Tax season is yet again upon us! That means if you’ve been working from home during the pandemic, there are some tax deductions you can (and should!) take advantage of! As an independent contractor at your disposal are the same tax deductions available to any small business. This time of year doesn’t have to be daunting or unhappy if you come to the “Tax Table” prepared with the knowledge of deductions that can save you a little on your tax bill.
In the USA, your taxable income is calculated as follows:
Total Income – Tax Deductions and Credits = Taxable Income
The more tax deductions or credits you have, the smaller your taxable income becomes, and the likelihood you may get a refund goes up, especially if your taxable income ends up being less than what you estimated at the start of the tax year!
This guide will be especially helpful for those who do consult, independent contracting, web and graphic design, and any gig economy work, like working for Instacart, Uber, or Lyft!
ChemiCloud is not tax professionals and is providing this information as a research tool for you. Please further investigate your tax options with a tax professional.
This topic can be really confusing and is often improperly calculated for independent contractors. In essence, the self-employment tax refers to taxes normally paid by an employer into the Medicaid and Social Security systems. If you’re self-employed, this responsibility falls to you, which means you would pay double, since you’re the employer and employee.
Here is how the tax rate breaks down:
- 6.2% Social Security tax on the first $128,700 of your taxable income.
- 1.45% Medicare tax regardless of your taxable income.
In 2018, the standard tax percentage for self-employed people was 15.3% + an additional 0.9% Medicare tax applied to certain situations.
You may be wondering, where’s the tax deduction? While you just have to pay double the self-employment tax, you now get to deduct half of that tax amount from your net income. Essentially, you have to pay taxes for being your own boss, but the IRS sees that extra cost as a legitimate business expense. On top of that, the self-employment tax is calculated on 92.35% of your net income, not your gross business income.
If you aren’t sure about the tax rate you should be paying, you should use a self-employment tax calculator.
Home Office Deductions
Did you know you can deduct a part of your home that is used regularly and exclusively as your primary place of business? This is true whether you rent or own your home or home-office space. This deduction operates on the honor system when you make the claim, so be honest should the IRS choose to audit you.
The home office expense is calculated based on the square footage of the home you use for your home office versus the square footage of the rest of your home. Because of this, it’s a pretty good idea to make a diagram of your home office space with accurate square feet measurements.
You really start to see savings when taking this deduction because the same percentage of square footage being claimed can also be applied to mortgage interest, depreciation of your home, property taxes, utilities, homeowners insurance, and home maintenance expenses, among other things. If you can’t find all the receipts in time for tax filing, you can also take a simplified deduction of up to $1500.
Use IRS form 8829, Expenses for Business Use of Your Home when filing your taxes with home office deductions.
Home Internet, Cell Phone, Laptops, and Accessories
Even if you opt not to take the home office deduction, you can still deduct the cost of home internet, cell phone, laptop, and other accessories you purchased when they are exclusively used for the purpose of your work from home job. You want to make sure you are only claiming expenses related to your gig work, however. This means if you use one phone for all your business but also use it for personal things, for example, you would claim the estimated percentage of time you use the phone for work unless you have a dedicated phone.
The same would be said for deductions applied to your internet and electric utility usage. You would only count the amount you consume of use for your job when deducting those expenses.
When it comes to more expensive items like laptops, cell phones, tablets, and other tech or software you’ve purchased to do your job, you have a choice on how to deduct the costs of these items.
You can spread out the deduction over a number of years for what the IRS considers shelf life for a specific item and deduct the depreciation. Or you can write off the entire cost of the item as a one-time itemization.
Rent for Your Studio or Workspace
If you have an office space outside your home or a studio you use for meeting clients, displaying your work, or anything you use for your gig/freelance / independent contractor work, you can deduct the amount space costs you on your taxes.
As a self-employed individual, you can also deduct any rent you pay for business equipment from your taxes, such as a fax machine or copier you may get on the lease.
It gets better, if you have to break a rental agreement and pay any fees, those fees are partially deductible as well. Just make sure you don’t own or partially own the property you’re renting!
When you’re starting your business, there are a lot of fees associated with these. The IRS typically requires you to deduct the larger start-up expenses over time as a capital expense, rather than a one-time expense, but deducting up to $5000 in business start-up costs is allowed.
Examples of these costs can include the research you performed, attorney fees, business license fees, and accountant fees for tax advice. If you set up a corporation (Inc) or LLC for your business, you can deduct up to an additional $5000 for the cost associated with organization expenses, such as state filing fees and any legal fees.
Keep in mind, the purchase of equipment or vehicles isn’t considered a start-up cost, but you can list their depreciation or amortize them as capital expenditures.
If you’re paying liability, property, or material insurance premiums, such as renters insurance, you can deduct your premiums as expenses. It’s super nice since the cost of protecting yourself is also a business expense!
Marketing & Advertising
Did you buy a billboard? Run a campaign on Google Ads and Facebook? What about business cards, flyers, and mailers? Anything you spent on services or materials for advertising your business is tax-deductible. Even costs associated with indirect advertising can be deducted.
Since in-person meetings and networking weren’t really possible this past year, you probably spent a lot of money on marketing and advertising.
Software & Apps
Did you pay for Slack, Salesforce, ZenDesk, OneDrive, Dropbox, Adobe Creative Cloud? Any software or app you use to design websites or manage your business can be deducted.
For many graphic and web designers, this is going to be one of your most-used tax deduction categories. Here are some examples of apps and services you can expense:
- Professional design software, like Adobe Creative Cloud or Affinity Apps.
- Stock content websites, like Adobe Stock and iStock Photo.
- Client onboarding tools, like Process Street and Tallify.
- Wireframing apps, like Sketch, InVision, and Figma.
- Cross-platform testing tools, like mabl, Browsershots, and Testize.
- Accounting and tax prep software, like Turbotax, Quickbooks, and Xero.
- CRM and Social Media apps, like Hootsuite, Sprout, ZenDesk, and LiveChat.
Payment Processing Fees
Do you have a service that enables you to take credit cards? If so, you’re probably being charged a transaction fee on each swipe to take that payment. What about clients who send wire transfers where you pay a fee?
Keep track of these fees as you can deduct them as the cost of doing business!
Professional Licenses and Memberships
If you need a license to operate your business or belong to any professional organizations or clubs that support your industry and enable you to network, you can write these off on your taxes. Unsure if your industry has a professional organization or community? Hint, it probably does! Check out a list of Professional Associations & Organizations by Industry.
Casualty and theft losses
If you suffered a loss in your business due to death, theft, vandalism, car accident, etc, you can deduct the dollar amount of the loss if it’s over $100. If you were unfortunate enough to have suffered more than one loss in the same tax year, you can deduct $100 from the dollar amount of each loss minus any funds received from your insurance company. Once you have the dollar amount, subtract the amount of whatever 10% of your AGI is. If there’s a balance, you deduct the value.
Here’s the math:
You suffered a loss of $8500. Your insurance company reimburses you $1200. Your AGI is 3600. So $8500- $1200 – $3600 = $3700 deduction.
Medical & Dental Expenses
The cost of healthcare in America is outrageous. Believe it or not, though, the IRS is very sympathetic to medical expenses! The standard write-off for medical and dental can only be taken if it exceeds 7.5% of your AGI. However, self-employed people who don’t have assistance with their health insurance premiums from the Government or a Spouse may be able to deduct 100% of your premiums. This amount is subtracted from your AGI rather than taken as an itemized deduction though.
You can also deduct premiums you paid to provide coverage for your spouse, dependents, or children who were younger than 27 (or 30 in some states) at the end of the year, even if they aren’t ‘dependents’.
Home Mortgage Interest & Other Interest
One of the biggest perks of being a homeowner is the ability to write off your home mortgage interest on your taxes. You can deduct the interest you incurred when you bought your home, built your home, or made real estate improvements. The mortgage interest deduction can only be taken if the homeowner’s mortgage is a secured debt, meaning they have signed a deed of trust, mortgage, or a land contract that makes their ownership in qualified home security for payment of the debt and other stipulations.
Additionally, if you took out a loan from a bank or credit union specifically for your business, the interest on the loan is tax-deductible. Keep in mind, though you can’t deduct credit card interest for personal purchases, you can if it applies to business purchases. Keep strong records or keep a separate card for business expenses if you find yourself unable to keep your records sorted.
Car expenses are one of the larger and more beneficial self-employment deductions you can take. Just make sure you keep an excellent record of when you use your car for business, including the date, mileage, and why/what you were doing. You have the option to calculate your deduction using either the standard mileage rate (which is adjusted every year by the IRS) or actual expenses. Most people opt for the standard mileage rate calculation because it involves less record-keeping, but the actual expense method can give you a larger deduction as its cost is based on the percentage of the driving you did for business all year, as well as the total cost of maintaining your vehicle, including things like oil changes, gas, registration fees, wipers, repairs, and your car insurance.
It’s common to combine a work trip with some personal pleasure so record keeping for business travel expenses is key here, especially if you get audited by the IRS.
A couple of things to keep in mind when using this deduction:
A trip must last longer than an ordinary workday, requiring you to get sleep or rest and do this away from the general area of your home.
To count as a business trip, you must have a specified business purpose planned before you leave home and you must actually engage in a work activity. Handing out business cards won’t cut it.
What counts as a real travel expense?
- Transportation (e.g. airfare, rental car, taxi, Uber, Lyft, etc). (100% deductible)
- Lodging (100 % deductible)
- Meals (50% deductible)
If you are claiming business expenses on trips where you also had pleasure activities, make sure your records are 100% clean!
It’s super easy to lose track and forget you did charitable donations because most people make several of them throughout the year. Believe it or not, those trips to Goodwill, the Salvation Army, local charity shops, and donations to local and national charities add up big time. Larger contributions, such as those valued at over $250 or more require a letter/receipt from the recipient for tax documentation purposes.
Keep a good log of any donations you make and ensure you get itemized receipts. You can also deduct the amount of mileage, cost of gas, and other expenses for donating your time and expertise.
Miscellaneous Business Expenses
There’s a lot of, how shall we call them, unique and creative business expenses that get overlooked or ignored because they seem like they don’t apply to your tax situation. The general rule of thumb, however, is if an expense for it exists at the IRS and it benefits your business, AND you can provide documentable evidence for it, you can write it off.
For example, if you’re a professional crochet artist, you can deduct the cost of yarn in your competitive entries, or if you own a cat cafe, you can deduct those little baggies you use to throw away the cats, well, unmentionables. You can even expense the cost of makeup if you’re a professional model!
As a taxpayer, you have the option to deduct state and local income taxes, and other local general sales taxes, from your federal income taxes. If you do pay state taxes, however, taking the sales tax break on your federal taxes could be financially beneficial if you make a larger purchase like an engagement ring or car. But because the standard deduction amount has increased over the years, it might be worth calculating both scenarios to see which will give you a better situation.
Earned Income Tax Credit
The Earned Income Tax Credit goes unclaimed by a lot of eligible taxpayers, like, a LOT of them. Most people don’t even know they qualify for it, and the amount can range from $510 to $6318, which could be a huge windfall for a lot of self-employed people.
If you want to lower your tax build now and build a tax-deferred investment haven, claiming after-tax dollars for a SEP, or Simple Employee Pension plan or contributing to an IRA (Individual Retirement Account) is definitely worth doing. However, one can be tricky to calculate because you need to understand what your “after-tax” dollar amount is, in order to claim, so be sure to check with a tax professional before you get too creative with this expense.
And there you have it, 20 deductible expenses to take advantage of when you do your taxes this year. As you can see, the professional expenses you encounter as a self-employed professional can do a lot more for you than you may realize. Keep in mind this advice comes pro-bono and you should check with a tax professional.