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 to be self-employed. Not only do you have more freedom and flexibility in your work, but you get quite a few benefits that employees don't. You have access to several tax deductions related to expenses for your business.

You can 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

You can take advantage of the popular home office deduction if you're an independent contractor who uses a space in your home as the primary place where you work. You must dedicate part of your home (or an external structure like a shed) to be used only for business activities. 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. You'll need to consider your home office size along with the costs you face to determine which applies to your situation:

  • The simplified method​: You can simply multiply the square footage of your work area by ​$5​ to arrive at this deduction, but there's a catch. You're limited to no more than ​300 square feet​, so the most you can claim is a ​$1,500​ deduction. Your work space can be larger, but you're losing out on any area that exceeds this square footage if it is. The benefits of this option include not having to worry about digging through old receipts and doing complex calculations. But this simplified method may not allow you to take full advantage of the deduction you could get by doing some more work if you have significant expenses.
  • The actual expense method​: The actual expense method requires that you fill out IRS Form 8829, Expenses for Business Use of Your Home. Start by calculating the percentage of your home's square footage that's used for business, 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 if you own it rather than rent. You can claim a deduction for 20 percent of your expenses if your work area takes up 20 percent of your home's square footage.

2. Business-Related Insurance Premiums

Several types of insurance you might pay for as an independent contractor can give you tax deductions. You can claim them as business expenses when you're filling out Schedule C, Profit or Loss From Business. You can deduct the entire amount of common business insurance types, such as business interruption, malpractice and liability coverage. You can also deduct health insurance premiums you paid for any employees, along with state unemployment insurance premiums.

You can usually deduct the entire amount of health insurance premiums you paid for yourself as well, as long as you don't have personal health insurance provided through another employer or your spouse's employer, You can claim personal health insurance premiums on line 17 of the 2021 Schedule 1, Additional Income and Adjustments to Income.

3. Business Vehicle Expenses

Costs related to transportation can lead to tax deductions whether you're paid to drive people from Point A to Point B or you have to drive to meet with clients. You also have a choice between using a simplified method to claim this deduction or determining each relevant expense and subtracting that from your 1099-NEC income.

  • The standard mileage rate method​: You can multiply your business-related mileage by the standard mileage rate set by the IRS, which is ​56 cents​ in tax year 2021, the return you'll file in 2022. The rate is adjusted annually for inflation and increases to ​58.5 cents​ in 2022. This can save you time, but you may miss out on a larger deduction by calculating your actual expenses.
  • The actual expense method​: Look at all your business-related vehicle costs, then calculate how much of the miles you put on your vehicle over the year were dedicated to business rather than personal driving. Then determine a prorated expense unless the car is used solely for business. You can include costs for gas, lease, insurance, repair and registration fees. You'll also calculate your vehicle's depreciation with this option. You can deduct half of your expenses if you drove 30,000 miles in 2021 and 15,000 or 50 percent of those miles were for business purposes.

In either case, you can only claim a deduction for the mileage you accrued while using your car for work. Track your mileage carefully so you can properly calculate your 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

You can deduct similar items associated with your office location from your 1099-NEC income as business expenses if you don't take the home office deduction because you primarily work from a location other than your home. 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.

It also qualifies as a business expense and reduces your business income for lower taxes if you pay for services, such as someone to clean your office space.

5. Business Advertising Costs

Depending on the type of 1099-NEC work you do, you may have to pay money to set up a business website and promote yourself online as well as throughout the community. The IRS allows you to deduct such advertising costs as long as they promote 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. You'll have to obtain tools and supplies, advertise yourself to the community and possibly purchase a vehicle that can hold all your equipment if you work independently as a plumber. 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 upfront startup and organizational costs in the tax year when you start your business, as long as they don't exceed ​$50,000​. You can have a smaller deduction if they're more than that and up to ​$55,000.​ You'll miss out on this first year deduction benefit if they're more than this ​$55,000​ ceiling. Any costs not claimed in the first year are amortized over a ​15-year period​.

7. Half of Self-Employment Tax

You must pay the full amounts for Social Security and Medicare taxes when you're self-employed because you don't have an employer that's chipping in 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. Any purchase of office equipment, supplies or services must be reasonable for your line of work. You can only take a deduction for the business use percentage of what you've acquired, so you may have to do some 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 have to select a depreciation method to use and deduct the costs over several years.

9. Qualified Business Income Deduction

Self-employed taxpayers who meet certain criteria can also benefit from the qualified business income deduction that arrived as part of the Tax Cuts and Jobs Act in 2018. After determining your net business profit, you can 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.

Your business must be a sole proprietorship, limited liability company, S corporation or partnership to qualify. All these business types require that you claim business income and deductions on your personal tax return. Then your total taxable income must fall below certain thresholds. This includes other earnings from employment and other sources.

A single person's total taxable income must be no more than ​$164,900​ in the ​2021 tax year​ to qualify for the full benefit. This increases to ​$164,925​ for married taxpayers who file separate returns and to ​$329,800​ for married taxpayers who file joint returns. The 20-percent credit begins phasing out and becoming less after you reach these thresholds.

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 mean 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.

The training or development activity must be necessary for your current line of work. 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 as a web developer. But a graphic designer can deduct the cost of classes to improve their design skills. A lawyer can deduct mandatory continuing education courses to maintain their license.