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1099-MISC: Business Expenses for Independent Contractors

June 21, 2016
Income Taxes, Personal Taxes, Taxes
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If you work as a freelancer, consultant or contractor — even as a side gig — your tax situation is more complex than that of someone who draws a regular paycheck.

The IRS considers you an independent contractor if you receive a 1099-MISC form showing your earnings rather than a W-2. That can include folks who moonlight as Uber drivers, freelance writers or consultants, and even (in some cases) attorneys. If you got a 1099-MISC, as far as the IRS is concerned you’re in business for yourself.

You may get paid more than a wage earner because the company making the payment considers you a “nonemployee” and does not have to include benefits, contribute to Social Security on your behalf or withhold your income taxes.

The bad news is that you have to do all those things yourself. The good news is that you can write off some costs associated with the development, maintenance and growth of your business.

As an independent contractor, it’s imperative to make a clear, documented distinction between your business expenses and your personal expenses. If the deductions you claim don’t pass the sniff test, the IRS might take a closer look at your return with an audit.

The federal agency receives a report of your income — copies of your 1099-MISC forms — from the businesses that pay you. Over the course of the year, you’ll have to pay your own self-employment taxes — currently, that’s 15.3% of your net profit to cover Social Security and Medicare taxes — as well as your own estimated income taxes each quarter.

How to claim business expenses

You report your nonemployee income — and claim expenses — on a Schedule C or the simplified Schedule C-EZ. If your net earnings from self-employment are more than $400, you also need to fill out a Schedule SE to determine your self-employment tax. As you prepare to fill out your return, make sure you’ve got all the necessary documentation for income and expenses.

Your net profit is the amount you were paid for your goods or services minus your business deductions. Examples of such deductions include:

  • Advertising.
  • Depreciation.
  • Home office expenses.
  • Transportation and travel — both locally and away from your home.
  • Business, professional and education licenses, and fees.
  • Office supplies.

Each business expense you claim must meet certain criteria:

  • Ordinary and necessary: An ordinary expense is one that’s common to your profession. The expense is considered necessary when it’s one that’s appropriate or helpful in developing or maintaining your business.
  • Current expense: An expense that benefits your business for less than one year.
  • Directly related to your business: An expense that is not related to personal costs.
  • Reasonable amount: An expense of a reasonable amount that doesn’t include inflated pricing.

To help independent contractors and other “self-employed” individuals understand their tax obligations, the IRS has set up a website with guidance on everything from quarterly tax payments to home-office deductions.