount of tax you owe. It gives you a dollar-for-dollar reduction of the income tax you owe.
Both will reduce your tax bill, but the tax credit is slightly better due to the dollar-for-dollar reduction.
Sole proprietor or limited liability company (LLC)?
As an independent contractor, unless you’ve set your business up as an LLC or a corporation, you will report your taxes as a sole proprietor. This means you will report your business's profits and losses on your personal tax return, filing a Schedule C IRS form.
16 amazing tax deductions for independent contractors
What can you write off on taxes? Let's explore the following categories of independent contractor tax deductions.
- Home office
- Educational expenses
- Depreciation of property and equipment
- Car expenses
- Business travel
- Cell phone
- Health insurance
- Business insurance
- Retirement savings
- Bank fees and business interest
- Startup costs
- Advertising
- Consulting and professional service fees
- Self-employment tax deduction
- The qualified business income deduction
- Tax advice
Note: The advice in this article shouldn't replace the advice of a tax professional. Businesses and their tax needs vary, and you should discuss all tax issues with a qualified, licensed professional.
1. Home office
Do you use your home office space only for work, and is it your primary place of business? If so, there are multiple options for calculating your independent contractor tax deductions in this category.
There are direct expenses to consider, like renovations and a paint job, and indirect expenses, like insurance, utilities, and home repairs. Homeowners can also write off portions of their property taxes and mortgage interest.
So, how much can you write off for a home office? The most straightforward calculation is the “simplified method,” which calculates using square footage vs. the “regular method,” which asks for the percentage of the home used for business purposes. With the simplified method, calculate $5 per square foot up to 300 square feet, which would be a maximum write-off of $1,500.
Remember to write off office supplies as part of your home office deductions. These include computers, printers, work-related software, pens, paper, postage, shipping and more. You can deduct these as long as you used them for business purposes the year you purchased them.
2. Educational expenses
Continuing education can be an important factor in growing a business and attracting new clients.
Educational expenses are potentially tax-deductible. For instance, webinars, virtual conferences, business-related books and subscriptions to professional publications are all eligible as potential deductibles when you file your taxes.
3. Depreciation of property and equipment
As an independent contractor, you likely purchased property and equipment for your business. Over time, those items lose value. For example, a printer you bought three years ago is worth less now than when you bought it. That's called depreciation.
According to the IRS, if business purchases will last you more than a year, you can write off the depreciation of their value on your tax return. Taxpayers can potentially deduct repairs on property used for your business as well.
4. Car expenses
If you spend time going from job to job or making deliveries, sometimes your vehicle can feel like your office. Luckily, car expenses and mileage can be one of the largest tax write-offs for entrepreneurs.
The IRS standard mileage rate for tax deductions is 56 cents per mile. The rules for calculating the rate are updated every tax year, so it's good to stay current.
Tolls and parking expenses are also deductible. For extended meetings or projects, these can add up to a significant out-of-pocket expense for an independent contractor. Keep your receipts, and add them to your 1099.
At this point, you might be asking, "Can I write off my car payment?" Unfortunately, the answer from the IRS is no.
If self-employed taxpayers purchase a car exclusively for business use, you can potentially deduct some expenses. Just be prepared for extra IRS scrutiny since 1099 workers rarely have a business-only vehicle.
5. Business travel
Do you have client meetings out of state or attend industry conferences? When it comes to business trips, your airfare, hotel costs, taxis (including rideshare services like Uber) and 50% of your meal costs can be written off as business expenses.
Even if you extend your trip to travel after the business commitments have ended, you can include those travel expenses. Just make sure that the number of leisure days on the trip doesn't exceed the total business days.
For example, if you fly from California to Paris for a three-day photography conference, you may want to extend your trip for two days of touring. 50% of the costs of meals and accommodations for the extra two days can be deducted, just like the first three days.
6. Cell phone and internet
Do you have a cell phone or an internet connection that you use for both personal use and business? If so, you can write off a portion of your monthly internet and cell phone bill. Similar to your home office, you'll want to determine what percentage of your phone and online usage is business vs. personal. You can then deduct that percentage of your bills at tax time.
7. Health insurance
100% of your health insurance is one of the many deductible business expenses for independent contractors to include on your 1099. You can deduct medical, dental and vision premiums.
In addition to health insurance premiums, you can write off expenses such as glasses, nonprescription medications, and visits to the chiropractor. There may be benefits for your spouse, as well.
8. Business insurance
Business insurance for the self-employed provides important coverage to protect you from unexpected expenses related to accidents or business mistakes. For example, a professional liability policy can help cover expenses if a client accuses you of missing a deadline or making a mistake that costs them money.
In some cases, a client or commercial landlord might ask you for a certificate of insurance before they sign a contract with you.
You can include your expenses for business insurance coverage in your 1099 tax deductions.
Get a quick estimate on how much business insurance could cost your business with NEXT's insurance calculators:
• Professional liability calculator
• General liability calculator
• Commercial property insurance calculator
9. Retirement savings
If you contribute to an individual retirement account (IRA), you may be able to make a tax deduction on those contributions. There are some caveats, however.
First, you may need to reduce or eliminate the deduction if you or your spouse contributes to an employee-sponsored retirement plan such as a 401(k) or 403(b).
You also can’t take the deduction if your Modified Adjusted Gross Income (MAGI) exceeds yearly limits.
10. Bank fees and business interest
If you got a loan from a bank to fund your business, you might deduct the interest as a business expense. If you used your loan for both business and personal expenses, you need to track how much of it went to your business and only deduct the interest from that portion.
You can also deduct business-related banking fees and charges. For example, paying for replacement checks, monthly service charges and lost card fees. These charges add up as many traditional banking institutions often nickel and dime you.
Similarly, you may write off the interest from a business credit card and any associated costs like annual fees. By the way, you don’t need to have a business credit card to deduct qualifying interest. You can still deduct if you have a personal card used exclusively for business expenses.
11. Startup costs
If you got your business up and running this year, you can claim deductions for many of the associated expenses — up to $5,000. These related expenses include registering for a website domain, travel for scouting business locations, market research, and training staff.
If you set up an LLC or corporation for your business, you can deduct an additional $5,000.
However, buying equipment and vehicles isn't considered a startup cost. You can deduct them in a few years as they depreciate.
12. Advertising
Spending money to advertise your business can mean more write-offs. Expenses include both digital and physical advertising costs.
From business cards to flyers. Facebook or LinkedIn ads. A billboard, a TV commercial or a radio spot. Website design and maintenance. They all qualify as advertising expenses.
13. Consulting and professional service fees
When you’re a business owner, you may need extra help from people specializing in different areas.
For example, you may need to consult with a lawyer to answer a legal question. You may ask an accountant to help manage your books or a financial advisor to help you define long-term goals.
Whatever the case, if the fees are a necessary expense related to operating your business, write them off.
14. Self-employment tax deduction
When filling out your tax form as a self-employed worker, self-employment taxes can be something of a shock. That’s because you're paying both the employer and employee sides of Social Security tax and Medicare taxes—that’s a tax rate of 15.3% of net earnings.
The IRS knows this isn’t fair, so they allow you to deduct half of your self-employment tax.
While it won’t reduce the actual amount of self-employment tax you need to pay, it can reduce your income tax. (Self-employment tax and income tax aren’t the same things.)
15. The qualified business income deduction
Good news: the qualified business income deduction (QBI) allows eligible self-employed people to deduct a portion of their business income.
QBI allows people with “pass-through income” — business income reported on personal tax returns — to deduct up to 20% of their business income.
There are limitations, though. To qualify for the deduction, as of 2020, your total taxable income must be below $163,300 for individuals and $326,600 for married couples filing jointly.
16. Tax advice
There are many benefits to being a self-employed contractor. A qualified tax advisor can help you optimize your strategy when filing your 1099 independent contractor income tax deductions.
While hiring a tax advisor may seem like an unnecessary cost, the tax preparation they provide may save you valuable time. Preparers can help you with your itemized deductions, figure out your actual expenses, and ensure you’re claiming all the available tax breaks you can.
Even better — you can write off their fees as a business expense.
Learn more about tax deductions for your business
The tax deductions listed above can generally be applied to all 1099 workers. Still, it's important to consult with a tax professional to see if any exclusions apply.
You can also learn more about tax deductions for various professions with these articles:
Personal trainer tax deductions from A to Z
Top 7 lawn care & landscaping business tax deductions
5 real estate agent tax deductions you shouldn’t miss
7 electrician tax deductions to keep in mind
Tax deductions for self-employed hairstylists: 7 write-offs to help your business
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