Independent contractors owe taxes on their earnings less their business expenses—their profit (in other words, rather than gross revenue). When you understand things you can write off as an independent contractor, you can claim accurate business deductions to pay the proper amount of taxes.
10 Tax Deductions for Self-Employed Contractors
Here are 10 tax write-offs for 1099 employees, better known as independent contractors:
1. Home office: If you work remotely, you can write off your home office and related expenses, which include furniture; home office repairs; and a percentage of utilities or property taxes, which correlates to your home office's square footage expressed as a percentage of your home's square footage.
2. Auto and mileage: If you drive for work, you get to write off your mileage, gas, tolls, parking and other automotive expenses. The mileage reimbursement rate, which changes annually, is currently 57 cents per mile. Since most people use the same car for work and personal purposes, keep good records or use a mileage tracking app for accurate reporting.
3. Business insurance: Business insurance may be required for your profession; even if it's not, it's recommended. Whether this is a necessary cost of doing business, or just a wise way to protect your personal assets from a lawsuit, it's a legitimate tax deduction.
4. Health insurance: Independent contractors who pay for their health plans get to deduct the cost of their premiums, as well as necessary medical expenses.
5. Business meals and travel: Business travel—whether it's for a local meeting or a national industry conference—is deductible. Allowable deductions include airfare, bus tickets, train tickets, car rental, parking, conference fees, accommodations, etc. Since you have to eat while traveling for work, you can deduct meals, snacks and groceries purchased while conducting business travel. However, business meals are only deductible at 50% rather than the full amount, since the IRS assumes you'd be paying to eat whether at home or away.
6. Supplies: Business supplies is a catchall category many entrepreneurs use to deduct tools of the trade. Depending on your line of work, supplies might include software, industry-specific magazine subscriptions, office supplies, tea and coffee served during meetings, reference books, hand tools, cleaning supplies, and more. While recordkeeping, show how the particular supply you're claiming helps you do your job.
7. Education or professional development: Independent contractors need to keep their skills fresh, thus, education and professional development expenses are allowable. Things to claim include fees for required continuing education credits; dues to membership organizations that provide mentorship or industry-specific career support; course fees for new skills; and the cost of trainings, workshops, or skill-building materials.
8. Marketing and advertising: Independent contractors would get few clients if they didn't advertise or market their services, so it's no surprise these expenses can be deducted. Examples of marketing and advertising expenses include business cards, website expenses, cost of print or web advertisements, printed signs, and direct mailings.
9. Depreciation: While inexpensive supplies are deducted in the same year they're purchased, big-ticket items are instead depreciated over time. Thus, every year you'll take a small deduction as a piece of business equipment (such as a printer) depreciates in worth. Generally, if something is used for more than a year, it should be depreciated. If something is used within one year, it's claimed as a supply. However, it's usually not worth depreciating low-cost items you'll use for several years, so most 1099 employees write these items off as supplies in the tax year they're purchased.
10. Retirement savings: Independent contractors are able to deduct the cost of their contributions to certain types of retirement plans for self-employed workers, including the solo 401(k) and the SIMPLE and SEP IRAs. There are contribution limits, set annually and pegged to the total earnings. For tax year 2021, the maximum an independent contractor can contribute is $19,500 (plus $6,500 for workers over age 50), plus 25% of their net earnings.
While you may not be able to claim all 10 of these deductions, you should be able to leverage these deductions to reduce your taxable expenses as an independent contractor. Additionally, while business insurance may be tax-deductible, it offers critical protection of your personal assets and can provide peace of mind that your business is protected against legal claims.