Tax season is around the corner, and you need to read this Quick Guide if you are an Independent Contractor.
A Quick Guide: Independent Contractor Taxes
As an independent contractor, there are several things you need to be aware of, and one of them is Independent Contractor Taxes. I am not a certified CPA or Tax expert, but I have filed my US Taxes
as an Independent Contractor for several years. Please always refer to the IRS website for the most recent Tax rules because they may change frequently.
In this post, we will discuss possible Tax deductions for US Independent Contractors to ensure a smooth and stress-free tax season.
Who needs to pay Independent Contractor Taxes?
Small Business owners, independent contractors, and other self-employed individuals have to pay Medicare and Social Security taxes if they have net earnings of more than $400.
Currently, for the 2022/2023 Tax season, the self-employment tax rate is 15.3% (12.4% Social Security and 2.9% Medicare).Source
How are they calculated?
Calculating your Tax begins with calculating your self-employment earnings. You can calculate net earnings by subtracting your business expenses from your self-employment income.
Self-employment tax generally applies to 92.35% of your net earnings. You will need to apply the 15.3% tax rate to your net earnings from self-employment once you have determined how much is subject to Tax.Source
What Independent Contractor Taxes can I deduct?
1. Home Office Expenses (Office & Supply)
Whether you have a little office nook or a room (rented outside your home or in your house/apartment) that you use regularly and exclusively for your business, this space is tax deductible. The IRS has specific rules regarding calculating your Home Office Deduction, which you can read more about here.
Generally, Home office deductions can be calculated using the standard or the simplified method, and you can use a different method yearly. However, in the event of an audit, you must keep detailed records of your actual home office expenses when you choose the standard method.
In the simplified method, you will have to multiply an IRS-determined rate by the square footage of your home office. If you choose the simplified method, your home office cannot exceed 300 square feet, and you cannot deduct depreciation or home-related itemized deductions.
To determine which method would most benefit you, you should use both the regular and simplified methods to Calculate your home office deduction. The regular method requires you to use IRS Form 8829, Expenses for Business Use of Your Home. Source
Business/ Office Supplies
Business supplies and materials can be deducted if consumed and used during the tax year. This includes items such as copy paper, postage, paper clips, and pens. The IRS also allows books, professional instruments, and equipment as long as they are used within the year. However, if the items use extends beyond a year, you generally must recover their costs through depreciation. If you do keep certain supplies on hand, please refer to the IRS Manual for more information regarding Business supplies deductions. (on the left side-scroll down to Miscellaneous Expenses – Supplies and materials)
2. Phone and Internet Bills
You can deduct the business portion of your phone, fax, and internet expenses regardless of whether you claim the home office deduction. However, it’s important to deduct only the expenses that are directly related to your business. For instance, you can deduct the costs of running your business’s website.
You shouldn’t deduct the entire monthly bill if you only have one phone line. For the first telephone line you have in your home, even if you have an office there, you cannot deduct the cost of basic local telephone service (including taxes). It is, however, possible to deduct 100% of the additional cost of long-distance business calls and the cost of a second business phone line. More information about Phone & Internet Bill deduction you can find here
3. Expenses for doing Business (Meals, Travel, Vehicle)
Meals
Meals are tax-deductible business expenses if you are traveling for business, attending a business conference, or entertaining a client, but entertainment expenses are generally not tax-deductible. The meal itself cannot be lavish and over-the-top expensive. Previously, you could only deduct 50% of the actual cost of the meal if you kept your receipts or 50% of the standard meal allowance if you kept records of the time, place, and business purpose of your trip, but not the actual receipts. Because of this, desk lunches cannot be tax deductible. More information about Business Meals can be found here and IRS Manual.
Travel
For business travel to qualify for a tax deduction, it must last longer than an ordinary workday, require sleep or rest, and take place outside your tax home (usually outside the city where your business is based). Moreover, to qualify for a business trip, you must have a specific business purpose planned before leaving home, and you must engage in business activities while on your trip, such as finding new customers, meeting with clients, or learning new skills.Source
Vehicle Use
When you use your car for business, you can deduct the expenses. Keep detailed records of each trip, including the date, mileage, and purpose, and don’t claim personal trips as business trips.
Either the IRS’s standard mileage rate or your actual expenses can be used to calculate your deduction. Because it requires minimal documentation and calculation, standard mileage rates are the easiest to use. Just write down the business miles and the dates when you drive them. Then, multiply your total annual business miles by the standard mileage rate. This amount is your deductible expense.
To use the actual expense method, you must calculate the percentage of driving you did for business all year and the total cost of operating your car, including depreciation, gas, oil changes, registration fees, repairs, and car insurance. A $300 deduction would be allowed if you spent $3,000 on car operating expenses and used your car for business 10% of the time. Source
4. Subscriptions & Books
Specialized magazines, journals, and books related to your business are Tax deductible as supplies and materials, as are dues or fees for certain professional membership organizations. Daily newspapers, for example, are not specific enough to qualify as business expenses. Alternatively, the Modernist Cuisine boxed set would be a legitimate book purchase for a self-employed high-end personal chef. As for membership dues or fees, please read more details here
5. Business Insurance
How about fire insurance, credit insurance, car insurance on your business vehicle, or business liability insurance? Yes, the Premiums can be Tax deductable.Source
6. Continuous Education
To deduct education expenses, you must maintain or improve your skills for your existing business. A class that prepares you for a new career field is not deductible.
The cost of taking a course called “Real Estate Investment Analysis” to brush up on your skills would be tax deductible, but a class on teaching yoga would not.Source
7. Other Possible Deductions
- Advertising
- Startup Cost
- Retirement Plan Contributions
- Rent Deduction
- Health insurance Premiums
You can find more about other possible Independent contractor tax deductions on the IRS website. Investitopia is also doing a great job of explaining the processes more closely.
Here are a few more helpful links on Independent Contractor Taxes
The IRS PDF Tax Guide for Small Business
This Post was all about a Quick Overview of Independent Contractor Taxes, which will get you started and prepared for the upcoming Tax Season.
Awesome. Thanks for this.