You need to know the independent contractor deductions for business expenses, to reduce your tax liability and to take advantage of tax credits. Not taking the deductions, or taking the wrong ones, are common mistakes made by some independent contractors. Don't invite the Internal Revenue Service (IRS) to audit you unnecessarily. The following are legal and typical deductions you can take for business expenses as an independent contractor:
If you belong to a trade organization in your industry, you can deduct the dues. You have to prove that it's an "ordinary and necessary" expense, for the deduction to be valid. For example, if you're a lawyer working as an independent contractor, then the membership dues you pay to the American Bar Association will qualify. You won't be able to deduct dues paid to the Soap Guild, even though making soaps is your hobby, and you have big plans for turning it into a small business venture some day. As ridiculous as that example may seem, many independent contractor take deductions along those lines, and end up raising red flags. Ask yourself the simple question when it comes to membership dues, "Would other people in my line of work deduct these dues?" If the answer is no, then don't take the deduction.
You have to use a portion of your home exclusively for business to take home office deductions as an independent contractor. Working from your bedroom or in the living room doesn't count. A dedicated room in your home, or garage, that you use as a principal place of business is allowed. You have to use the room exclusively and regularly for it to be a legitimate independent contractor deduction. Practically speaking, that means you can deduct some of your property taxes, utility bills and other bills as business expenses, based on the square feet of your home office. For example, if your home office is 25 percent of the total square feet of your home, you would deduct 25 percent of those bills.
As an independent contractor, you may need to invest in office
equipment or machinery to do your work. The depreciation of most
equipment and machinery must be considered in the deductions you can
take. You can deduct the entire depreciation amount in the first year,
but you should ask a tax professional or do further research to see
whether that's in your best interest to do.
There are times when you need to pay for meals when meeting with clients or employers. Independent contractor deductions can include meals and entertainment expenses. The maximum deduction is 50 percent of the expenses, so it's important to be wise when you budget for this category, as well as when you take deductions. Tax filing software or your accountant will take the right amount of deductions for you, but if you're doing it manually, you can make mistake of taking a 100 percent deduction.
Stay away from "fringe" advice that you read about regarding independent contractor deductions. Consult with a small business accountant if you're not sure how to differentiate between what's good tax advice, and what's illegal.
Daphne Mallory, Esq. is the co-owner of Mallory Writing Services and has written more than 100 articles helping home based business owners and entrepreneurs start and market their business. You can learn more about her here.