What expense category is an independent contractor?

If you've hired independent contractors for your business, you might be wondering how to categorize their expenses. Properly classifying these costs is important for accurate bookkeeping and can simplify your tax obligations.

Classifying independent contractor expenses

Here are key ways to categorize these expenses:

• Professional services: Payments made to independent contractors for their services typically fall under professional services. This category includes fees for consulting, design, legal work, and more.
• Subcontractor expenses: If you frequently hire contractors, consider creating a specific account for subcontractor expenses. This helps track these costs separately and provides clearer financial insights.
• Contract labor: Some businesses categorize these expenses under contract labor, distinguishing them from employee wages and benefits.

Examples of independent contractor expenses

Understanding examples of independent contractor expenses can help you categorize them correctly:

• Consulting fees: Payments to a freelance consultant providing business strategies.
• Design services: Costs for hiring a graphic designer for your marketing materials.
• Legal services: Fees paid to a contract attorney for legal advice.
• IT services: Payments to an independent IT professional fixing technical issues.
• Cleaning services: Costs for a contract cleaning company maintaining your office.

For instance, if you pay a freelance web developer $2,000 for creating your website, this expense falls under professional services or subcontractor expenses.

Tax implications of independent contractor expenses

Properly categorizing payments to independent contractors has important tax implications. Here’s what you must keep in mind: 

• Tax deductions: Payments to independent contractors are generally tax-deductible as business expenses, reducing your taxable income.
• Form 1099-NEC: If you pay a contractor $600 or more during the year, you're required to report this on Form 1099-NEC to the IRS.
• Avoid misclassification: Ensure these expenses are not recorded as employee wages to prevent confusion and potential penalties.
• Contractor responsibilities: Remember that contractors handle their own taxes, so you're not responsible for withholding payroll taxes.

Accurate classification helps maintain compliance with IRS guidelines and simplifies your tax reporting.

Let Ramp automate your expense process

Managing independent contractor expenses doesn't have to be complicated. With Ramp, you can automate the categorization, tracking, and management of these expenses, saving you time and reducing errors. Ramp's expense management software simplifies your bookkeeping, so you can focus on growing your business.