In general, when we think of independent contractors, we imagine liberated freelancers who are able to set their own schedules and pick their own clients. But independent contractors can also include any profession that is providing independent services to the general public without an employer dictating any legal control over the way services are offered [source: IRS]. Fantastic, one might think: working for yourself, in your jammies and no pesky legal control!
Of course, independent contracting has one big drawback: No employer is withholding taxes, Medicare or Social Security from your paychecks. You are solely responsible for paying your own taxes, and that means a sizable part of every single payment you earn is going straight to Uncle Sam. Fortunately, there are quite a few deductions that independent contractors can take advantage of to lower their tax bills.
Independent contractors can absolutely deduct expenses related to their business. Contractors will be asked to fill out a Schedule C form, in which they'll have to detail their business profit. After noting the profit, there's a sizable list of deductions the contractor can take, including a home office, office expenses, utilities -- even travel, meals or entertainment related to work [source: IRS].
But don't get too excited. While it's certainly possible to write off loads of expenses as an independent contractor, there are strict requirements for what is actually covered. Don't expect to casually write off your whole house as a deduction if you work from home, for instance; you have to calculate the square footage of the space used for work. You can deduct a portion of your driving costs, but you're going to have meet some pretty specific terms if you're trying to write off that new car you bought.
If you've bought a load of stuff for your office this year, don't overlook Section 179 deductions. Section 179 allows you to write off up to $250,000 in a single tax year for qualifying property, equipment or supplies. Naturally, there are quite a few requirements [source: IRS]. And don't forget: just because you put it on your taxes doesn't mean it's accepted. If your tax return raises eyebrows at the IRS, you're going to need to provide them with receipts for everything you bought during an audit.
- Diaz, Michael. "Tax Guide for Independent Contractors." CanDoFinance.com. Feb. 29, 2012. (Sept. 18, 2014) http://www.candofinance.com/taxes/independent-contractor-tax-guide/
- IRS. "Electing the Section 179 Deduction." (Sept. 18, 2014) http://www.irs.gov/publications/p946/ch02.html
- IRS. "Form 1099-MISC and Independent Contractors." Jan. 1, 2014. (Sept. 18, 2014) http://www.irs.gov/Help-&-Resources/Tools-&-FAQs/FAQs-for-Individuals/Frequently-Asked-Tax-Questions-&-Answers/Small-Business,-Self-Employed,-Other-Business/Form-1099-MISC-&-Independent-Contractors/Form-1099-MISC-&-Independent-Contractors-1
- IRS. "Independent Contractor Defined." Aug. 22, 2014. (Sept. 18, 2014) http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Independent-Contractor-Defined
- IRS. "Schedule C - Form1040." 2013. (Sept. 18, 2014) http://www.irs.gov/pub/irs-pdf/f1040sc.pdf
- Tozzi, John. "Hidden Tax Tips for Entrepreneurs." Bloomberg BusinessWeek. Feb. 17, 2009. (Sept. 18, 2014) http://www.businessweek.com/smallbiz/content/feb2009/sb20090212_479578.htm
- TurboTax. "Tax Topics for Freelancers, Contractors and Consultants." Intuit. 2013. (Sept. 18, 2014) https://turbotax.intuit.com/tax-tools/tax-tips/Self-Employment-Taxes/Tax-Topics-for-Freelancers--Contractors--and-Consultants/INF12025.html