The gig economy is here to stay, and study shows that 35% of today’s workforce are freelance. The tax rules for those earning money through independent employment must evolve. A tax deduction can help with this transition, but it is easy to miss out on potential opportunities without proper records.
Tax deductions are a valuable tool for managing the financial side of an independent contractor’s business. Tax professionals take the tax deductions before calculating your taxable income. This means that they reduce the amount of money you owe in taxes by lowering your total income. Both operating expenses and capital expenditures are eligible for tax deductions.
In this article, we will discuss the top five tax deductions for independent contractors and how to take care of them.
What Are Independent Contractors?
Before discussing the top five tax deductions for independent contractors, it is important to understand what an independent contractor is.
An independent contractor is a self-employed business owner who provides goods or services to clients. They are not considered employees of the company but as freelancers or consultants. This distinction means that they are responsible for their taxes and do not have the same benefits as employees.
Independent contractors commonly generate and use the 1099 form to report their income to the IRS. This form reports the income from independent contractors, freelancers, and other self-employed individuals.
The Top Five Tax Deductions for Independent Contractors
There are many tax deductions that independent contractors can take, but the following five are the most common:
Self-Employed Tax Deduction
A self-employed tax deduction allows you to write off a percentage of your earnings as business expenses. This can be a big help in reducing your taxable income, as an independent contractor. You can generate a form W-2 to help you determine your earnings so that you can calculate this deduction accurately.
The amount you can write off depends on your business’s net profits, which is the profit after all the deducted business expenses.
You can claim this deduction on Schedule C of Form 1040. Be sure to keep track of all your business expenses throughout the year to calculate this deduction accurately.
Home Office Deduction
Instead of having your business take up space in your house, you can instead designate a specific room for business use.
Having an office means that if you work an average of four hours per day in this room or at least ten hours per week, then half the square footage of the home office can be deducted as part of your tax deductions.
As long as you meet these requirements and calculate this deduction accurately using Form 8829, you can remove $5 per square foot up to 300 square feet (a max total deduction of $750) from your taxable income each year.
Health Insurance Tax Deduction
If you are self-employed, you can deduct the cost of your health insurance premiums from your taxable income. To do deduct the cost, simply calculate the total amount you paid for premiums during the year and write it off on Schedule C. This deduction can be a big help in offsetting the cost of health insurance. Health insurance can be expensive for self-employed individuals.
Business Mileage Tax Deduction
If you use your car for business purposes, you can deduct the cost of mileage from your taxable income. This deduction can be calculated by multiplying the number of miles driven for business purposes by the standard IRS deduction rate of 56 cents per mile.
Hence, keep yourself updated on the latest rates to ensure that you’re taking the deduction accurately. It’s also important to keep track of all your business mileage throughout the year, and be sure to write it off on Schedule C.
Capital Expense Deduction
Capital expense deduction allows you to write off the cost of certain capital expenses incurred in running your business. These expenses can include the purchase of equipment, furniture, or software.
To claim this deduction, simply record the amount spent on each item and its corresponding depreciation schedule.
Credit Card Interest
If you use a credit card for business expenses, the interest you pay on this card is deductible. This includes both your personal and business credit cards.
The interest amount to be deducted depends on how much money the business uses for company growth. For example, if you charged $500 from your business on a personal credit card but only $300 was actually applied towards business usage. You, or a tax professional, can deduct only $300 worth of interest from your taxable income.
Why Are Tax Deductions Important For Independent Contractors?
Taxable income basically refers to how much money you make during the year, which is subject to taxes. The deductions made from the taxable income are important for independent contractors because they lessen the amount to be paid to the IRS, leading to increased financial freedom and security.
Hence, it is important to find as many tax deductions as possible to keep your taxable income low.
Final Thoughts:
Tax deductions are important to independent contractors because they help them reduce their taxable income each year, saving money on taxes and increasing financial security. Keeping track of all your business expenses throughout the year is the best way to accurately calculate these tax deductions and reduce stress when dealing with financials.
