Top 10 Tax Deductions That Independent Contractors Can Claim

If you’re a gig worker, sole proprietor, or any other type of independent contractor, there are some tax deductions you need to know about. We all know that tax time can be brutal for the self-employed worker, as you don’t have an employer to share the tax burden. Still, if you keep close track of your business expenses, you can significantly reduce your taxable income and maximize your refund when April 15th rolls around. 

The following deductions are not intended as tax advice (everyone’s situation is unique and should be considered with the help of a tax expert), but hopefully they should give you a general idea of the deductions for which you may qualify. 

1) Self-Employment Taxes 

The self-employment tax comprises both the Medicare and Social Security taxes. This 15.3% tax can be burdensome for a self-employed individual, as you have to pay the full amount yourself. W2 employees, by contrast, have half of their Social Security and Medicare taxes covered by their employer. 

Luckily, the IRS views this tax as a business expense, so you can deduct half of your self-employment tax from your net income. If you make $50,000 in self-employment income, your self-employment tax would amount to $7,650. That means you could deduct $3,825 as your self-employment tax deduction. 

2) Home Office 

If you work from home as an independent contractor, and you have a space that you use exclusively for your business, you may qualify for the home office deduction. It doesn’t matter if you rent or own your home; it qualifies as long as your home is your principal place of business. 

There are multiple ways to calculate your home office deduction. The simplest way is to measure the square footage of your office space (no more than 300 square feet) and multiply the square footage by five—$5 per square foot. You can deduct a maximum of $1,500 for a 300 sq. ft. office space. 

3) Phone and Internet Usage 

If you use your mobile phone and internet to conduct business, you can deduct the portion reserved for business use. For instance, if you pay $200 a month for your home internet, and 50% of your internet usage is work-related, you could deduct $1,200 for the year. Your phone deduction works the same way. 

Do not deduct the cost of your home’s primary landline if you have one. If you have a second landline reserved exclusively for business use, you can deduct the full cost as a business expense. 

4) Car Expenses

This is a big one for rideshare drivers and anyone who uses their vehicle as part of their business. The catch is that you have to keep meticulous records of each business-related trip, including the date, mileage, and reason for travel. 

You can calculate your deduction based on your actual expenses, or you can use the IRS’s standard mileage rate, which changes from year to year. In 2023, for example, the standard mileage rate is $0.655 per mile. The standard mileage rate is the easiest way to calculate your deduction, as you just have to multiply the total number of miles traveled by the annual rate. 

5) Business Travel Expenses

Business travel expenses have specific requirements. You must leave your standard business location (typically to another city, state, or country). You must be traveling for longer than a standard workday. You must have a specific pre-planned business purpose. Most importantly, you must engage in activities related to your business. 

If your travel meets all of the necessary criteria, you can deduct 100% of the cost of your plane, train, or bus tickets. You can also deduct the cost of any rental cars or other transportation. 

6) Meals

Certain meals are also tax-deductible. For instance, if you’re dining out on a business trip, at an industry convention, or with a client, you can deduct 50% of the meal’s cost (if you keep the receipt) or 50% of the standard meal allowance. 

Note that entertainment expenses are not tax-deductible even in the course of business (sorry, that client golf trip no longer qualifies), and tax-deductible meals cannot be extravagant.

7) Education Expenses 

You can deduct the cost of your education as a business expense so long as the intended purpose is to improve or reinforce the skills related to your existing business. So if you run a management consulting business, you could deduct the cost of any education related to management, leadership, or business administration, but you cannot deduct the cost of a music production class. 

As you calculate your standard deductions, you can also deduct the interest paid on any student loans up to $2,500. 

8) Business Loan Interest 

Interest paid on a business loan also qualifies as a tax-deductible business expense. If a loan is used for both business and personal expenses, you’ll need to determine the percentage of the loan that’s allocated toward your business and calculate your deduction accordingly. 

As with student loan deductions, the amount that you can deduct is determined only by the amount of business interest paid or accrued. It does not apply to the principal. 

9) Insurance 

If you pay for business insurance and/or health insurance premiums, you can deduct your total insurance cost as a business expense. Because many independent contractors have to cover their own healthcare costs, the medical allowance can be especially advantageous. 

Your car insurance may also qualify. If you use your car for your business, you can deduct at least part of your insurance premium. However, if your vehicle is used for both business and personal use, you can only deduct according to the amount of business usage. So if 50% of your driving is for your business and 50% is for personal commutes, you can deduct 50% of your car insurance premium. 

10) Startup Costs 

If you’ve just started a new business within the last year, you can deduct up to $5,000 in startup costs. 

That includes the cost of starting an S-corporation or LLC, the cost of market research, the costs associated with advertising and attorney fees, and the costs for business consulting. As always, make sure to keep a detailed record of every expense.

Make the Most of Your Deductions and Reduce Your Tax Bill 

One distinct advantage of being an independent contractor is that you can deduct all of your business expenses even if you take the standard tax deduction. While employees are extremely limited in the deductions they can claim, independent contractors can essentially subtract any costs directly related to their business. 

When calculating your tax deductions, be sure to consider state-level deductions as well. For instance, we have a comprehensive list of Florida tax deductions that can help you save money if your business is incorporated in Florida, and many other states have their own deductions as well. 

So make sure you’re getting the most value at tax time. Keep your receipts, work with a tax planning expert, and get the tax deductions you deserve.