It’s that dreaded time of the year again when we must start thinking about taxes and as an independent contractor, you must also consider your allowable business expenses. According to the IRS, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. Independent contractors often enjoy lucrative salaries, however, a high salary often comes with high taxes. This is a simple guide to some of the most common tax deductions, which might help you lower your tax liability.
- Vehicle expenses – This would involve having good records of all your gas receipts, oil changes, maintenance records, and lease payments if you lease your vehicle. You may opt to keep track of your travel miles instead and take the standard mileage deduction, which is 58 cents per mile for 2019.
- Travel – With out-of-town travel, you can deduct transportation costs as mentioned above. If required by your job, airfare, lodging, and meals may be deductible as well.
- Office and utilities – Do you rent or lease business office space? Maybe space in your home serves as a home office. Either way, you may be able to deduct a portion or percentage of your utilities, mortgage interest, property taxes, maintenance, home insurance, and office phone, internet or cell phone.
- Advertising expenses – This could include business cards, brochures, print ads, billboards, paid ads, a professional website, and other business promotion materials.
- Insurance – This could include your malpractice insurance, liability insurance, commercial property insurance, equipment insurance (not your vehicle), and other business-related insurance.
- Legal and professional fees – Lawyer fees for setting up your LLC or entity structure might be deductible, as well as accounting fees, professional membership fees, business books, and online subscriptions related to your business.
- Office supplies and small tools/equipment – Consider the paper, writing supplies, and postage your job requires. Maybe you need a computer, printer, calculator, or other related office expenses.
- Uniforms – Maybe your job requires uniforms or items for a dress code; these may be tax deductible.
- Salaries and wages – If you have employees, you can deduct FICA, state and federal unemployment tax of employer contribution, bonuses, commissions, per diem allowances, educational expenses, life insurance, and other related expenses.
- Student loan interest – You can deduct up to $2,500.
- Retirement account contributions – Contribute as much as possible to your retirement accounts; these may include SEP IRAs, Simple IRAs, and 401Ks. A SEP IRA allows you to contribute up to 25% of your salary or up to $56,000. This may also include an additional contribution to a Roth IRA of $6,000. If you invest in a solo 401K you can contribute up to $19,000 or up to $25,000 if you are over the age of 50 for the 2019 tax year.
- Tax loss harvesting – If you have losing investments, this allows you to sell them and harvest your losses to offset taxes on investment gains or to help reduce your taxable income up to $3,000. (This is helpful if you want to avoid the next higher level tax bracket, or if you sell investments on which you’d pay short term capital gains.)
- Health insurance – Acquire or keep your health insurance; health insurance premiums are tax deductible. Some states have imposed penalties in 2019 in the form of a tax if you fail to maintain qualifying health care coverage.
- Invest in a HAS (Health Savings Account) – You can invest $3,500 for individual and $7,000 for family with pre-tax dollars. This means you can reduce your taxable income between $3,500 – $7,000 if you max out your contribution. You can then take out the money tax-free to cover healthcare costs, so you get a sizable tax benefit because both deposits and withdrawals are tax-free. If you do not use the funds for healthcare, after the age of 65 you can withdraw the funds and be taxed as ordinary income without penalties.
- Keep track of all medical expenses – Medical costs exceeding 10 percent of your income can be deducted.
- 529 savings college plan – While not deductible on your federal return, many state returns allow you to deduct up to $10,000.
- Life-long learning credit – Take classes and continuing education credits with up to $2,000 tax deduction (as long as your earnings are not too high).
- Charitable contribution – Make a contribution in the form of cash or items with estimated cash value. Keep receipts.
- Mortgage interest – This is tax deductible, and may also include your home equity loans and lines of credit interest.
- Energy efficient improvements – Making energy efficient improvements to your home or business allows you to deduct up to 30 percent of the cost of your project.
No one really looks forward to Uncle Sam’s visit each year, but with adequate preparation, you can maximize your annual deductions. Smart financial planning with your accountant and financial adviser can help you to minimize your tax obligations and save more for retirement.
