Consultants -- along with contractors and other self-employed individuals -- are considered business owners in the eyes of the Internal Revenue Service. While employee wages are reported directly on Form 1040, business income from consulting is filed on Schedule C. Complete Schedule C and record your net business profit on Form 1040 to file your taxes as a consultant,
Step 1: Determine Consulting Revenue
Report consulting revenue from all sources on part 1 of Schedule C. Reduce revenue by any returns on line 2 to arrive at your gross income on line 7.
Step 2: Subtract Business Expenses
Reduce your gross income by any eligible business expenses in part 2. Some expenses consultants typically incur include:
- Marketing and advertising
- Office supplies, likes pens, pencils and paper
- Computer equipment, like laptops and printers
- Business fees and other business taxes
If you travel for your consulting work, you can list travel expense at the current IRS standard rate of 57.5 cents per mile. You can also deduct a portion of your rent, utilities and home repairs if you claim the home office deduction. You must have a dedicated space in your home that you use solely for your consulting work to claim this deduction. This means you can't work out of your family room or living room if anyone else enjoys that space.
Step 3: Record on Form 1040
Subtract all your business expenses from your gross income to arrive at your net profit or loss on line 31 of Schedule C. Record this amount on line 12 of your Form 1040.
Form 1040 offers a few more deductions consultants can take below line 12 to arrive at taxable income. Deduct half your self-employment tax on line 27 and any health insurance premiums you paid for yourself on line 29.
Because you're a consultant and not an employee, your clients don't pay into unemployment insurance on your behalf. This means income you earn as a consultant won't make you eligible for unemployment. If you want to retain eligibility for these benefits, contact your state unemployment agency and request to pay separately into the state unemployment fund.