Your guide to independent contractor tax deductions

When you work for yourself, you’ll quickly realize how many expenses employers generally cover for their employees. Whether it’s office supplies, plane tickets, software, or even health insurance, every penny spent when you work for yourself comes out of your own pocket.

But here’s the silver lining: some of these business costs may be tax-deductible, allowing you to put your money to productive use in your business. If you’re not sure about the tax deductions you can claim as an independent contractor, you’re in the right place.

This guide dives into some of the most common potential self-employment tax deductions you could use to offset your independent contractor income. We’ll also cover crucial independent contractor tax information that you’ll need to be aware of, including forms and deadlines.

What does it mean to be an independent contractor?

According to the IRS, you’re an independent contractor if the payer — your employer/client — can only control the direct result of your work, not the nature of the deliverables or how you complete them.

Unlike an employee, you have control over your processes, procedures, and deadlines when it comes to completing your work. You also use your own software unless your client wants to provide it. 

Independent contractors often work on a project-by-project basis, taking a fixed fee per project completed. However, some contractors work on fixed monthly retainer fees, which resemble a fixed paycheck. Others work on performance or a mix of retainer and performance. Regardless of their payment structure, a good way to distinguish independent contractors from employees is through benefits. Employees typically get benefit packages, whereas independent contractors don’t.

Ultimately, independent contractors are business owners. Employees are not.

Independent contractor taxation

Since you’re a business owner, you’ll pay quarterly estimated taxes as an independent contractor. These cover the following:

• Self-employment taxes: Social Security and Medicare taxes, a.k.a. FICA taxes. You pay the employer and employee portions, totaling 15.3% of your net self-employment earnings. Employees, on the other hand, pay half that, or 7.65% of their earnings, since their employer covers the other half.

• Income taxes: These are the taxes applied to your taxable income that fund most other government programs.

You pay all these taxes as one lump sum. There’s no need to distinguish them when making payments.

Self-employed individuals generally have a higher tax burden than those who are employed, given the same income, since the former have to pay additional FICA taxes.

However, tax deductions can help offset some of that.

Essential tax forms for US independent contractors

There are several tax forms for you to keep track of as an independent contractor in the US. We’ll cover the broader ones here. Later, we’ll look at some forms specific to certain deductions.

Form W9

Form W9 allows businesses to keep records of US-based contractors they pay for tax purposes. 

Contractors working for a US-based company who must file information returns with the IRS during tax season need to provide a Form W9 to all their clients. This applies to contractors both in the US and abroad — as long as their client is US-based.

If you meet the criteria, you’ll have to file Form W9 at the start of your working relationship with your client.

You’ll need to provide all clients with a new Form W9 if:

• Your name changes, such as after a marriage or divorce

• Your business entity changes, such as from a sole proprietorship to an LLC

You do not need a new W9 if your address changes.

Forms 1099-NEC and 1099-MISC

Form 1099-NEC details all your non-employee compensation from a company (that’s what NEC stands for). It includes the total amount your client paid you over the tax year and any federal or state taxes they withheld.

You’ll get one Form 1099 from every US-based client that paid you $600 or more in the tax year.

Companies must file these forms by January 31 for the tax year that just finished, so you’ll most likely receive them in February.

This form was introduced in 2020 to replace Form 1099-MISC for independent contractor payments.

You may still receive a Form 1099-MISC if you have relevant taxable income, like rents or royalties. However, it is no longer used to report independent contractor payments.

Tax return

Form 1040 is the main tax return form where your taxable income and taxes owed or refunded are determined.

Schedule C, Profit and Loss From Your Business, is where you calculate your profit or loss from self-employment. It contains sections for your business revenues, writing off business expenses, and other relevant information.

Schedule SE, Self Employment Tax, is where you calculate your self-employment tax and your self-employment tax deduction.

All the information on these other forms eventually makes its way to Form 1040 to calculate your taxable income and taxes owed or your tax refund.

What expenses are tax-deductible for an independent contractor?

Self-employed people can take numerous potential deductions since they foot the bill for their business expenses.

Home office expenses

If you work from home, you can deduct the cost of your home office to reduce your taxable income. There are two methods for calculating your home office deduction.

The Regular Method involves multiplying a home office percentage by your total home office expenses.

First, calculate your home office space as a percentage of your home’s total space.

For example, let’s say you have a 2,500-square-foot house. Your office is 100 square feet: 100 / 2,500 means your home office is 4% of your home.

Next, keep records of all qualifying expenses. These include things like:

• Mortgage/rent

• Utilities

• Internet

• Renters/homeowners insurance

• Property taxes

Let’s say these total $30,000 at the end of the tax year.

$30,000 in expenses ✕ your 4% home office percentage = a $1,200 deduction.

The Simplified Method is much easier, but usually results in a smaller home office deduction.

Here’s the formula:

IRS-defined $ per square foot amount ✕ square footage = deduction.

For 2023, the deduction amount was $5 per square foot.

Using our previous numbers, $5 per square foot X 100 square feet = a $500 deduction — that’s much less than the deduction from using the Regular Method. Plus, the Simplified Method caps your deduction at 300 square feet.

Self-employment taxes

You may have to pay more in self-employment taxes, but you can also deduct half of them from your income.

First, calculate your self-employment tax. Then, multiply your net self-employment earnings by 92.35%.

Net earnings are gross earnings minus allowable business deductions — essentially, your profits from your independent contractor work.

Multiply the result by 15.3% (the self-employment tax percentage). Then, multiply that result by 50% to get your self-employment tax deduction.

This calculation may be confusing, so work with a tax expert if you need help.

Health insurance premiums

Independent contractors may qualify to deduct 100% of premiums paid for health insurance to cover themselves, their spouses, their dependents, and their nondependent children.

Your deduction cannot exceed your business income.

Also, you can’t take this deduction if you have access to an employer-sponsored health plan.

For example, if you work full-time but are self-employed on the side and your job offers health insurance, you likely won’t be able to purchase an external policy to get a deduction.

Similarly, if you are self-employed full-time, but your spouse’s workplace health plan can cover you, you can’t deduct an external policy’s premiums from your taxes.

Retirement contributions

Contributions to your self-employed retirement account may be tax-deductible, helping you save for retirement.

There are several account types, each with different requirements, limits, and other factors to keep in mind:

• Traditional/Roth IRA

• SEP IRA

SIMPLE IRA

Legal and accounting costs

If you hire an accountant to do your books or handle your taxes, their fee may be tax-deductible.

Only the amount paid for business bookkeeping and business tax matters, though. Any fee paid for personal help is not deductible.

Same story with a lawyer. Business matters, such as drafting agreements or advising on business structure, may be tax-deductible. Personal legal matters, however, are not.

Startup costs

The IRS lets you deduct up to $5,000 in startup costs for the first year of business.  These costs can include things like:

• Market research

• Traveling to find a location

• Legal and filing fees for business structure

• Legal help with setting up the company

Travel expenses

Business-related travel may be tax-deductible. Examples of legitimate travel purposes include the following:

• Meeting clients

• Gaining customers

• Learning new business skills

Other travel expenses you can potentially deduct include the following:

• Hotels/lodging

• Plane tickets

• Transportation (only at the destination)

• Wi-Fi purchased for business use (such as work completed while on a plane)

  

Business meals

You can deduct 50% of the cost of business meals. This deduction was 100% in 2021 and 2022, but it returned to 50% for the 2023 tax year and on.

Meals must be eaten while at a restaurant. You can’t deduct grocery store purchases used to prepare meals.

Meals also can’t be lavish or extravagant. The IRS says, “an expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.”

You must use your best judgment since there is no hard guidance. For example, grabbing lunch during a visit to a client will likely qualify. However, purchasing several bottles of particularly expensive wine during a business meal will likely not.

Vehicle use

Using your vehicle for business might be tax-deductible.

There are two ways to deduct costs related to vehicle use:

• Simple method: You deduct an IRS-specified amount per mile. The standard mileage rate changes yearly. This year, it’s $0.67 per mile driven. Keep records of trips and miles.

• Actual expense method: Track and keep records of costs like gas, oil changes, maintenance, depreciation, and insurance. This is much more complicated than the simple method, so check with a tax professional to see which option would work best for you.

Loan/credit card interest

Interest incurred on business loans and business credit cards could be tax-deductible. This can make it easier to afford financing for your business.

If you use a loan for business and personal use, you can only deduct the interest accrued on the portion used for business purposes. The same thing goes for credit cards — only interest accrued on business purchases is deductible.

This may require some math to figure out. Working with a tax professional can help.

That said, it’s best to separate business and personal spending to avoid complicating your situation.

Independent contractor tax filing deadlines

Independent contractor tax filing and payments involve a little more work than employee taxes.

Quarterly tax deadlines

Estimated taxes are four times a year. You must save some of your self-employment income to make that quarterly payment.

Here are the deadlines:

• April 15: Income for January through March

• June 15: Income for April through May

• September 15: Income for June through August

• January 15: Income for September through December of the previous year

If any of these falls on a weekend or legal holiday, the due date moves to the next business day.

Technically, you file Form 1040-ES with your quarterly payment. However, the IRS offers an online payment option through its EFTPS system.

Some bookkeeping software platforms may connect to EFTPS for easier tax payments, too.

Personal income tax filing and payment

The income tax filing and payment deadlines are the same for independent contractors and employees.

You must file your return by April 15. If you owe tax, you must pay it by then as well.

If April 15 is a weekend or legal holiday, the deadline will move to the next business day.

If you can’t file by April 15, you can file Form 4868 before April 15 for a six-month filing extension.

However, this does not extend your payment deadline. You must pay taxes owed by April 15 to avoid penalties, even if you can’t file by then.

State and local filing and payment

State and local filings and payments vary. Some may differ from the federal deadlines. Their forms may be different, as well, not to mention that different states and localities have different tax codes and, thus, unique tax forms. 

Check with your relevant tax authorities and work with a professional to ensure state and local taxes are filed correctly and on time.

Manage your independent contractor business easily with Remote

Independent contracting gives you more freedom and flexibility than a traditional gig as an employee. However, more freedom means responsibility over your business expenses.

Fortunately, you can potentially deduct many of these against your income to cut your tax bill. But you also have to track all these expenses and your income.

From writing contracts to tracking invoices, it can be challenging to keep track of it all as an independent contractor. If you’re looking for an easy way to manage your business, check out Remote’s Freelancer Hub. You can manage your invoices, track your income, and more, all from one place. Sign up for free today. 

Contractor Management —

6 min

Independent contractor taxes: a guide for businesses

If your business works with independent contractors, it’s important to understand what your tax obligations are. Here’s what you need to know.