KPMG Spark Blog
"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 a verbal agreement or specified contract. Some examples of independent contractors include truck drivers, writers, real estate brokers, and web designers. 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.
The IRS does not step in to correct your return should you fail to claim a deduction for which you are qualified. 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 potential write-offs for independent contractors.
The cost of advertising yourself, your services, or your products 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 for business purposes, or you can have a separate business account (we recommend a separate business account if possible as it avoids challenges with allocating use between personal and business). The same applies for a phone line. Business cards you have made are another potential write-off that falls under occupational operating expenses.
Almost any items you need to conduct business can be written off. Items like a computer, camera, printer, or other office machinery, used on the job are tax deductible (with special depreciation elections). 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.
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 may be able to deduct 15% of each utility, such as gas and electric, as office expenses. You may also be able to deduct a portion of your mortgage interest, homeowner's insurance, repairs, and painting. If you rent your home, you may also write off a portion of your rent. An alternative calculation is available, known as the simplified home office deduction. The deduction is $5 for every square foot of your home office, up to $1,500 per year. The optional method requires no additional record keeping.
A little known tax write-off often overlooked is the cost of providing yourself and any employees with snacks while working – if needed while working. 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. For tax years beginning in 2018, all food is 50% deductible unless it falls into a certain category. To be considered 100% deductible, the expense must be made available to the general public (if you have coffee and snacks that would be given out if you meet with clients) or a social or recreational activity for the benefit of the employees (a holiday party or a summer outing), for example.
Almost all business entertainment cannot be deducted for tax purposes. However, you may be able to get a tax deduction for some of the entertainment if there was, for example, food included in the price of an entertainment ticket. You will need to have an itemized listing of what is included in the ticket price as proof of the deduction.
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 items that may be scrutinized or audited by the IRS – so keeping track of your travel in your calendar and using a mileage calculator app (and taking a screen shot of the calculation for your records), for example, may be helpful to support any tax deductions.
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.
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 have a relative interested in earning a wage, you can pay her or him to clean. You must be sure to pay them reasonable compensation for the work done. There is also the possibility of hiring young adults to work in your business – but check the rules! Children under 18 are exempt from Social Security tax. They also are not subject to federal unemployment tax until they turn 21. Another benefit of hiring a relative 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 the person you hired has a lot of unearned income, she or he will not owe income tax on the wages you pay them.
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 may be a lower deduction. If instead you use the actual expense method, it requires more individual bookkeeping but may allow 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 versus personal use when calculating expenses.
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 also potentially may be written off. Depending on the plan, an HSA is a great option to save for future medical expenses and it is deductible as well. For single individuals the max contribution is $3,550, or $7,100 if you are married or have other dependents.
There are many options when it comes to retirement planning. Self-employed may have the opportunity to set up and contribute to a retirement plan, and the contributions may be fully deductible. There are many different investment vehicles ranging from a SEP-IRA, SIMPLE IRA, or a solo 401(k). Contributions vary based on the vehicle you choose, and the IRS adjusts the maximum allowable contribution annually.
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.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.
The information herein is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
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