16 Important Tax Deductions for Independent Expat Contractors You Need To Know
As an independent contractor, you have the freedom to structure your business as you see fit, but this also means you are responsible for keeping track of your expenses and deductions. Sorting through all the possible tax deductions to reduce your federal income tax can be challenging.
As a 1099 employee, you likely want to claim as many business expenses as possible to maximize your savings. You may not have the same tax benefits as a regular employee but you still have plenty of deductions available to you. The U.S. tax code offers a variety of deductions to make working as an independent contractor more profitable. Understanding the deductions available to you and taking advantage of them strategically can save you hundreds or even thousands of dollars on your taxes each year.
What Qualifies as an Independent Contractor?
An independent contractor is someone who is in business for themselves. This means that you are not employed by one company and are not subject to their control.
An independent contractor is self-employed and provides services to clients. Your clients may be individuals, businesses, or both. The IRS also considers you an independent contractor if you are a freelancer or other self-employed worker.
What Taxes Do You Need to Pay as An Independent Contractor?
Being an independent contractor can provide a great deal of freedom and autonomy, but it also comes with several responsibilities. One such responsibility is taxes. As an independent contractor, you have to pay taxes just like everyone else. However, the type of taxes and the way in which you have to pay them can be quite different from regular employees.
So, what taxes do independent contractors have to pay?
This tax covers the Social Security and Medicare taxes that are generally paid by employees and businesses. As an independent contractor, you must pay both the employer and employee portions of these taxes. The tax rate for self-employment in 2022 is 15.3%, with 12.4% for Social Security and 2.9% for Medicare.
- Federal Income Tax
Just like regular employees, you must pay income taxes on any income you receive from your business. Your tax liability will be determined by your taxable income as well as other factors such as deductions and credits.
- State and Local Taxes
In addition to federal tax, you may also be required to pay state and local taxes, such as state income tax or sales tax.
Essential Tax Deductions for Independent Contractors
Here are some of the most important tax deductions available to independent contractors and freelancers:
1. Self-Employment Tax
This IRS allows you to deduct fifty percent of the self-employment tax from your net income. This is because the IRS considers the employer part of the self-employment tax to be a business expense and lets you deduct it as such.
2. Home Office
Whether you own or rent your home, you can take a home office tax deduction as long as it’s regularly and exclusively used for business purposes. With this deduction, you can deduct expenses for utilities, house repairs, and the maintenance of your home office. You may also be eligible to deduct rent, mortgage interest, and property taxes.
3. Internet and Phone Bills
As an independent contractor, your internet and phone expenses may be deducted if they are used for business purposes. However, the IRS requires you to deduct only the portion of these expenses that are directly related to your business activity. You can compute the percentage of time you use your internet and phone for business to see how much of those costs are tax deductible. For instance, you can deduct 60% of your internet cost as a business expense if you use the internet for work 60% of the time. This also applies to your phone bill.
4. Health Insurance & Medical
If you pay for your own health insurance, you can deduct the cost of the premium as long as you are not eligible for a plan through your spouse’s employer. You can also deduct the premiums you pay to cover your spouse, dependents, and children under the age of 26, even if they aren’t tax dependents.
5. Business Travel
If you take trips outside the general area of your home for business purposes, you can deduct travel-related expenses from your taxes. These expenses may include the cost of transportation, such as plane, train, or bus tickets, as well as taxis or rideshares during your trip. Baggage fees and car related expenses such as rentals and parking fees may also be deductible. Additionally, the cost of lodging may also be included.
6. Business Meals
The IRS allows you to deduct business-related meals as long as they’re reasonable and necessary, as well as directly tied to your business activities. You can deduct up to 50% of the total meal expense, including taxes and tips.
7. Vehicle/ Mileage Deduction
You can claim vehicle deductions when you use your car for business purposes, such as meeting with clients and attending seminars. To calculate your deductions, you can either use the standard mileage rate or the actual expense method. The standard mileage rate is a fixed rate per mile set by the IRS each year that is used to calculate the deduction for total business miles driven. On the other hand, the actual expense deduction involves tallying up all of the expenses related with driving a car for business purposes, such as gas, insurance, repairs, and depreciation.
8. Advertising
You can deduct advertising or promotion expenses directly related to your business. This includes costs associated with promoting and marketing your services to potential clients such as running ads in newspapers or online, sponsoring events or social media posts, creating business cards or flyers, and more.
9. Loan Interest
The interest paid on a bank loan is eligible for a business expense tax deduction. However, if you used the loan for both personal and business purposes, you could only deduct the interest related to the business portion.
10. Education
If you take courses or attend seminars to maintain or improve your professional skills, you may be able to deduct the cost of those expenses from your taxes. This could include the cost of tuition, textbooks, and any associated fees.
11. Start-up Cost
You may be able to deduct up to $5,000 in start-up costs associated with launching your business. These deductions can help offset the initial costs of starting your independent contracting work. Some tax-deductible startup costs include research and planning, advertising, location scouting, and professional fees.
12. Retirement Plan
Self-employment comes with the advantage of greater flexibility in selecting retirement plan options that suit your needs. Furthermore, you may qualify for tax deductions associated with your retirement plan contributions.
13. Professional Publications and Subscriptions
As an independent contractor, it can be important to buy publications and subscriptions to stay up to date with your industry and maintain professional skills. You can deduct expenses related to professional publications and subscriptions, such as trade publications, professional journals and magazines, online subscriptions, books and periodicals related to your work.
14. Office Supplies
You may be eligible to deduct the cost of business-related supplies and materials that are considered regular and essential. This contains copy paper, stamps, paper clips, and pencils. In addition, books, instruments, and equipment used during the year may be deducted.
15. Asset Depreciation
As a self-employed individual, you may be eligible for tax deductions for the depreciation of business-related assets. Depreciation is the gradual loss in value of an asset over time due to use or deterioration.
16. Dependent Care
If you pay for childcare for your dependent, you can deduct the cost from your taxable income. This deduction is available to independent contractors with a dependent who is under the age of 13.
The Bottom Line
The IRS provides a variety of options to assist both new and seasoned self-employed individuals in minimizing their tax liability. By identifying the expenses and deductions that are available, independent contractors can take advantage of them to lower their overall tax bill. After all, who wouldn’t want to reduce their tax burden?
If you’re unsure which tax deductions you can take or which approach to use, Tax Samaritan is here to help. Our experts have provided quality tax resolution services to expats since 1997. We ensure you don’t miss a single tax deduction so you can get the most savings from your taxes. Contact us today and get a free tax quote.