Common tax deductions for independent contractors and self-employed workers
The Rippling Team — Mar 3, 2023
Self-employed workers use their own equipment, find their own office space, and make their own retirement contributions. It all takes time. And costs money.
The good news is that if you're an independent contractor, sole proprietor, or another form of self-employed worker, many of your business expenses are tax-deductible.
These deductions, also known as write-offs, are subtracted from your taxable income, which lowers your tax bill. While a deduction won't provide a dollar-for-dollar refund for an expense, it’ll likely lessen the amount you owe to the IRS.
It pays for self-employed workers in the US to know what is and isn't tax-deductible. While you should consult a certified public accountant (CPA), attorney, or another tax professional to get a comprehensive view of which expenses qualify, consider this your starter guide, complete with common write-offs to keep in mind and strategies for recording them.
What taxes do independent contractors have to pay?
In the US, independent contractors, sole proprietors, and other self-employed workers must pay:
- Federal, state, and local income tax. This is a requirement for all taxpayers, regardless of worker classification. The tax rate is calculated based on the past year's income.
- Self-employment tax. These make up self-employed workers' Social Security and Medicare contributions.
Unlike employees whose employers deduct taxes on their behalf, self-employed workers are responsible for making their own contributions based on their income. If you expect to owe more than $1,000 in taxes, you are generally required to make quarterly payments throughout the year.
Essential tips for writing off deductions
There are scores of tax write-offs independent contractors and other self-employed workers can take advantage of. But if not done correctly, you run the risk of an IRS audit. So, before you make any big spending decisions banking on a tax deduction, here are some important guidelines to bear in mind.
Keep great records
Proper bookkeeping makes deductions infinitely easier to claim come tax day—it's also your first line of defense in case of an audit. This means keeping and organizing receipts for anything you consider to be a business expense required to perform your line of work.
Some deductions benefit from even more detailed record-keeping. For instance, if you're driving for business you should record every trip's date, mileage, and purpose. If you work out of a home office, you should have the dimensions of the workspace to calculate how much you write off.
Separate business and personal
The best ways to improve your bookkeeping: clearly delineating business expenses from personal ones. Those lines are often blurred when you're self-employed.
Tax deductions are only for business expenses. You can't write off the cost of your bed because you messaged a client from it. The more you draw a clear line, the easier time you'll have claiming deductions. A simple way to do this is to have credit cards and bank accounts that are solely for your business.
"Is this an ordinary and necessary business expense?"
This is the question you should always ask yourself before expecting a tax write-off—if the answer is yes, you can often claim a deduction. There are exceptions, such as capital expenses and the cost of goods sold. If the answer is no, the expense is likely non-deductible.
According to the IRS: "An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business."
This means you shouldn't deduct any expenses outside your line of work. It also means that while you don't have to pick the cheapest possible options to claim a deduction (a motel stay on a business trip), you shouldn't pick any luxurious options, (a five-star resort) either, as these will draw IRS scrutiny.
Paperwork and deadlines
If you've made more than $600 from a client, they'll send you a Form 1099-NEC by the end of January. These forms will help you establish your gross income.
Before the annual tax deadline, you'll need to file a Form 1040, which all taxpayers use to calculate what they owe. As a self-employed worker, you'll also include a Schedule SE, which factors in the self-employment tax, and a Schedule C, which is where you’ll report your gross business income and expenses under different categories. Some expenses may require additional forms to help you determine what to record.
Once you determine your net income, you can use the worksheet on Form 1040-ES to figure out whether you need to pay quarterly taxes. If so, payment deadlines fall on the 15th business day after each fiscal quarter. Form 1040 and Schedule C are only due once a year in mid-April.
What can an independent contractor write off?
Below you'll find some of the most common 1099 write-offs self-employed workers can take advantage of along with where to claim the expenses on your tax forms. This list is by no means exhaustive and the exact provisions are constantly changing, so you should consult tax professionals and check the IRS' Self-Employed Individuals Tax Center for more information.
Self-employment tax deduction
Contractors can deduct half of the self-employment tax from their net income. Since you're your own boss when you're self-employed, the IRS allows you to treat this tax as a business expense.
Paperwork: Fill out a Schedule SE, then record half of the tax determined on Line 15 of your Schedule 1.
Home office deduction
If you work from home, you can deduct a portion of your housing costs from your taxes. This includes:
- Mortgage interest
- Home depreciation
- Homeowners insurance
- Maintenance and repairs
If you rent (rather than own) your home office space and quality for the home office deduction, you can deduct a percentage of your monthly rent. That percentage is equal to the percentage of you home’s square footage used for work. Keep in mind that according to the IRS, you can only take a home office deduction for parts of your house that are used both "regularly and exclusively," for your business. That means that while you can claim costs from an entire room you dedicate to your work, you may have a harder time deducting office space in the same room as your bedroom or living room.
If your home office takes up 15% of your home, you can also deduct 15% of your annual utilities, like electricity. It helps to have a floorplan of your workspace handy with the exact measurements of your home office in case you get audited.
Paperwork: The standard way to deduct your home office expenses is by filling out IRS Form 8829, which involves calculating the percentage of square footage the workspace takes up relative to the entire home. If your home office is less than 300 square feet, there's a simplified option that lets you write off $5 per square foot. Additionally, you can record home office expenses on Line 30 of your Schedule C.
Other office expenses
If you're a commuter, any office space outside the home is 100% tax-deductible. This applies to both owning and renting external space, including a coworking membership. Keep in mind that you can't deduct rent on any property you own.
Additional office-related expenses you can deduct include:
- Supplies: Any type of stationary (pens, sticky notes, paper, etc.) that is "ordinary and necessary" to your business is fully deductible if you've already used it. This includes books and equipment as long as they're used within the tax year.
- Furniture: Office chairs, desks, shelves, and other furniture important for your workspace are all eligible for write-offs.
- Maintenance: If you're renting office space outside of your home, you can deduct incidental repairs and maintenance.
- Utilities: Power, water, and internet bills for an office outside of your home are tax deductible.
Paperwork: Record these deductions between lines 18 and 27 on your Schedule C.
Any cost you put up to advertise your business is tax-deductible. This includes:
- Online ads (like Facebook or Google)
- TV commercials
- Radio spots
- Mail fliers
This also includes deducting fees from any PR or advertising agencies. You can also write off ads that encourage charitable giving that have your company's name on them.
Paperwork: Schedule C, Line 8.
- Health insurance. You can deduct your health, dental, and long-term care premiums so long as you're not qualified for a plan through your spouse's employer. If you have a spouse, children, or dependents age 26 or younger, you can also deduct health insurance premiums you paid on their behalf.
- Business insurance. You can deduct premiums for fire insurance, credit insurance, business liability insurance, and car insurance (if the vehicle is used for business).
Paperwork: Health insurance costs go on Line 17 of your Schedule 1 and business insurance costs go on Line 15 of your Schedule C.
Cell phone and internet bills
You can write off the parts of your phone and internet expenses you use for your business. For example, you can write off any extra costs of long-distance business calls. You can also deduct the entire cost of a second phone line so long as it's exclusively dedicated to your business.
Writing off internet use is similar. While you can deduct costs associated with hosting a business website but not bills for personal internet use. Once you delineate which portions of your phone and internet bills are for business and which are personal, you can fully deduct the former.
Paperwork: Business-related cell phone expenses go in Part V of your Schedule C. Internet expenses go in the utilities section on Line 25.
You can deduct travel-related expenses from your taxes if you have a specific, business-related purpose for your trip, which has to be outside of the general area of your home. This includes costs of:
- Plane, train, or bus tickets
- Taxis and rideshares during your trip
- Baggage fees (including shipping)
- Car expenses on your trip, including rentals, tolls, and parking fees
While you don't have to always pick the cheapest travel options, you should stay away from writing off any lavish expenses (e.g. booking a first-class flight) for your business trip.
Paperwork: Schedule C, Line 24.
You can also write off half the cost of any meals from business-related travel. Other eligible meals include:
- Lunch or dinner with clients
- Food from a business conference
- Catering for promotional events
You can deduct 50% of the actual cost of the meal with a receipt or take the standard meal allowance—which is pegged to the per diem for federal workers and updated by the US General Services Administration every year.
Paperwork: Record your meals under travel expenses on Line 24 of your Schedule C.
Independent contractors can claim tax deductions when they use cars for business-related reasons, like driving to meet a new client or attending a seminar. Commuting to and from work is never tax-deductible.
The IRS sets a new standard mileage rate every year that you can record to figure out your deduction. In 2023, the rate is $0.655 per mile.
While it's slightly more complicated, you can also figure out the percentage portion of business-related driving you did in the past year and multiply it by your car's operating expenses. For example, if you spend $4,000 on maintaining a car you used for work 20% of the time, you could write off $800. That said, there are significant record keeping requirements for this deduction that you can learn more about here.
Paperwork: Schedule C, Line 9.
You can also write off any interest incurred from business loans, like business credit cards, equipment loans, and business lines of credit. If you take out a loan for business and personal reasons, you're only eligible for a deduction for the business portion. So keep careful track of where those funds are going.
Also, keep in mind that these deductions won't pay off all of your business-related interest. It's always better to pay debts off in full yourself as soon as you can instead of relying on write-offs.
Paperwork: Schedule C, Line 16.
Any education related to your field of business is tax-deductible. You can claim credit on tuition expenses and get comped for webinars, online courses, and textbooks. But you can't write off any education expenses if you're pursuing a new career path separate from your current line of work.
Paperwork: Schedule C, Part V.
Dues and publications
Self-employed contractors can also deduct costs from trade magazines and journals directly related to their business—e.g. Graphic Arts Monthly if you're a web designer.
You can also deduct fees for belonging to groups related to your business, so long as they're not recreational (e.g., no country clubs). According to the IRS, these can include:
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations (such as bar associations and medical associations)
- Real estate boards
- Trade associations
Paperwork: Schedule C, Part V.
Retirement plan contributions
If you're a self-employed small business owner, contributions to certain employee retirement accounts are tax-deductible. These include:
- Simplified employee pension individual retirement accounts (SEP-IRAs)
- Savings incentive match plan for employees (SIMPLE) IRAs
Paperwork: Schedule C, Line 19.
Business licenses and taxes
If your business requires any special certifications (a real estate license, for instance), you can write off any associated fees on your tax return. The same goes for any regulatory taxes specific to your business.
Paperwork: Schedule C, Line 23.
Business startup costs
In your first year of a new business, you can deduct up to $5,000 in startup costs from your taxes. This can apply to things like market research, location scouting, and attorney fees. You can also write off filing fees associated with setting up an LLC.
Paperwork: Schedule C, Part V.
You can deduct the cost of the wear and tear of your work tools as they age. The IRS requires that the eligible property is:
- Something you own
- Used for your business
- Going to become obsolete
- Expected to last more than a year
The easiest way to calculate depreciation is by subtracting the equipment's expected value at the end of its life from its original cost, while also factoring in how long you plan to use the equipment. There are other methods and if you don't have expert accounting chops, you may want to seek the help of a professional.
Paperwork: Line 13 of your Schedule C.
Legal, accounting, and tax services
To keep track of all potential tax deductions from your business (and avoid any of the pitfalls), you should strongly consider soliciting help from CPAs, attorneys, or other tax professionals. These expenses are also tax-deductible.
Paperwork: Schedule C, Line 17.
The best way to send tax documents (and payments) to contractors
Contractors already face uphill battles filing their own quarterly taxes and documenting their own expenses for write-offs. The task is even trickier when clients are slow to send out 1099s and other forms that help them determine their taxable income.
Rippling, an all-in-one global workforce solution, automatically generates and distributes 1099 forms to contractors. Self-employed workers across the globe can get paid in their native currency, and quickly sign consulting agreements. Late payments will be a thing of the past, and contractors will have everything they need come tax season—no matter where they live.
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Rippling does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax advice. You should consult your own tax advisors before claiming tax deductions or preparing your tax return.