June 5, 2019 Taxes en_US Self-employed contractors and construction workers can write off many expenses on their taxes. Our list of contractor and construction tax deductions has them all. https://quickbooks.intuit.com/cas/dam/IMAGE/A0V7HRhRR/bba07819e1bbc3c8f823465be16798fd.jpg https://quickbooks.intuit.com/r/taxes/expenses-tax-deductions-1099-contractors 13 common expenses and tax deductions for independent contractors
Taxes

13 common expenses and tax deductions for independent contractors

By Chris Scott June 5, 2019

As an independent contractor, you’re responsible for paying self-employment tax on any income you make. Self-employment tax can come as a shock, especially when filing your first tax return as an independent contractor.
The IRS defines independent contractors as those who “offer their services to the general public” and whose services are not controlled by an employer. Independent contractors can include:

  • Rideshare service drivers, like Lyft and Uber drivers
  • House cleaners and maids
  • Consultants
  • Construction workers and contractors

Self-employed workers are unique because they don’t have taxes withheld from their paychecks like traditional employees. Because of this, the Internal Revenue Service allows self-employed professionals to claim deductions for work-related expenses, which helps lower their tax burden.

Thus, when working as an independent contractor, it’s vital that you track your business expenses. Doing so can net you a significant reduction come tax time. When you file your tax form for the year, you’ll want to complete a Schedule C. You’ll likely list the majority of your deductions in Part II of your Schedule C (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 15th along with your annual tax return.

Below, you’ll find a breakdown of common expenses and tax deductions for independent contractors. You’ll also find some industry-specific expenses, which could impact Uber taxes and other similar self-employment taxes.

Common Business Expenses

There are a few business expenses that tend to be useful for a wide array of independent contractors. Many of the most common tax deductions are travel expenses.

You can indicate these expenses on your Schedule C. In the information that you’ll find below, any reference to “lines” indicates where you can find the specific expense on the Schedule C.

Car-related expenses (line 9)

The use of a car to travel from work site to work site is deductible. No matter if you’re using a personal car or one that you purchased exclusively for your business, you have two methods of deduction to choose from: the standard mileage method or the actual expenses method.

Method 1: the standard mileage method

The standard mileage rate lumps ordinary expenses together and allows you to deduct a single price per mile. This is by far the simplest method. You track your business mileage and then multiply the total number by the rate set by the IRS for that tax year. The IRS mileage rate for 2019 is 58 cents per mile. This is the standard mileage deduction for all independent contractors.

Opting to use this mileage deduction could be useful if you put a lot of miles on the car. However, it prevents you from deducting other misc expenses that you put into your car, including:

  • Lease payments
  • Insurance
  • Maintenance and repairs (e.g., oil, tires, etc.)
  • Vehicle registration
  • Depreciation

The IRS mileage rate for 2019 of 58 cents per mile is supposed to be high enough that it accounts for these expenses. So, you cannot deduct these expenses separately. Additionally, you can only deduct the business miles, not the personal miles, from the use of a car. Here’s an example:

You own a car and drove a total of 18,000 miles for the year. Of those, 11,000 were business miles driven as a rideshare driver for Uber or Lyft. Because you are only allowed to deduct the business use of your car, you can only deduct those 11,000 miles. That would be 11,000 x 58 cents, which equals $6,380.00. You cannot expense the 7,000 personal vehicle miles on your mileage log, but you can deduct $6,380 from your Uber taxes for business purposes.

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 business standard mileage rate. There are also a few other cases where you cannot use it, including:

  • You aren’t the owner or lessee of the car
  • You use five or more vehicles at the same time

We should also note that the IRS issues optional standard mileage rates that vary for different industries. For instance, charitable organizations can deduct 14 cents per mile, while those with moving expenses for a new job can deduct 20 cents per mile. Because these mileage reimbursement rates can vary, you may want to double-check with a tax professional before filing your taxes.

Method 2: the actual costs method

In this method, you keep track of the variable costs you pay for your car. These vehicle expenses can include gasoline, insurance, maintenance, depreciation, lease payments, and more. Keeping track of expenses this way can be significantly more challenging, and you’ll need to be diligent about hanging onto receipts.

Financial software like QuickBooks Self-Employed can also help keep track of these expenses and automatically classify them as deductions, making it easier for you to take a write-off on your Schedule C and to deduct expenses related to your Uber taxes.

As part of your actual cost car deductions, you can deduct depreciation. Depreciation is a portion of the actual costs method that tends to cause a lot of confusion. Depreciation is when you apply portions of a single expense over a prolonged period.

For example, say your automobile cost is $10,000. Your car doesn’t provide all its value in the first year, because you’ll own it for longer than that. It gives you value for the entire time you have it, which means you’ll have to account for its depreciation manually.

The easiest way to calculate your depreciation for the year is by using what’s known as the Modified Accelerated Cost Recovery System. However, if you’ve used the standard mileage rate at some point and then switched to the actual costs method, you’ll need to use the “straight-line” depreciation method.

If you depreciate a $10,000 car over seven years (the maximum number of years the IRS has set for car depreciation), that’s $1,428 per year of depreciation expense. There are also other methods, like the 200% declining balance or 150% declining balance, but the IRS generally prefers the straight-line method.

A tax professional or accounting software can help you track vehicle depreciation. Depreciation is perhaps most relevant for ridesharing independent contractors, such as those paying Uber and Lyft taxes.

Because of depreciation calculations and expense tracking, the actual costs method can be confusing, which is why many people opt to use the standard mileage method instead.
Additionally, once you use the actual costs method, you will not be allowed to use the standard mileage method when paying Uber and Lyft taxes the following tax year. After using the actual costs method, you are locked into doing so for the lifespan of the vehicle.

Parking and tolls (line 9)

In addition to either of the mileage deductions outlined above, you can expense parking fees and tolls that relate to business driving and your Lyft taxes. Even if you elect to use the actual costs method to calculate business expenses, you can still deduct parking and tolls.

For example, if you’re picking up a client and have to pay for parking while you wait for them, you can deduct that parking expense. But if you’re taking a break for a personal lunch, you cannot expense the parking because it’s not business-related.

Public transportation (line 9)

If you travel from job site to job site via bus or train, you’re in luck. The cost of public transportation is deductible. You can’t deduct your commute to or from home. However, you can deduct your transportation from one work site to another.

Self-employment (SE) tax deduction (line 27 of Schedule 1)

Employed professionals are subject to a FICA tax that is split between themselves and their employers. But if you’re self-employed, you’re responsible for paying the full share of those Social Security and Medicare contributions, collectively known as SECA.

However, unlike employees, you can claim a SECA deduction on Line 27 of Schedule 1.

Health insurance tax deduction (line 29 of Schedule 1)

As a self-employed person, you can deduct the cost of your personal health insurance premiums as long as you meet these criteria:

  • Your business is claiming a profit. If your company 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 to cover your medical expenses. 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.

Cell phone (Part V: line 48)

If you pay for a phone and data plan, you can write off the business portion of this cost. The IRS allows you to use your judgment when calculating this number.

Let’s say you pay $50 per month for your personal cell phone use. After joining a ridesharing company, you decide to upgrade to a $100 per month data plan, since you’ll be using their app and your data plan more often. You have a good case for writing off the extra $50 per month because you wouldn’t have purchased the larger data plan if you hadn’t started this new business.

Industry-specific expenses

There are also some deductible costs that could be specific to a particular industry. So long as you can prove that you used a product or service for your business, you can potentially take it as a tax deduction.

Rideshare drivers

We previously detailed how to track business expenses for your car. However, there are some other deductions that rideshare drivers could take to lower their tax payments.

Food for passengers (line 24b)

You can write off refreshments for customers, such as bottled water, mints, snacks, and gum.

Car interest payments (line 16b)

You can write off the interest on your car loan payments. Like all expenses, however, you can only write off the business portion. So, for instance, imagine you have an interest payment of $100 per month. Let’s say 60% of the mileage you put on your car is related to your work as a Lyft driver. The other 40% is personal use. You’re permitted to deduct 60% — or $60 in this case — as a business expense.

House cleaners and maids

Much like how rideshare drivers can deduct food and water expenses, house cleaners and maids can deduct supplies as well. They can also deduct business insurance premiums.

Business insurance (line 15)

The cost of insurance premiums related to running your house cleaning business is entirely deductible. This can include contractor general liability insurance, property insurance, and others. This doesn’t include your personal health, auto, or disability insurance, however.

Supplies (line 22)

Any costs for standard replaceable supplies that you use in the course of your work can be deducted. For house cleaners and housekeepers, this can include cleaning supplies like solvents, rags, gloves, and more.

Consultants

Consultants must build their brand and secure work, which can result in them deducting a lot of advertising costs and other professional services.

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 else that isn’t branded.

Contract Labor (line 11)

If you made payments to independent contractors for things like logo design or content creation, those payments are deductible.

Legal and professional services (line 17)

Consultants can deduct professional fees incurred by attorneys, tax preparers, accountants, or other professionals. This deduction does not apply, however, to employees that perform these services for you. They should be included under “Wages,” detailed below.

Wages (line 26)

If your consulting business includes employees, then their wages can also generally be deducted. This consists of any salaries, commissions, or bonuses.

This does not apply to any employee benefits you provide, which can be deducted separately on Line 14. It also does not apply to any salary you pay yourself.

Meals for travel and entertainment (lines 24a and 24b)

You can make meal deductions either within the context of business travel or when 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. For the meal to be eligible for a deduction, it must be enjoyed with at least one client, and the meeting must include business either directly before, during, or after the meal is eaten.

Construction workers and contractors

If you operate a construction company, there are a few deductions you’ll want to consider.

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 the fact that you can deduct the various licensing fees that you pay. It’s worth noting that you can’t deduct self-employment taxes here.

Keep track of your business expenses

One of the most significant mistakes that self-employed individuals make is not tracking their business expenses throughout the year. They may receive a Form 1099-MISC indicating that they owe state and federal tax, at which point they scramble to remember their business expenses from the past year.

Make sure you’re in the driver’s seat by tracking all of your expenses and keeping reliable documentation throughout the year. QuickBooks Self-Employed makes it a breeze to track mileage and other business expenses.

Want more tax-time tips or tax advice? Read our guide to taxes for the self-employed and our complete list of self-employed expenses and tax deductions. With Quickbooks, you’ll find that tax preparation has never been easier.

Chris Scott

Chris Scott is a digital marketing consultant and freelance writer. He enjoys writing about personal finance and saving. He graduated from the University of Maryland with a degree in Finance and currently resides in Boston, MA. Read more