Form 1099 Tax Deductions: 10 Top Deductions for Independent Contractors

Form 1099 Tax Deductions: 10 Top Deductions for Independent Contractors
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As an independent contractor who receives Form 1099-NEC income (previously noted as nonemployee compensation on Form 1099-MISC), you're considered self-employed and thus get several benefits that employees don't. Not only do you get more freedom and flexibility in your work, but you also get access to several tax deductions related to expenses for your business.

Depending on your type and place of work, you could deduct costs related to your home office, vehicle use, supplies and equipment, insurance premiums and more as long as you meet the criteria the Internal Revenue Service has set. Here's a list of the top tax deductions you may be able to take as an independent contractor.

1. Home Office Deduction

If you're an independent contractor who uses your home as the primary place where you work, then you could take advantage of the popular home office deduction. To qualify, you need to have a dedicated part of your home (or external structure like a shed) used only for business activities, and you can be either an owner or renter. This deduction accounts for expenses such as maintenance, rent, utilities, mortgage interest, insurance and similar items.

The IRS offers two options for taking this deduction, and you'll need to consider your home office size along with the costs you face to determine which applies to your situation:

  • Simplified method​: To qualify for this option, your home office needs to take up no more than ​300 square feet​. You simply multiply the calculated area by ​$5​ to get a ​$1,500​ maximum deduction. The benefits of this option include not needing to worry about digging through old receipts and doing complex calculations. However, if you have significant expenses, this simplified method may not allow you to take full advantage of the deduction you could get with some more work.
  • Actual expense method​: For larger home office spaces as well as situations where you have higher home office expenses, then the actual expense method requires you to fill out IRS Form 8829, Expenses for Business Use of Your Home. You start by calculating the percentage of your home used for business and then determine each direct and indirect expense amount for things like utilities, real estate taxes, rent, maintenance and mortgage interest. You have to also account for the depreciation of your home with this method.

2. Business-Related Insurance Premiums

Several types of insurance you pay for as an independent contractor can give you tax deductions since you can simply report them as business expenses when filling out Schedule C, Profit or Loss From Business. For example, you can deduct the whole amount of common business insurance types such as business interruption, malpractice and liability coverage. If you have hired employees, you can also deduct health insurance premiums you paid for them along with state unemployment insurance premiums.

As long as you don't have personal health insurance provided through another employer or your spouse, you can usually deduct the entire amount of premiums paid for yourself as well. You'll make this entry for personal health insurance premiums on your Schedule 1, Additional Income and Adjustments to Income.

3. Business Vehicle Expenses

Whether you have an independent contractor job where you're paid to drive people places or you need to drive to meet with clients, costs related to transportation can lead to tax deductions for you. Similar to the two options you get with the home office deduction, the IRS lets you decide whether you want to use a simplified method to calculate your business vehicle expenses or determine each relevant expense manually and subtract that from your 1099-NEC income.

These options include:

  • Standard mileage rate method​: If you don't want to have to go through receipts and bills to determine every vehicle expense you incurred during the tax year, you can simply take your business-related mileage and multiply that by the standard mileage rate, which is ​57.5​ cents in 2020. While this saves you time, keep in mind you may miss out on a larger deduction than with calculating each expense manually. For example, you won't get to separately deduct expenses like your business vehicle insurance, car registration, repair and maintenance costs, gas, depreciation or lease payments.
  • Actual expense method​: If you're willing to do more work and keep careful records of all vehicle expenses, then the actual expense method could get you a larger deduction. With this option, you'll look at all your business-related vehicle costs, calculate how much of the time you used your vehicle for business and then determine a prorated expense (unless the car is used solely for business) for each category, such as gas, lease, insurance, repair and registration fees. You'll also calculate your vehicle's depreciation with this option.

In either case, you should know that you can only get a deduction for the amount of time during which you use the car for work, so this means prorating expenses if you also use your car for personal travel. You also need to track your mileage carefully so that you can properly calculate the prorated vehicle expenses.

Depending on your type and place of work, you could deduct costs related to your home office, vehicle use, supplies and equipment, insurance premiums and more as long as you meet the criteria the Internal Revenue Service has set.

4. Business Rent, Utilities and Services

If you don't take the home office deduction since you primarily work from a place other than your home, you can deduct similar items associated with your office location from your 1099-NEC income as business expenses. For example, you can deduct your office rent, cell phone service (prorated if it's also a personal phone) and utilities like internet service, landline phone service, water, electricity and trash. If you pay for services, such as someone to clean your office space, that also qualifies as a business expense and reduces your business income for lower taxes.

5. Business Advertising Costs

Depending on the type of 1099-NEC work you do, you may need to pay money to set up a business website and promote yourself online as well as throughout the community. Fortunately, the IRS allows you to deduct such advertising costs as long as they're for promoting your business activities and seem reasonable for the line of work you do.

Qualified advertising expenses could include things such as newspaper and radio advertising, business card printing, attendance at promotional events, online marketing service fees, web hosting services and even promotional merchandise.

6. Startup Costs

Acquiring everything you need to get started as a 1099-NEC contractor can cost a lot of money in some industries. For example, if you work independently as a plumber, you'll need to obtain tools and supplies, advertise yourself to the community and possibly purchase a vehicle that can hold all your equipment. Even a home-based design business can have startup expenses for software, electronics and materials.

The IRS will allow you to deduct a maximum of ​$10,000​ in startup and organizational costs up front for the tax year when you started your business, as long as they don't exceed ​$50,000​. If they're more than that and up to ​$55,000​, then you can have a smaller deduction. Any more than the ​$55,000​ ceiling and you miss out on this first-year deduction benefit. Any costs not claimed in the first year get amortized over a ​15-year period​.

7. Half of Self-Employment Tax

As an independent contractor, you have to pay the full amounts for Social Security and Medicare taxes since you don't have an employer paying their half. This self-employment tax adds up to ​15.3 percent​ of your earnings. The good news is that the IRS will allow you to deduct half of those taxes (​7.65 percent)​ when figuring your earnings subject to federal income taxes. You'll calculate this income adjustment on Schedule 1 before transferring it to Form 1040.

8. Office Equipment, Supplies and Expenses

Whether you bought a new computer for your web development work, restocked your office supplies or signed up for an online business service, you can deduct such expenses as long as you follow the IRS guidelines. Specifically, any kind of purchase of office equipment, supplies or services needs to be reasonable for your line of work, and you can only take a deduction for business use of what you've acquired, meaning you may need to do calculations to prorate the costs.

The IRS lets you deduct the whole cost of office supplies you use up throughout the year, as long as you're not keeping track of each item or inventorying them. Office equipment and expenses have different rules that depend on the value of the purchases. For example, you can deduct the whole amount of an item like a business computer or copier as long as it's ​not more than $2,500​. Otherwise, you'll need to select a depreciation method to use and deduct the costs over several years.

9. Qualified Business Income Deduction

Along with taking the traditional deductions for various business expenses, self-employed people who meet certain criteria can benefit from the qualified business income deduction that arrived as part of the Tax Cuts and Jobs Act. After determining your net business profit, you could subtract as much as ​20 percent​ of your qualified business earnings to get a lower taxable income overall and thus save on federal taxes. Your qualified business income doesn't include things like dividends, interest income or capital gains.

To qualify, first your business needs to be a sole proprietorship, limited liability company, S corp or partnership where you file your business taxes using a personal tax return. Then, your total taxable income (business plus any other earnings from employment and other income sources) needs to fall under certain thresholds.

For the 2020 tax year, this means a single person's total taxable income would need to be ​under $163,300​ for the full benefit or between ​$163,300​ to ​$213,300 f​or a partial benefit. Those who are married and filing jointly would see a phase-out with a total taxable income between ​$326,600​ and ​$426,600​.

10. Continuing Education and Development

Whether you're a lawyer, construction worker or designer, it's likely you at least occasionally have to pay for continuing education or professional development. This could be paying for a certification program, seminar, college courses or books. The IRS will let you deduct work-related education and development costs as long as they meet certain criteria.

Specifically, the training or development activity must be needed for your current line of work. For example, you can't take classes to become a real estate agent and deduct those from your business income if your current line of work is a web developer. However, a graphic designer may deduct classes to improve their design skills, and a lawyer could deduct mandatory continuing education courses to maintain their license.