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The Ultimate Guide to Consultant Tax Write-offs
7
Min Read
Working as a freelance consultant offers a lot of perks. You get to be your own boss, set your own hours, and control your workload. But there are also some downsides—namely, taxes.
As a consultant, you are considered an independent contractor, which means you are responsible for paying your own taxes. But don't worry – there are some deductions you can take to help offset the cost of taxes.
Note: Try Bonsai Tax today to track your business expenses automatically. Our expense tracker will scan your bank/credit card statements to discover potential tax write-offs. The majority of our users save on average $5,600 from their tax bills. Claim your 14-day free trial here.
The most common consultant tax write-offs
Here are a few of the top consultant tax deductions that you can take advantage of:
Meals and entertainment
Maintaining positive client relationships is one of the most important aspects of the consulting business. To grow your consulting business, you'll often need to take clients out to lunch or dinner or entertain them in other ways.
The cost of these meals and entertainment expenses is tax deductible.
However, there are a few rules you need to follow:
- You can only deduct 50% of the cost of meals and entertainment. So, if you take a client out to dinner and the bill comes to $100, you can deduct $50 from your taxes.
- You can only deduct the cost of meals and entertainment if they are directly related to your business. For example, if you take a potential client out to lunch to discuss the possibility of working together, you can deduct the cost of the meal. But, if you take a client out to lunch just to catch up and chat, you can't deduct the cost of the meal.
Even the expenses you incur when traveling to meet clients are deductible. In such cases, lodging expenses, car expenses, gas, airfare, and car rentals are deductible business expenses.
Education and certifications
As a consultant, it's crucial to remain competitive in your niche. That means investing in your education, research, and certifications regularly. Fortunately, the IRS offers several tax breaks for consultants who do just that.
You can deduct the cost of tuition, books, conferences, and seminars that are related to your business.
You can also deduct research costs, like the cost of hiring a research firm or subscribing to industry-specific publications.
And if you're required to get certified to operate in your state or city, you can deduct the cost of the certification as well.
The only catch is that the expenses must be related to maintaining or improving your current skill set – so you can't deduct the cost of a new degree or certification that isn't directly related to your business. The IRS considers such expenses as personal expenses and you can't deduct them.
The Lifetime Learning Credit is another great way to offset the cost of education expenses.
The credit is worth up to $2000 per year and can be used for tuition, fees, and other eligible expenses – like books, supplies, and equipment – at eligible educational institutions. Discover how to maximize the education expense deduction here.
Marketing costs
Having a strong personal brand is essential for any consultant who wants to be successful. After all, if potential clients don't know who you are or what you do, they're not going to hire you. You need to market yourself effectively to land more and better client opportunities.
Fortunately, the cost of marketing your consulting business is tax deductible. This includes expenses like:
- Advertising expenses
- PR
- Website design and development
- Branding expenses
For example, let's say you spend $500 on a new website and $1000 on Google AdWords. You can deduct the full cost of these expenses from your taxes, saving you a significant amount of money and reducing your tax bill. Any business start up costs are deductible as well.
Home office deduction
If you have a dedicated home office space, you can deduct a portion of your mortgage interest or rent, as well as utilities and maintenance costs like painting or repairs.
The IRS allows you to deduct home office expenses using two different methods:
- the simplified method
- the actual expense method
The simplified method calculates your deduction by taking the square footage of your home office space and multiplying it by $0.50. So, if your home office is 200 square feet, you can deduct $100 from your taxes.
The actual expense method is a bit more complex and requires you to track actual expenses like insurance, repairs, and utilities.
You'll then calculate your deduction by taking the percentage of your home that is used for business and applying it to your total expenses.
For example, if your home office is 200 square feet and your home is 2000 square feet, your home office makes up 10% of your total home. If you spend $20,000 to renovate your home, you can deduct $2,000 from your taxes.
Which method you choose is up to you, but the simplified method is generally easier to calculate and takes less time to complete.
Professional services
As a consultant, you probably rely on several different professional services – from accounting and legal services to marketing and web design. These services can help you run your consulting business more efficiently and effectively, allowing you to focus on your clients and grow your business.
You can deduct the cost of these services as business expenses. This includes the cost of hiring an accountant or bookkeeper to help you estimate income tax, as well as the cost of legal services related to your business.
And if you use any professional service to help you find new clients – like a headhunter or placement service – you can also deduct those costs.
Note: Organize your finances with Bonsai's consultant accounting software. Manage your tax deductions, keep track of payments and organize your finances--all in one place. Try a 14-day free trail here.
Business equipment and supplies
You can write off the cost of most business-related equipment and office supplies on your taxes. This includes big-ticket items like computers and office furniture, as well as smaller expenses like printer ink and paper.
Let's say, for example, you needed to improve your home office setup and spent $2000 on a new computer, printer, and office furniture. You can deduct the full cost of these purchases from your taxes.
Just keep receipts and other documentation so you can prove the expenses if necessary.
Vehicle expenses
If you use your vehicle for business purposes, you can deduct a portion of the operating costs from your taxes. This includes gas, oil changes, repairs, and insurance.
You can either deduct your actual vehicle expenses or take the standard mileage deduction, which is 58.5 cents per mile driven for business purposes.
To deduct your actual vehicle expenses, you'll need to keep track of all your receipts throughout the year. This can be a bit of a hassle, but it may be worth it if your vehicle expenses are high.
If you decide to take the standard mileage deduction, you don't need to keep receipts or track actual expenses. You'll just need to keep a mileage log to document your business miles.
Either way, make sure you're only deducting the percentage of your vehicle that is used for business purposes. For example, if you use your car 25% for business and 75% for personal use, you can only deduct 25% of your vehicle expenses.
Health insurance
If you're self-employed, you're not eligible for employer-sponsored health insurance. This means you need to buy your own health insurance policy.
Fortunately, health insurance premiums for independent contractors are deductible. This includes the cost of both individual and family health insurance policies.
Business insurance
As a consultant, you're probably not working for a single company. Instead, you're working with many different clients on a variety of projects – like most independent contractors. This means you don't have the same level of job security that employees have.
You're likely to face several risks that other businesses don't have to deal with. For example, if you give your client bad advice and they lose money as a result, they could sue you for damages.
To protect yourself financially, you need to have business insurance. This includes things like:
- Professional liability insurance
- Business interruption insurance
- Product liability insurance
- Insurance for business property
The cost of business insurance premiums can be deducted from your taxable income. This is a valuable deduction for consultants, as it can help to reduce the amount you owe Uncle Sam, and ultimately bring down your business expenses.
What Defines a Verbal Contract?
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
When is a Verbal Agreement Legally Binding?
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
- Offer and acceptance: An offer is made and accepted by another party involved in the agreement;
- Consideration: The involved parties must exchange something of value (money, a service, time, etc), this is known as consideration;
- Intention and certainty: All parties must fully understand the terms of the contract and intend to make a legally binding agreement freely; and
- Capacity: The parties must have the capacity to legally enter into the contract; they're above age and of a stable mindset.
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
How strong is a verbal agreement in court?
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
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get started nowWhen are verbal agreements not enforceable?
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
- The sale of real estate or vehicles
- Real estate leases lasting longer than one year.
- Property transfer following the death of the owner.
- The case of a party agreeing to pay debt for someone else.
- Any contract that requires more than a year to fulfil.
- A contract involving and exceeding a specified amount of money (which varies by state).
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
How are Verbal Contracts Enforced?
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
How can you prove an oral contract?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Written vs Verbal Contracts: What's the Verdict?
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Say hello to digital contracts
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
Benefits of written contracts
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Create Professional Contracts with Bonsai
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?
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