Is it time to file our taxes again? Every year, whether we like it or not, the tax man rears his ugly head this time of year. It’s an even worse time of the year if you’re self employed. Not only does an independent contractor have to pay federal income tax, but they must also pay self employment taxes.
If you received Form 1099-misc from a company you did some freelancing work for, you are considered an independent contractor and must pay taxes on those earnings.
Unfortunately as a self employed independent contractor you’ll need to pay more taxes than a salaried employee. But the only upside is that you can also claim more deductions, thus reducing your tax obligation.
Here are 4 such tax deductions independent contractors can take this year.
An independent contractor can deduct many business related expenses. This includes costs such as:
- Equipment. You can deduct the cost of a new computer, printer or other equipment that you use for work.
- Supplies. Office supplies count too so that would include paper, ink, tape and staples for example.
- Advertising. Did you pay for any ads to advertise your services? Whether it was a print ad or Facebook advertising, the costs are fully deductible.
- Office. If you rented some office space then you can deduct all of those monthly rent payments which can really add up.
- Learning. If you wanted to expand your education in your field and take some classes, buy some books, get some tutoring or professional help, you can also deduct those fees as well.
Health Insurance Premiums
Another item you can deduct if you’re self employed is the cost of your health insurance premiums. This is extremely helpful if you aren’t eligible for health insurance from your spouse’s employer and have to shell out a costly monthly premium on your own.
If you have Medicare you can deduct what you pay for Medicare Part B, Part D, the cost of medigap or a Medicare Advantage plan. You’ll find the deduction on your 1040 form and not on Schedule C.
Home Office Expense
Independent contractors are able to claim a home office deduction. You may do this if you use a part of your residence exclusively for work purposes.
A simplified way of taking the deduction is to deduct $5 for each square foot you use for work. The maximum tax write off is 300 square feet or $1,500.
The slightly more complicated way uses a percentage of the house you use for business and takes into account the actual expenses you have.
If you are self employed you may be able to make tax deductible contributions to your retirement account. This is perhaps the most impactful tax deduction. The government is essentially helping you find your retirement account.
By setting up an individual 401k plan you can contribute and thus deduct a substantial portion of your income and shelter it from the tax man. If you also have a regular job in addition to your side hustle, it’s an excellent way of funding a retirement account.