As a consultant, you’re simultaneously on the move while you share your acquired expertise with businesses of every stripe and size. Along the way, you’re likely to incur some expenses, many of which are tax-deductible.
This might strike the seasoned pro as obvious, but it’s worth repeating for every independent consultant reading this: If you’re a self-employed professional, no one is making tax withholdings for you. The silver lining, however, is that you can claim many expenses as deductions, thus lowering your tax burden.
After you finally find a quiet moment to sit still, you’ll list the majority of your deductions in Part II of your Schedule C (IRS Form 1040). If you have less than $5,000 in claims, you may be able to use Schedule C-EZ. Whichever you choose, both are due April 15 along with your annual tax return.
(NOTE: If April 15 falls on a weekend or holiday, it is observed the following Monday. In 2016, this means your taxes aren’t due until April 18. In Massachusetts and Maine, the delayed celebration of Patriot’s Day further moves the tax deadline to April 19.)
Transportation Expenses (Line 9)
Getting from Point A to Point H—and everywhere in between—can take a lot of your time as a consultant. That being said, you can deduct trips between meetings and other business-related trips throughout the day. You can’t, however, deduct the commuting portion of your day to or from home.
When it comes to using your personal car or your business’ company car, you have to choose between two methods of deduction: the actual expenses method or the standard mileage method. Here’s the difference between each choice.
Method 1: The Standard Mileage Rate
As a consultant, you value efficiency whenever possible. So, how better to streamline efficiencies than by consolidating costs into one single expenditure? The IRS agreed, so it offers you a tax deduction that pulls together deductible vehicle expenses into one single per-mile rate. After tracking your business mileage, multiply it by the rate set by the IRS for that year ($0.575 per mile for 2015). This includes:
- Lease payments
- Maintenance and repairs (e.g. oil, tires, etc.)
- Vehicle registration
Opting for the standard mileage rate means you can’t deduct any individual expense that it encompasses. Also, it should go without saying, but you can only deduct the miles spent as part of your business usage of said car. Here’s an example:
You drove a total of 10,000 miles in tax year 2015. Of that total, 6,000 were spent driving from meeting to meeting outside of your normal commute. When you go to claim your standard mileage rate deduction, you multiply 6,000 by 57.5¢, which equals $3,450.00.
An important note: If you’ve used the actual costs method for this car in the previous year (see below), you are not allowed to switch back to the standard mileage method. There are also a few other cases where you cannot use it: If you aren’t the owner or lessee of the car, or if you use five or more cars at the same time.
Method 2: The Actual Costs Method
The actual costs method means exactly what you think it does: You manually keep track of every cost you have related to your car. This includes gasoline, insurance, maintenance, depreciation, lease payments and more, which requires manually keeping good records and all receipts for each one. If you prefer a software-based solution, QuickBooks Self-Employed lets you track and organize expenses with the click of a mouse or swipe of a finger.
Costs written on receipts (e.g. gas, insurance) are easy, if not cumbersome to add up for the year. But the most complicated category for deduction is that of vehicle depreciation. Here’s how it works:
You buy a $25,000 car. Since the IRS expects its value to last past its first year, you can deduct that total value as a business-related depreciation expense spread across up to seven tax years. For the first year, a $25,000 car used entirely for business can claim a $3,571 depreciation deduction ($25,000/7 = $3,571) on the car’s first year of business operation.
The equation above was done using the “straight-line method,” which is the IRS’ preferred way of accounting for depreciation. There are also other methods, like the 200% declining balance or 150% declining balance, but the IRS generally prefers the straight-line method.
This might seem attractive for some self-employed individuals, but there’s a caveat: Once you use the actual costs method, you will not be allowed to use the standard mileage rate the following tax year. This is on top of meeting other requirements, such as weight and vehicle type restrictions.
There’s a lot of confusion that surrounds depreciation, and it’s not right for everyone. That’s why most people decide to use the standard mileage method. In fact, based on the above example, you could claim the same deduction amount by driving 6,210 miles. If that’s you, we suggest you stick with the standard mileage method.
Parking and Tolls
Visiting a client for business purposes and finding yourself having to pay for parking? That’s deductible. So are tolls. But if you’re taking a break for lunch for yourself, you cannot expense the parking, since it is not business-related.
The cost of public transportation is deductible, but must follow the same guidelines as car-related expenses. That is, you can’t deduct the commute to or from home. You can, however, deduct business-related trips made from worksite to worksite.
Deductible Costs of Doing Business
Advertising (Line 8)
You can deduct any materials you use to market your business. This includes not only the flyers and branded promotional items themselves, but also the cost of hiring someone to design and make them for you.
Just remember that “advertising” doesn’t apply to things like gifts, holiday party fare or anything that isn’t branded.
Business Insurance (Line 15)
The cost of insurance premiums related to running your business is entirely deductible. For consultants, this might include something like professional liability insurance or even insurance for your office.
This doesn’t include your own personal health, auto or disability insurance, however.
Cellular Phone Service (Part V, Line 45)
Can you hear the taxman now? Well, if you use your personal phone for business purpose, the business-use portion is generally deductible. To get the deductible amount, multiply your phone’s monthly cost by the percentage of time you use it for business purposes.
Contract Labor (Line 11)
If you made payments to independent contractors for things like logo design or content creation, those payments are deductible.
If you’re looking for where to list employee payment deductions, check out the “Wages” section below.
Health Insurance Deduction (Line 29 of Form 1040)
You can deduct the costs of your personal health insurance premiums as a self-employed person as long as you meet certain criteria:
- Your business is claiming a profit. If your business claims a loss for the tax year, you can’t claim this deduction.
- You were not eligible to enroll in an employer’s health plan. This also includes your spouse’s plan. If you were eligible to enroll in one and chose not to, you cannot claim this deduction.
- You can only claim premiums paid for the months when you were not eligible for an employer’s health plan.
Legal/Professional Services (Line 17)
Professional fees incurred by attorneys, tax preparers, accountants or other professionals can be deducted.
This deduction does not apply, however, to any employees that perform these services for you. They should be included under “Wages.”
Meals for Travel and Entertainment (Lines 24a and 24b, Respectively)
Meal deductions can be made either within the context of business travel or for entertaining a client. When traveling for business, you can deduct up to 50% of the meal expense, which includes sales tax and gratuity.
If you’re deducting meals as part of entertaining a client, you can still only deduct up to 50% of the cost. In order for the meal to be eligible for a deduction, it must be consumed with at least one client, and the meeting must include business either directly before, during or after the meal is consumed.
Self-Employed Contributions Act (SECA) Tax Deduction (Line 27 on Form 1040)
Traditionally employed professionals have what is known as a FICA tax that is split between themselves and their employers. But if you’re self-employed, you’re responsible for paying your own share of those Social Security and Medicare contributions, collectively known as SECA.
Supplies and Equipment (Line 22)
Any costs for normal replaceable supplies that you use in the course of your work can be deducted. For consultants, this could apply to common office supplies, such as paper, pens, etc.
Taxes/Licenses (Line 23)
Business taxes (e.g. your share of FICA if you have employees) can be deducted. Perhaps even more relevant, however, is that the various licensing fees you pay can also be deducted.
Note that self-employment taxes, however, are not deductible here (see “Self-Employed Contributions Act (SECA) Tax Deduction” above).