A Guide to Tax Deductions as an Independent Contractor Optometrist

So you are a recent graduate from an optometry school. If you’ve begun working, there is a good chance you are currently working as an independent contractor optometrist. If you are an independent contractor, you are self-employed. The definition of an independent contractor is defined by the IRS as:

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax. – IRS website

Mistakenly classifying an employee as an independent contractor can result in significant fines and penalties. There are 20 factors used by the IRS to determine whether you have enough control over a worker to be an employer. Though these rules are intended only as a guide-the IRS says the importance of each factor depends on the individual circumstances. Click here to view a 20 point checklist that will determine if you are an independent contractor.

The Basics of Tax W2 vs W9 in Optometry – Interview with CPA Gary Topple

Develop an Efficient Way to Track All Expenses

This is my first year, making a decent income after all those years of being a student. Getting 100% of the money I earn and putting it into the bank sounds great, but there are also tax obligations required by the IRS.

Check out the IRS Website for the Self-Employed Individuals Tax Center. It has information such as…

Because the IRS treats your contractor work as your business, you are entitled to claim deductions for the expenses that you incur for the services you provide. However, if you want to take these deductions, you need proof of your expenses.

I hired an accountant recently to help me navigate the complicated tax system. Where I ended up saving the most money is developing a filing system to track all receipts for equipment and supplies, and services needed to do my work.

4 Ways To Track Your Expenses:

There are always 2 steps here. First is to save receipts, and the second is to record, classify and add up totals for your expenses in a program like Excel or Quickbooks.

Be old school and collect all your receipts, file them weekly into different folders that corresponds to different expense categories.
A more advanced (and digital) approach is to use your smart phone or tablet. Get an app like Genius Scan to digitally covert all receipts and documents to PDFs. This is convenient since you could digitally keep all your receipts and file them away any time at the push of a button on your phone. Then you could use excel to organize your expenses.
A popular app on the iPhone is the iXpenseIt app. This allows you to track all expenses and income and you can take a photo on the spot. Then you could print a summary report! A similar one on the Android platform, which I have not used, but read about is Expensify.
Dr. Geller uses a paid service, QuickBooks. Quickbooks is more than just tracking expenses. It allows you to determine the financial status of your business, in this case yourself as an independent contractor. With Quickbooks you can set budgets, track income, expenses and more. Dr. Geller puts all of his receipts in a shoe box but tracks individual expenses in Quickbooks. If he is ever audited he can pick out receipts if need be.

Use Categories To Track Your Expenses:

It is important to track your expenses in different spending categories so that you can report it at tax time. For example, rent gets a different percentage deduction then meals & entertainment, so you must distinguish each transaction in a particular category.

I recommend using an Excel spreadsheet or Quickbooks.

Here are some categories to use to track expenses. Label each expense you have with one of these categories. Your accountant will know the percentage you can write off based on each category.

Rent
Utilities
Services
Restaurant & Entertainment
Travel
Equipment
Phone
Health Insurance
Shipping
Marketing
Investments

Here is an Excel Spreadsheet you can download to track your expenses. It is organized based on the categories listed above. To use it, enter the date, item, location, category and cost. MOST IMPORTANTLY – you must copy exactly the category of your item as listed at the bottom of the spreadsheet. The spreadsheet only knows to calculate cost totals based on the correct spelling of categories listed at the bottom of the sheet.

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Get the spreadsheet

Qualifying Tax Deductions

As an optometrist, here are some qualifying deductions you may not have thought about:

Indirect expenses are not directly related to the job, but are incurred as part of doing the job such as:

Direct expenses are costs that are directly related to doing work:

Postage, supplies and other necessary work items or services
Home-based contract workers are allowed to take the home office deduction if the primary location for the work is done at home. Talk to an accountant about the percentage you should be utilizing.
If travel is also a part of doing your work, keep track of mileage, hotel and other travel-related expenses
Other possible deductions include: health care insurance costs, retirement savings accounts and professional service fees, such as lawyers or accountants

Some Last Thoughts…

Consider starting an S-Corporation (more information about this to come in a future post)
Start a retirement account.
Interest that you are paying on your student loans could be deducted. At tax time, ask your loan company for a 1098-E form and provide this form to your accountant. It will contain how much interest you paid. Your student loan servicer (who you make payments to) will provide a copy of your 1098-E if the interest you paid in 2013 exceeded $600.
Check with your accountant to see if any donations you’ve made over the last year could be deducted. Donations to AOA-PAC will be tax deductible.