Certain entrepreneurs are classified as independent contractors by the IRS and may require additional tax advice to maximize their deductions. If you obtain a 1099 form during tax season, you are an independent contractor and must pay income tax as well as an additional self-employment tax to cover the Social Security and Medicare taxes withheld by most employers.
To alleviate this extra tax burden, independent contractors must claim as many deductions as possible to lower their taxable income, such as keeping records, tracking automobile expenses, and more. While the following is not intended to replace expert guidance — we recommend speaking with a tax professional before filing — here are some habits you may develop throughout the year to optimize your deductions as an independent contractor:
Monitor Vehicle Spending Tax records are vital for any small business owner, reducing stress, increasing deductions, and preparing you for potential audits. The IRS pays great attention to your personal vehicle use for business during an audit, so keep careful track of all your driving expenses.
Independent contractors can claim a flat standard mileage rate — a specified dollar amount for each mile travelled — of $0.625 per mile in 2022 when deducting auto expenditures. To use the regular rate, you must own or lease your automobile and meet specific IRS requirements, such as not running five or more cars for your business at the same time.
Another approach for tracking miles is to apply depreciation to every business-related mile driven on your vehicle. The IRS estimate of depreciation allows you to recoup the cost of utilizing your property for business purposes over time. This is the more difficult technique of spending tracking, although it can sometimes result in better deductions.
The IRS pays great attention to your personal vehicle use for business during an audit, so keep careful track of all your driving expenses.
You must log your mileage regardless of whether you claim accurate mileage or a flat rate. When keeping a corporate mileage journal, keep three pieces of information in mind:
Date of departure.
Business purpose, including client name and meeting reason (e.g., annual review or company event).
To and from addresses, giving kilometers from start to finish.
Apps like MileIQ and Trip Log have made it more easier to track distance in recent years. Don’t forget to include tolls and parking fees in your driving expenses.
Deductions for Home Offices
If a portion of your home is used entirely for business on a regular basis, you can deduct the expense of operating a home office. You can deduct $5 for each square foot of your home that is used as a home office (up to $1,500) or add up portions of the following and receive a standard deduction based on that amount:
Repairs to HOA dues
Lawn maintenance
Utilities for pest control
Mortgage payments
Property taxes
Insurance for your home
Documentation of Travel
Maintain all of your tax records, including proof of participation at any out-of-town business activities, for at least five years. Save your itinerary and other flyers or handouts from FFS events like Leaders Conference and Level Up – these serve as valuable records of the event for your deductions.
Keep track of spending on meals, housing, and transportation while on business trips. Again, keep track of the dates and locations of your travel, as well as the explanation or business advantage for each spend. Cleaning, laundry, telephone, and Wi-Fi are all deductible expenses.
Meals must be directly related to your business in order to be deducted, and they cannot be exorbitant. Businesses can generally deduct the whole cost of food purchased from restaurants in 2022. Before, the maximum was 50% of the meal’s cost — this restriction may be reinstated in the future, so be sure to check the IRS guidelines for each filing period.
Save all receipts and include the business purpose for the occasion, the money paid, the time and place, the type of entertainment (lunch, etc.), and the occupations of individuals joining you in your records.
Retain all of your records, including proof of participation at any out-of-town business gatherings, for five years.
Maintain Documents and Get Advice from a Tax Professional
When in doubt, save something for your records rather than throwing it away since you might need it later. Consult a tax professional before filing to verify you are filing correctly and maximizing your deductions – while these tax recommendations serve as a starting point for independent contractors, each tax situation is unique to the individual. Only a tax professional can understand the big picture and assist you in filing with confidence.