Independent contractors, also known as 1099 employees because their clients “control or direct only the result of the work, and not what will be done and how it will be done”, often benefit from using a CPA to help with accounting, preparing annual tax returns, estimating and submitting quarterly taxes, and tax planning. However, unless an independent business owner maintains adequate records, a CPA will be unable to help him or her maximize deductions. Therefore, it’s worth taking time to figure out what records to keep.
First, 1099 contractors should schedule a pre-planning meeting with their CPA to go over what records they need to keep to claim the maximum deductions possible. As part of that meeting, it’s a good idea to review the IRS’s Schedule C expense categories, which apply to the vast majority of 1099 earners. In discussing the categories with their CPAs, independent business owners may realize that they’ve been overlooking some deductions for years. “Advertising,” for example, may take many shapes and forms.
In the rush to finish up this year’s, or this quarter’s taxes, a separate pre-planning meeting may not be feasible. If that’s the case, contractors should at least briefly discuss record-keeping necessities going forward and inquire about tools and apps that will ease the record-keeping burden.
Finally, independent business owners should set aside a portion of one day to follow through on their tax professional’s recommendations. They should install helpful apps, practice with specified tools, measure and record the square footage of a home office, and set up a system that will capture necessary data as painlessly as possible.
Keeping that background in mind, the following is a list of selected deductions all independent contractors should seek to optimize. Like the Schedule C, this list is in alphabetical order.
Attending promotions, trade shows, and networking events, and donating to or sponsoring community fundraisers are good for an independent business’s image, and can all be written off as advertising expenses. In addition, business owners should include the cost of creating and distributing marketing materials such as old-school flyers and signs, as well as Facebook and other online advertising, in this category.
BUSINESS INSURANCE PREMIUMS
Most independent business owners require insurance, such as fire and flood, theft, errors and omissions (E&O), general liability, malpractice, and workers compensation. Although it’s virtually impossible to ignore a major expense like malpractice, other smaller-dollar types of business insurance like E&O add up too. Take note, though, that car insurance is covered under Car Expenses, Health insurance has its own category, and any other type of personal insurance is generally non-deductible.
Most independent contractors will fare better financially by claiming the standard mileage deduction (see Mileage). However, Uber drivers and others may benefit from deducting actual car expenses such as minor and major maintenance, leasing payments for a business vehicle, insurance, registration, parking payments, and tolls. Unfortunately, traffic tickets are non-deductible.
CELL PHONE SERVICE
Yes, this ubiquitous office-in-a-pocket is a legitimate tax write-off. Business owners who have one phone that does double duty for business and personal communication should determine the percentage of business use to deduct the business portion. Phone records of business calls, data usage of apps used solely for business, etc., can substantiate the business percentage. In actual practice, business owners track their usage for a typical week and then average that percentage out over the year. The IRS understands a cell phone is a necessary part of doing business, and it typically doesn’t quibble overestimated business usage.
CONTRACT LABOR COSTS
To keep the payroll as lean as possible, independent contractors often hire people on a one-off basis to perform services such as creating a website. These payments are tax-deductible. However, professional fees, such as those paid to a lawyer, have their own category, as do employee wages.
HOME OFFICE EXPENSE
Small business owners who maintain a home office need to identify the percentage of their homes used exclusively for business (for example, working at the kitchen table doesn’t qualify). The percentage can be determined by estimating the square footage of the dedicated office or workshop space as a percentage of the overall square footage of the home. Multiplying rent or mortgage payments and utility bills by the estimated percentage yields the total deduction. Alternately, independent contractors can use the simplified method of $5.00 per square foot of dedicated office space. Please note that the IRS caps the square footage for the simplified deduction at 300 square feet.
INTEREST (VEHICLE, OTHER)
Interest paid on business credit cards or lines of credit, as well as interest on a vehicle according to its percentage of business use, are fully deductible. To determine the business usage of a vehicle, contractors should calculate their business mileage, subtract that from the total mileage, and arrive at a percentage. For example, if a truck logs 50,000 miles per year, and 30,000 of those miles are work-related, the business usage percentage is 60%, so 60% of the interest on a truck payment can be deducted.
MEDICAL INSURANCE PREMIUMS (DEDUCT ON FORM 1040, NOT SCHEDULE C)
Although the spiraling cost of health care premiums is painful, at least many independent contractors can deduct the cost of health, dental, and long-term care premiums. All contractors should check with their CPAs to make sure they maximize this high-dollar deduction.
As noted in the Car Expenses section, some vehicle-dependent contractors may elect to deduct actual expenses. For most business owners with fuel-efficient vehicles, however, the standard mileage is reasonably generous, with the 2018 rate clocking in at 54.5 cents per mile. Mileage records should be carefully maintained either electronically or with a written log, and they should list the business reason for the trip. Mileage information is also useful to calculate the business usage percentage of a vehicle for Interest purposes (see that section).
REPAIRS AND MAINTENANCE
Repairs to maintain an item used in business can be deducted. The cost of fixing a computer or a copy machine qualifies, as does repainting an office. However, substantial repairs or improvements would be deducted under another category. Car repairs would go under Car Expenses, and significant upgrades would fall under Depreciation of Section 179.
Depending on the type of business, a business owner may spend a substantial amount on supplies, and most of them are deductible. For example, a cleaning contractor may write off the cost of mops, brooms, and cleaning products, while a dogwalker can deduct doggie bags. If these supplies are purchased frequently, the cost begins to mount. Note that Office Supplies have their own category, though, and those business owners who set aside some supplies for their personal use must deduct only the percentage used for business.
Most expenses related to business travel can be deducted. Such travel must be “overnight, away from your residence, and be primarily for business.” Business owners can deduct lodging, airfare, rental cars, and local transportation, but they must deduct meals in a separate category.
Although this is not an exhaustive list, business owners would do well to concentrate on keeping track of these expenses and any others identified in consultation with their tax professionals. A little diligence in maintaining records throughout the year will reap the rewards at tax time.
Finally, if you have any questions or would like to schedule a meeting, please feel free to reach out to Jeremy Hall, CPA at (214)402-2345 or schedule a meeting here.