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For freelancers, and independent contractors it is always hard work: "To decide what things to write off as an independent contractor, for more savings on taxes." Although there is a misbelief that tax deductions are minimal and very few things are deductible, the truth is much simpler. You may be asking, what can an independent contractor write off? How much can you write off as an independent contractor? That's where the Lunafi app can help.
According to the IRS, to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
What can an independent contractor write off, in particular?There are still a few areas for the independent worker with particular limitations, including meals, entertainment, clothing, home offices, health insurance, and vehicle expenses. Here are the rules and limitations on things to write off as an independent contractor.
Meals with vendors and clients or while traveling for business are going to be deductible. Until 2021, it was only deductible at 50%, meaning if you spend $100, you are only going to get a $50 deduction.
However, The Consolidated Appropriations Act 2021, temporarily allows full deduction for business meals purchased from a restaurant which will expire at the end of 2022. So, you can deduct your business meal expenses up to 100% till then.
Self-employed people are often afraid to claim home offices because they have heard it raises a red flag. It may be true that it raises your audit risk some, but that does not mean you should not take it if you do it correctly. You may deduct the portion of your mortgage, rent, property taxes, utilities, and repairs that corresponds with the business use of your home.
This proportion is calculated by taking the portion of your home that is used regularly and exclusively for business divided by the total square footage. The IRS is very strict about the exclusive requirement; if the space you are calling an office is also sometimes used as a guest bedroom, it is unlikely to qualify as an office space. To fix this problem, claim the portion of the guest room containing a desk and computer instead of the whole guest bedroom.
Expenses for the independent worker using their vehicle for your business are overlooked by some people and exploited by others. There are two different options for deducting a vehicle expense.
Going for the standard mileage deduction method is much more simple. In this case, just record your total mileage for the whole year and determine the percentage of the mileage that is related to your business. Finally, multiply the total business mileage with the Standard Mileage rate. This rate is 56 cents per mile for 2021.
If you choose to claim the actual expense, you need to keep a record of the total amount you spend in the operation of your vehicle and multiply the amount with the business mileage percentage.
If you are not able to participate in the employer plan of a spouse or your family's health insurance plan, you can still claim self-employed health insurance for amounts you have to pay. Unfortunately, you can not deduct the amount you pay for self-employed health insurance as a normal business expense. This means it doesn't reduce your self-employment tax but still applies as an adjustment to your income tax.
You can write off all training related expenses like online course subscriptions, tuition, books, etc. as a business expense for your freelance business, only if the training is related to your job.
Entertainment expenses were used to be deducted at 50% like meals before. As of 2018, a new law passed, and entertainment expenses can not be deducted anymore.
There is a simple rule with clothing expenses. If you are paying for the clothes that you can only wear work like uniforms, safety goggles, etc., you can deduct those expenses. If you are paying for a pair of business suit to look more professional; however, you can not deduct it.
Knowing how much you can write off as an independent contractor and keeping these special rules in mind is one of the most overwhelming aspects of working as an independent worker or self-employed. Lunafi helps all independent workers and self-employed people get over this burden easily.
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