You're an independent contractor “if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done,” as defined by the Internal Revenue Service. You're self-employed. You don't work for or report into an employer.
Independent contractors who earn more than $600 for work performed during the tax year will receive Form 1099-MISC after year's end from each client or entity who paid them at least that much. Use this form to file your tax return, but don’t forget to offset your tax burden by claiming allowable deductions.
Deductible Office Space
You can deduct the rent paid for your office as long as the amount paid is reasonable, you use the property to conduct business and you're not receiving equity or title for the property.
You can deduct costs for the business-use percentage of an area in your home if you use a separate room or an identifiable area of your home for a workspace. The area must meet IRS standards for “regular and exclusive use” and “principal place of your business” requirements. This means that you don't use the area for any purpose other than work, and you run your business from that location even if you leave to perform services elsewhere.
You have two options for calculating the amount of your deduction for home office space. Multiply your overall household expenses by the percentage of the area of your home that's used solely for business. Your deduction for the year would be $4,500 if you spent $30,000 to maintain your home for the year, including costs for mortgage or rent, utilities, and insurance, and if your work area takes up 15 percent of your total square footage: $30,000 times .15 equals $4,500.
The IRS also allows you to calculate this deduction using the simplified method: $5 per square foot of space used for work up to 300 square feet. This option might be easier, but it often works out to less of a tax deduction.
Read more: Guide to Home Office Deductions
Equipment and Supplies
The money an independent contractor spends to take care of business can often be claimed as a deduction on their tax return. This includes office equipment and furniture, such as printers, computers, laptops, chairs, file cabinets and desks.
You can claim the full amount as a 179 deduction, depreciate these costs over a number of years or break up the expenses between both. You can deduct the cost of smaller business supplies, such as paper, pens, ink cartridges, folders and mailing supplies from your total income.
Travel and Car Deductions
You can claim a deduction for travel expenses if you must travel to perform your service, to meet with customers, to distribute your product or to attend an educational class pertaining to your business. Acceptable travel expenses include transportation to and from the destination, baggage fees, airfare, tolls paid and parking fees, as well as meals and accommodations.
You can deduct either your actual car expenses equal to the percentage of the time you used it for business purposes, or you can use the IRS standard mileage rate for the miles driven. The rate is adjusted annually to keep pace with inflation. It's 56 cents per mile in tax year 2021, the year for which you'd file a tax return in 2022.
Both methods require keeping a log of your miles driven for purposes of business as opposed to personal reasons. You might have put 24,000 total miles on your vehicle in 2021, but your tax deduction is limited to 10,000 miles if you drove 14,000 of those miles for personal reasons.
Just as with the home office deduction, you would multiply the applicable percentage of business use against your overall auto expenses. Maybe you spent a total of $4,800 on fuel, maintenance and auto insurance over the course of the tax year. Your deduction would be $1,920 if you drove 40 percent of your miles for business purposes: $4,800 times .40 equals $1,920. Or you could claim the standard mileage rate for those 10,000 miles instead. It would work out to $5,600: 56 cents times those 10,000 miles you drove for business reasons.
How to Claim Business Your Deductions
Claiming any of these deductions or others that are available to independent contractors requires filing Schedule C with your Form 1040 tax return. Enter the full details of the income you earned for the year in Part I. You can then claim your expenses line by line in Part II. The tax form provides a full list of all possible deductions you might be able to claim. You can then subtract the total of your expenses from your total gross income to arrive at your taxable income, the portion on which you'll have to pay tax.
- Internal Revenue Service: Independent Contractor Defined
- Internal Revenue Service: Forms and Associated Taxes for Independent Contractors
- Internal Revenue Service: Deducting Business Expenses
- Internal Revenue Service: Publication 334, Tax Guide for Small Business
- Internal Revenue Service: Publication 535, Business Expenses
- Internal Revenue Service: Publication 587, Business Use of Your Home
- Internal Revenue Service: Publication 463, Travel, Entertainment, Gift and Car Expenses
- Internal Revenue Service" Topic No. 509 Business Use of Home
- Internal Revenue Service: IRS Issues Standard Mileage Rates for 2021
- Internal Revenue Service: 2021 Schedule C Profit or Loss From Business
Diane Dilov-Schultheis has been writing professionally since 2000. She is a food and travel writer who also specializes in gaming, satellites, RV repair, gardening, finances and electronics. She is a member of the Society of Professional Journalists and has been published online at the Travel Channel and Intel.