tax deductions

Top 10 Write Offs for Independent Contractors (2018)

Write Offs for Independent Contractors

"Write Offs for Independent Contractors are the Frosting on the Freelancer Cake" says us, right now.

Are you newly in business for yourself as an independent contractor? An independent contractor is defined as a person or business that provides goods or services to another entity under of a verbal agreement or specified contract. Some examples of independent contractors include truck drivers, writers, real estate brokers, and web designers. With the beginning of a new year and the dawn of a brand new tax season, it's important to know what tax deductions you qualify for so you can keep detailed records like receipts and invoices as proof for when it is time to file your itemized deductions.

Deductions for Independent Contractors

The IRS does not correct you should you fail to claim a deduction you are qualified for, so it's in your best interest to be aware of the items you can write off as a cost of doing business. Your deductions should include all necessary and ordinary expenses associated with your work. While there are many tax benefits of being an independent contractor, here are our suggestions as the top 10 write offs for independent contractors in 2018.

1. Occupational Operating Expenses

Tax Benefits of Being an Independent Contractor

The cost of advertising yourself, your services, or your product would 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, or you can have a separate business account. The same applies for a phone line. Business cards you have made are another write-off that falls under occupational operating expenses.

2. Supplies and Materials

Tax Deductions: Supplies and Materials

Any items you need to conduct business can be written off. All equipment, including items like a computer, camera, printer, or other office machinery, used on the job is tax deductible. Even the lesser items like paper, pens, and ink are a deduction. It's not commonly known that books, magazines, and newspapers related to your business are also deductible. Even greeting cards sent to clients can be a deduction. Supplies and Materials definitely lands a spot as one of our top write offs for independent contractors.

3. Home Office

Tax Deduction: 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 off its size relative to the rest of the house. For example, if your office takes up 15% of the house, you can deduct 15% of each utility, such as gas and electric, as office expenses. You can also deduct mortgage interest, homeowner's insurance, repairs, and painting. If you rent your home, you may also write off a portion of your rent.

4. Snacks and Coffee

Tax Deduction: Snacks and Coffee

A little known tax write-off often overlooked is the cost of providing yourself and any employees with snacks while working. The cost of caffeine can also be deducted. 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 deductions. A good way to take advantage of this tax break is to have a weekly team lunch meeting.

5. Business Entertainment

Tax Deduction: Business Entertainment

While this deduction is only for half the cost of expenses related to entertaining clients, it can be used for business meetings and marketing efforts that take place at restaurants, sporting events, and golf courses. This is a commonly abused deduction, so keep in mind it is always best to consult a professional and follow the strict guidelines given by the IRS.

6. Travel

Tax Deduction: Travel

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, air fare, 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 longer that 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 the items most likely to get you audited by the IRS.

7. Child Care

Tax Deduction: 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 the independent contractor. The dependent care benefits are tax free for the employee, even if the employee is your spouse.

8. Cleaning Services 

Tax Deduction: 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 would like to get more creative, you can pay your child to clean. You must be sure to pay them reasonable compensation for the work done. Keep in mind your children can also be paid for data entry, answering the phones, or other business related activities. Children under 18 are exempt from Social Security tax. They also are not subject to federal unemployment tax until they turn 21. The other benefit of hiring your child 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 your child has a lot of unearned income, they will not owe income tax on the wages you pay them. This is a great way to lower the family's tax bill by making taxable income of the parent into untaxable income for the child.

9. Car Related Expenses

Tax Deduction: Car Related Expenses

Depending on how much record keeping you like do, this can be a big deduction. Many choose to use the standard mileage rate as it is the easier method, but it is a lower deduction. If instead you use the actual expense method, it requires more individual bookkeeping but it allows 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. 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 when calculating expenses.

10. Medical Plans 

Tax Deduction: 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 can also be written off. While being able to write off 100% of your health insurance is great, it can be taken one step further. If you hire your spouse, as was briefly mentioned under the child care deduction, you can provide family health insurance coverage to your employee. Under these circumstances you will be covered on your spouse's insurance plan while further reducing your taxable income.

Write Offs for Independent Contractors: Final Thoughts

There are lots of tax benefits of 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. 

Can I Deduct my new Armani Suit as a Business Expense?

can I claim a suit as a business expense

Now that you’re a small business owner, it’s time to step up your game when choosing clothing. After all, you can’t meet potential clients for coffee wearing break-away sweat pants. So you head out to the mall to pick up an Armani suit or two. Since you’re doing this for your business, it’s tax deductible. Right? Sadly, the IRS small business deduction for clothing doesn’t work like that. 

Can I deduct Clothes as a Business Expense?

It's true that you can deduct the amount you spent on the purchase and upkeep of work clothes, but your clothing must meet two requirements before you can claim the costs as an “other expense” on the Schedule C tax form where you report self-employment income and expenses: 

• You must wear them as a condition of your employment. 

• The clothes cannot be suitable for everyday wear. 

Taking a look at these conditions, it looks like you won’t be able to write off those designer suits, since they wouldn’t be distinctive enough to meet these requirements. So no, you can’t write them off. Are your clothes a requirement for your job? But wait, there’s more. Just because some clothing might be distinctive, that is not enough for the write-off. Your employer must specifically require you to wear it as part of your job. 

Additionally, you cannot make the claim that since you do not wear the clothing away from work, you should be able to deduct its costs. Part of the distinctiveness test is that the clothing must not be suitable for taking the place of your regular clothing. Say, for instance, that you are a real estate agent. You probably dress up a bit to show properties to your clients and to attend open houses. If you were walking down the street wearing the Armani suit you wore to a showing earlier in the day, would someone be able to tell you’re a real estate agent for a particular agency? Probably not -- so the clothing would not be deductible. But let's say you’re in the medical profession and wear scrubs. You probably wouldn’t wear your scrubs (given a choice) out to dinner or to the movies. And other people would likely identify you as a member of the healthcare field because of your clothing. So, read on… Yes, this is clothing you can deduct. 

Final Thoughts on Claiming Clothes as a Business Expense

The cost of some types of protective clothing worn on the job -- like safety shoes or boots, safety glasses, hard hats, and work gloves -- can be deducted on your return. You would have to list your profession on your return as the type of work that requires this kind of clothing, such as if you were a carpenter, electrician, steamfitter, someone who works with chemicals, or a fishing boat crew member. The rules on when you can deduct the cost of work clothing can be confusing. If you do run across something that you don’t understand, check with a good accountant who can advise you. It is better to understand all your options rather than making a rash decision about a potential tax deduction.

Tax Deductions you Probably Aren't (but Should be) Taking as a Freelancer

hipster photographer girl

Paying taxes as a freelancer can be a particularly painful affair. In addition to paying all of the income taxes that regular employees have to pay, freelancers have the additional burden of paying the approximately 15.3 percent “self-employment tax”, which consists of the social security and medicare taxes that normally get paid by an employer. In some states, this means that freelancers can pay more than 40 or even 50 percent of their income in taxes!

Fortunately, freelancers have the ability to offset these taxes by deducting “legitimate business expenses.” While some of these expenses, like office supplies, are obvious, there are many others that are less apparent, and often go unused by freelancers. Remember, taking advantage of these business deductions is not in any way immoral or illegal; they are legitimate deductions that you should be taking.

Phone bills

Most freelancers are aware of the fact that businesses can deduct landline and mobile phone bills for their employees. However, many freelancers are unaware of that fact that they can deduct a portion of their personal phone bill as well. If you use (and can prove that you use) your personal cell phone for business purposes, you can deduct a portion of the bill that is equivalent to the amount the device is used for business (business use percentage). Depending on your phone plan, this can easily add up to hundreds of dollars per year.

Electronics Purchases

If you need to use a tablet, laptop, or other electronic device for business (and again, can prove the legitimate business need), you can deduct some or all of the cost of the device. For some devices, you can choose to deduct the entire cost of the device in one tax year (section 179 deduction) or deduct the depreciation over a set number of years. Either way, you’ll be able to cut your tax bill and stay one step ahead of the competition. 

Industry-specific 

If you’re like most freelancers, what you do for a living is probably closely related to your personal interests. You might already have (or be considering) subscriptions to websites, SaaS tools or other subscription-based services. All you have to keep in mind is how the IRS defines a deduction, an expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. So, if the service in question is directly related to the industry you freelance in, you can deduct the entire cost from your taxes.

Safe Harbor home office

Last year the IRS released a "safe harbor" method that may make home office deductions more accessible. The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space. You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual. But you won't have to calculate any actual expense or depreciation deduction for the space. On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction but you can determine year-by-year which home office deduction method to use. You don't have to elect one and lock yourself into it for the future. 

These are just a few of the ways you can offset the tax burden of being a freelancer. As a small business owner there are hundreds of potential tax deductions, that is why it is crucial to take the time to better understand what you can or can't do before you do it. 

Make sure to speak with a tax professional about whether or not you qualify for these deductions, and if there are any other deductions you may be missing out on.