Independent Contractor Business Deductions

[ConsultingTM]

I’m starting my independent business this year. It’s mostly consultant based. I started with the idea some time in May and talked to a prospective client and was just given a date of November as a possible start day with them. 

For the time being, I am still keeping my full time job in the public sector. 

I began taking some education courses in August to polish up on some subjects for the same line of business. My question is, can my education expenses be deducted? If so, what expenses exactly can I deduct? Is gas or mileage something I can deduct to and from school? 

I also plan on purchasing a new vehicle since my client is about an hour away and my current personal vehicle is not good with commutes. This will be a new vehicle which I plan to get an auto loan for. What can I deduct as it relates to this new vehicle? 

[Critter]

If you are new to being self employed and  acting as your own bookkeeper and tax preparer you need to get educated ....  

If you have net self employment income of $400 or more you have to file a schedule C in your personal 1040 return for self employment business income. You may get a 1099-Misc for some of your income but you need to report all your income.  So you need to keep your own good records. Here is some reading material……

IRS information on Self Employment….
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Self-Employed-Individuals-Tax-Center 

Publication 334, Tax Guide for Small Business
http://www.irs.gov/pub/irs-pdf/p334.pdf 

Publication 535 Business Expenses
http://www.irs.gov/pub/irs-pdf/p535.pdf 

Home Office Expenses … Business Use of the Home

https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

https://www.irs.gov/pub/irs-pdf/p587.pdf

There is also QuickBooks Self Employment bundle you can check out which includes one Turbo Tax Home & Business return and will help you keep up in your bookkeeping all year along with calculating the estimated payments needed ....
http://quickbooks.intuit.com/self-employed

Self Employment tax (Scheduled SE) is generated if a person has $400 or more of net profit from self-employment on Schedule C.  You pay 15.3% for 2017 SE tax on 92.35% of your Net Profit greater than $400.  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  You do get to take off the 50% ER portion of the SE tax as an adjustment on line 27 of the 1040.  The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 line 57.  The SE tax is in addition to your regular income tax on the net profit.
 


PAYING ESTIMATES
For SE self employment tax - if you have a net profit (after expenses) of $400 or more you will pay 15.3% for 2017  SE Tax on 92.35% of your net profit in addition to your regular income tax on it. So if you have other income like W2 income your extra business income might put you into a higher tax bracket.

You must make quarterly estimated tax payments for the current tax year (or next year) if both of the following apply:
- 1. You expect to owe at least $1,000 in tax for the current tax year, after subtracting your withholding and credits. 
 
- 2. You expect your withholding and credits to be less than the smaller of: 
    90% of the tax to be shown on your current year’s tax return, or 
  100% of the tax shown on your prior year’s tax return. (Your prior year tax return must cover all 12 months.)

To prepare estimates for next year, You can just type W4 in the search box at the top of your return , click on Find. Then Click on Jump To and it will take you to the estimated tax payments section. Say no to changing your W-4 and the next screen will start the estimated taxes section.

OR Go to….
Federal Taxes or Personal (H&B version)
Other Tax Situations
Other Tax Forms
Form W-4 and Estimated Taxes - Click the Start or Update button

[Carl]

To answer your questions:

can my education expenses be deducted?

No. According to IRS Tax Top 513 at https://www.irs.gov/taxtopics/tc513

"To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) a law requires to keep your status or occupation. However, even if the education meets either of these tests, the education can't be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business."

What can I deduct as it relates to this new vehicle?

Since this purchase will be the purchase of a personal vehicle that most likely will be for both personal and business use, it is important that you keep mileage logs from the day you drive the vehicle off the lot. Your best bet is to take the "per mile" deduction, which for tax year 2019 is already set at 58 cents per mile for the 2019 tax year. 26 cents of that 58 cents per mile is for vehicle depreciation. It is "IMPORTANT" that you keep track of your business use miles as you will be able to deduct 58 cents for each business mile driven. It is also equally important to keep track of your depreciation amount from year to year too. These amounts change every year, based on the economy and average/expected price of fuel. These figures will matter when you sell, trade in, or otherwise dispose of the vehicle in the future.

You "may" have the option of taking the actual expenses deduction for the vehicle. But I recommend the per mile deduction because in my experience that has always provided the greater tax break in my 15 plus years of self-employment.

For more details about business vehicle use, see https://turbotax.intuit.com/tax-tips/self-employment-taxes/standard-mileage-vs-actual-expenses-getti...

[ConsultingTM]

Thank you for the detailed response. For education, would it not qualify since its being used both for my current position which I’ve held for a couple of years or because it can also be used for the consulting portion? 

Long story short, I am providing the same field of expertise both in the public sector as well as the private consulting business. The courses I’m taking are used and applicable to both as it’s technically the same duties. 

For the vehicle I think I can see how it will be easily calculated with mileage. 

Since I will be starting off this late in the year, I am seeing quite a bit of upfront costs. It’s a little intimidating as I see the initial month or two being a net loss but can see next year improving and getting good cash flow.