Ten Independent Contractor Tax Write-Offs
By: Kelley Amstutz
Working as an Independent Contractor, the importance of saving money, and staying frugal is imperative. But, sometimes you have to spend a little money in order to make a little money. When you properly deduct the expenses that are needed to keep your business up and running successfully, you will minimize your tax bill, and increase the money you find in your bank account.
When figuring out whether an expense is a tax deduction, it is also important to remember that all things tax related are based on your facts and circumstances. All deductible expenses have to be for your business. If you use something for your business and in your personal life, you have to deduct a percentage of what is used for business purpose, and you have to maintain records to reflect these deductions.
Before you begin, you will have to ask yourself if what you are considering a tax deduction follows the IRS guidelines, and whether or not the expense is “ordinary and necessary.” An ordinary expense is common and accepted as a norm in your field or business. A necessary expense is one that is considered both helpful and appropriate for your field of business. Please note that an expense does not need to be vital in order to qualify as necessary by the IRS.
Please reference the informative PDF file from the IRS for the details on Business Use for your Home, here: https://www.irs.gov/pub/irs-pdf/p587.pdf.
Since we have defined what considering factors are needed before you determine what you can deduct, below you will find ten (10) tax write-offs for Independent Contractors to take advantage of:
Your Startup Costs
This includes the expenses that are associated with starting your business, of which you can deduct $5,000 in your first year of business. Any expenses remaining must be deducted in equal parts and can be done over the course of 15 years.
Your Home Office
When you work from home, your home office is a very important deduction. Your space must be solely devoted to your business and you must follow the IRS rules. The best way to utilize this deduction is to measure the total square feet of space used as your Home Office, and divide that by the square footage of the home. This is the percentage of your home related business expense that you can claim. (e.g., rent, interest on mortgage, homeowners insurance, HOA fees, utilities, etc.)
The best practice to identify deduction is to take $5 per square foot of office space.
If you are self-employed and use your cellphone for business purposes, you can claim the business use of your cellphone as a tax deduction. If 30 percent of the time on your phone is spent dealing with business matters, you could legitimately deduct 30 percent of your phone bill.
By requesting an itemized phone bill you are able to measure your business use verses your personal use and will be able to prove your deduction to the IRS. Another option is to have a second phone number and use it solely for your business, in which you will be able to deduct the entire cellphone expense.
Computers, printers, fax machines, copiers, scanners, routers, and furniture for your business are all tax deductible. If your business is profitable, you can either take the full 100 percent deduction up front using deduction 179, or depreciate over a course of five (5) years, depending on assets.
Once your business is functioning, expenses on things such as advertising, postage, office supplies, software, cable and any repairs to your home office can be deducted.
Beyond these, you may claim a tax deduction for your desk, chair, coffee table, and even any art hanging on your home office walls. Just ensure that any decorative item that you decide to deduct stays put in your home office, to avoid potential audit woes down the line.
You can also use tax deductions for repairs or improvements within your home office workspace. Just be mindful that larger expenses, such as carpet, may be subject to an asset-depreciation schedule.
Websites are an essential tool for businesses to be successful and stand out. The cost of creating a website will be treated much like computer software if a business looks to a third party to develop, design, program, and create the website. If the website is developed and created in-house, then the costs may be deducted in the year the costs are paid or accrued depending on accounting methods used or amortized and treated like a computer software deductions. These costs are amortized over a 3-year period that begins in the month that the website is placed in service for use.
The costs incurred for the design of a website that do not fall under the software-type costs are deductible over the useful life of the expenditure, or the number of years it is expected that the non-software portion of the design will be used in the business.
Maintenance, updating, and costs associated for adding to a website are treated as normal business expenses and are deductible when incurred if these costs are truly maintenance-type costs. These typical maintenance-type costs would include costs to update content, add contacts, and correct minor errors or style formatting changes consisting of font sizes, types, and colors. If the costs of the content on the website is currently deductible, they could be considered advertising-type costs.
It is also important, as an Independent Contractor, to continue to further your education in order to improve your skill set. Any education expense obtained can be deducted as long as it is related to your occupation or business. The expense must be made to maintain or improve your skills within your current employment. This includes ongoing education, classes, seminars, etc. If the expense if to prepare you for a new field entirely, it is not deductible.
When you use credit in order to finance business purchases, any interest charges are fully tax deductible. This is true for a personal loan if the proceeds are used within the business. Please note that you will need to keep good records that show what the money was used for within your business.
Professional, Legal and Financial Services
Any expenses paid to a legal or tax professional for services related to your business or advice regarding your business are fully tax deductible during the calendar year paid.
Association Fees are also tax deductible in full when they are related to your business or industry and can include membership/subscription fees for magazines, the BBB, or job boards, like VirtualAssistants.com.
This is just a summary of some common deductions. The process of finding what and how to file your business deductions is a complicated task, and in every situation, it is completely dependent on your facts and circumstances. It is highly recommended you talk with a tax professional about what deductions can be applied to your taxes, in order to maximize your deductions and keep more money in your pocket. A helpful site to answer more common questions about what and how to file is, https://turbotax.intuit.com/tax-tools/tax-tips/Self-Employment-Taxes/Tax-Topics-for-Freelancers--Contractors--and-Consultants/INF12025.html.