Independent contractors are self-employed individuals who essentially work for themselves. They are not regular employees of a business and are treated the same as the self-employed and sole proprietors by the Internal Revenue Service. In addition to paying income tax and self-employment tax, independent contractors are required to file a Schedule C, Profit or Loss from Business, to claim income and deduct business expenses for each tax year.
Expenses incurred in the course of your business that do not pertain to a home office are fully deductible. Such expenses include advertising, office expenses, utilities, supplies, contract labor, wages, insurance, repairs, rent or mortgage payments, interest, legal services, taxes, licenses, employee benefit programs, profit-sharing plans, depreciation and depletion. Travel, meals and entertainment expenses are deductible; however, the amount is generally limited to 50 percent for meal expenses. Certain individuals may deduct 80 percent.
Business Use of Home
Form 8829, Expenses for Business Use of Your Home, may be used to take a deduction if you operate your business out of your home. A percentage of household expenses such as utilities, mortgage or rent payments, interest and insurance is deductible based on the size of your workspace. Business expenses that apply only to your office or work space are 100 percent deductible.
Vehicle expenses incurred in the course of your business are deductible using either actual expenses or the standard mileage rate. You may deduct the business portion of actual expenses such as fuel, oil changes, repairs, insurance, tires and license plates. If you choose to use the standard mileage rate, multiply the number of business miles driven by the current year rate. Parking fees and tolls can be added to that amount. Depreciation and rent or lease payments are also deductible.
Cost of Goods Sold
Independent contractors whose business involves the production, purchase or sale of merchandise must account for beginning and ending inventory and may take a deduction for cost of goods sold. The amount is deducted from gross income on Schedule C to arrive at an amount for gross profit. Certain qualifying taxpayers or small business taxpayers, whose annual gross receipts are under the current tax year limit, do not have to account for inventories. Expenses may be deducted in the same manner as regular business expenses.
Ordinary and necessary business expenses not included anywhere else on Schedule C can be deducted in section V on the back page of the form. Expenses that fall into this category include amortization of allowable expenses, bad debts, business start-up costs, at-risk losses not allowed in the prior tax year, energy-efficiency costs, qualified disaster expenses, film and television production expenses, forestation costs and costs for removing barriers for the disabled and elderly. See the instructions for Schedule C for details on allowable deductions.
- Internal Revenue Service: Publication 1779 Independent Contractor or Employee?
- Internal Revenue Service: 2009 Instructions for Schedule C
- Internal Revenue Service: Expenses for Business Use of Your Home
- Internal Revenue Service: Schedule C Profit or Loss from Business
- U.S. House of Representatives, Office of the Law Revision Counsel. "26 USC 162: Trade or business expenses." Accessed Jan. 31, 2020.
- Internal Revenue Service. "Deducting Business Expenses." Accessed April 4, 2020.
- Internal Revenue Service. "Publication 535 (2018), Business Expenses." Accessed Jan. 31, 2020.
- Internal Revenue Service. "Publication 535 (2018), Business Expenses," Page 3. Accessed Jan. 31, 2020.
- Internal Revenue Service. "Publication 946 (2018), How To Depreciate Property." Accessed Jan. 31, 2020.
- Internal Revenue Service. "Publication 535 (2018), Business Expenses," Page 9. Accessed Jan. 31, 2020.
- Internal Revenue Service. "Publication 535 (2018), Business Expenses," Page 5. Accessed Jan. 31, 2020.
- Internal Revenue Service. "Publication 535 (2018), Business Expenses," Pages 45–48. Accessed Jan. 31, 2020.
Lara Lawrence has been writing professionally since 2008, with articles appearing in “The Pioneer East." Lawrence is a professional pianist and has been teaching piano for more than 20 years. She is a member of the National Federation of Music Clubs and holds a Bachelor of Science in business administration from Central Michigan University.