How to Maximize Employee and Contractor Expense Write-offs for Small Businesses in 2025

For small business owners managing their workforce, whether it comprises full-time employees or freelance workers, overseeing these expenses is a critical part of running your enterprise. From paying salaries to handling payroll taxes and healthcare costs, these expenditures can quickly add up, especially during the busy Q4 holiday season. The good news is that many of these costs are eligible for tax deductions, helping to decrease your tax liability and keep more money within your business. Learn how employee and contractor expense write-offs can help you maximize profits for your small business.

Our team at Cowdery Tax is here to guide you through the process of claiming deductions for employee and contractor expenses in 2025. This article will detail the deductible costs, the correct procedure for claiming them, and how partnering with us can simplify tax time for your small business.

Importance of Employee and Contractor Expense Deductions

Your workforce is the backbone of your business, whether you run a retail store in Charleston, WV, or a tech startup in Columbus, OH. According to IRS statistics, labor costs are one of the most significant expenses for small businesses, typically making up 20-30% of annual budgets. The bright side is that a substantial portion of these expenses – like wages, payroll taxes, and health insurance premiums – can be deducted, resulting in a significant reduction in your taxable income. With 2025 bringing updated tax brackets and potential changes to credits such as the Small Business Health Care Tax Credit, now is the perfect time to understand and utilize these deductions. When utilized effectively, they can free up funds for restocking inventory, upgrading equipment, or hiring seasonal staff for the holiday season.

Primary Deductions for Employee and Contractor Expenses

Let’s explore the main categories of deductible employee and contractor costs. Understanding these will help you plan strategically and keep well-organized records for tax season.

1. Compensation and Salaries

All wages or salaries paid to for an employee and contractor expenses are deductible, as long as they are reasonable and tied to services provided. This includes:

• Regular pay for both full-time and part-time employees.
• Seasonal bonuses, like those given to your retail team in December.
• Extra pay for overtime, which is common during the busy Q4 period.

For example, if you own a café in Morgantown, WV, and pay your baristas $40,000 in salaries this year, the full amount is deductible, effectively lowering your taxable income. It’s essential to maintain detailed payroll records, including pay stubs and timesheets, to support your claims.

2. Payroll Taxes

As an employer, you are responsible for payroll taxes, which include the employer’s share of Social Security (6.2% up to the 2025 wage cap of $168,600), Medicare (1.45%), and federal and state unemployment taxes (FUTA and SUTA). These taxes are entirely deductible as business expenses. In Ohio, SUTA rates vary from 0.3% to 9.1%, depending on your industry and history, while West Virginia’s rates range from 1.5% to 8.5%. For a small business with a $100,000 payroll, these taxes could exceed $7,000 – an amount that is deductible to reduce your tax liability. Use payroll software like Gusto or QuickBooks to accurately track these taxes and avoid costly mistakes.

3. Health Insurance Premiums

If you provide health insurance for your employees, the premiums you pay are fully deductible. Additionally, you may qualify for the Small Business Health Care Tax Credit, which can cover up to half of premiums for businesses with fewer than 25 full-time equivalent employees earning average salaries below $62,000 (adjusted for 2025). For instance, a family-owned repair shop in Akron, OH, offering health coverage to five employees could benefit significantly from this credit. To qualify, you must purchase insurance through the Small Business Health Options Program (SHOP) marketplace. Keep records of premium payments and employee headcounts to easily claim this credit.

4. Contractor Payments

Payments to independent contractors, such as a freelance web designer in Huntington, WV, or a marketing consultant in Cincinnati, OH, are also eligible for deduction. It’s crucial to provide Form 1099-NEC to any contractor who receives $600 or more in a year, and they must provide a valid Taxpayer Identification Number (TIN). For example, if you hire a contractor for $5,000 to redesign your online store during Q4, the entire amount is deductible. Ensure you have a written contract and invoices to verify the expense.

Avoiding Common Errors

While claiming these deductions is relatively straightforward, minor mistakes can lead to significant problems. Here are some pitfalls to steer clear of:

• Mixing Personal and Business Expenses: Avoid paying employee or contractor compensation from a personal account. Use a dedicated business account to maintain clear records.
• Missing Deadlines: Payroll tax deposits are due monthly or semi-weekly, depending on your business size. Late filings can result in penalties ranging from 2-10% of unpaid taxes.
• Incomplete Records: Keep detailed records of salaries, tax withholdings, and contractor payments. Utilize accounting software to automate tracking and generate reports.
• Correct Worker Classification: Ensure employees and contractors are classified accurately. Misclassification can result in audits and fines. For example, a courier in Ohio who works fixed hours likely qualifies as an employee, not a contractor.

Tips for Maximizing Deductions in 2025

To make the most of these deductions, follow these simple guidelines:

• Use Payroll Software: Tools like QuickBooks or ADP simplify payroll tax calculations and generate IRS-compliant reports. This is especially useful for businesses managing seasonal staff during Q4.
• Track Expenses in Real-Time: Record salaries, taxes, and insurance payments promptly. Regular reviews can help catch errors before they escalate.
• Plan for the Health Care Credit: If you meet the criteria, apply for the Small Business Health Care Tax Credit in advance. Our team can help you navigate the SHOP marketplace requirements.
• Review Year-End Figures: Before December 31, review a payroll summary to ensure all deductions are included. This also aids in Q4 estimated tax payments, due by January 15, 2026.

Benefits of Professional Support

Navigating employee and contractor expense deductions can be overwhelming, particularly during the holiday rush. A single miscalculation, like inaccurately calculating payroll taxes or overlooking the health care credit, could lead to significant penalties or missed savings. This is where [Your Tax and Bookkeeping Company] can offer assistance. We provide:

• Payroll Management: We handle tax calculations, submissions, and compliance, allowing you to focus on running your business.
• Tax Credit Guidance: We identify credits like the Small Business Health Care Tax Credit and ensure your eligibility.
• Year-End Preparation: We organize your records and maximize deductions before tax season begins.
• Customized Advice: Whether you run a retail store in Wheeling, WV, or work as a consultant in Dayton, OH, we tailor our services to meet your needs.

Prepare for Tax Season Now

As you’re still preparing for 4th quarter, it’s essential to organize your employee and contractor expenses. By leveraging deductions for salaries, payroll taxes, health insurance premiums, and contractor payments, you can reduce your tax burden for 2025 and set your business up for success in the coming year.

Don’t let potential deductions slip through the cracks – partner with Cowdery Tax to ease the pressures of tax season.

Are you ready to boost your savings? Contact us today for a complimentary consultation. Let us handle the financial details while you focus on growing your business.

Here’s to a prosperous 2025!

This information is not intended as legal or tax advice. Cowdery Tax and its representatives does not offer legal or tax advice. We offer services for business bookkeeping, payroll, tax payments, and personal tax filings. We share information that is publicly available. Tax laws may change with or without notice that may alter or change the information contained in this publication.