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Independent Contractor Versus an Employee: A Brief Overview of Expense Deductions

Employee-Independant Contractor

For career purposes, someone considering whether to work as an independent contractor or as an employee faces many considerations–financial and other. One of the financial factors is the tax strategy.

Business expenses of an independent contractor including start-up costs are deducted directly (“above-the-line”) from the Schedule C business income; whereas, business expenses (in most cases) of an employee are deducted as itemized deductions which, along with any other miscellaneous itemized deductions, can only be deducted to the extent they exceed 2% of the employee’s adjusted gross income. General categories of business expenses are material and supplies, office space, travel, continuing education and a variety of miscellaneous expenses. Interest is an allowable deduction to the independent contractor but not to the employee who borrows money for their trade or business as an employee.

Both the employee and the independent contractor deduct (below the line and above the line, respectively) home office expenses and rental and depreciation expenses; however, the employee’s deductibility is only allowed if the home office is “for the convenience of the employer”.

Because the IRS has many rules regarding each aspect of deductibility, many of which change from year to year, consulting a tax professional is a must in deciding to become an independent contractor, as well as to taking advantage of allowable deductions each year.

 

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