Figuring out your tax liability for income reported on your 1099 forms can get pretty complicated.
The tax rate for 1099 income is twice the rate of W2 income because employers are required by law to automatically withhold income tax from their employees’ paychecks. However, as a freelancer or independent contractor, you are your own boss–so you pay the percentage that the boss would normally pay, on top of your personal tax rate.
It’s not all about losing money, though. You are also in charge of deducting your expenses, which lowers the amount you have to pay in taxes.
You can use an accounting program to keep track of and itemize any expenses. If you categorize all your expenses as you go, it will be easy to sum up all the tax deductible expenses by category at the end of the year.
Well, because you’re an independent contractor, chances are that you use some of your personal resources for business. You can itemize deductions using a Schedule C (Form 1040) and reduce your tax liability to the lowest level allowed by the IRS.
Here are some of the most common 1099 tax deductions to look out for:
This is one of the biggest 1099 tax deductions for independent contractors. Any driving that you do during work, like traveling to meet with clients or going out of town on business, can be written off. Please note: You cannot deduct expenses from commuting to or from work.
As of January 1, 2018, the standard mileage deduction is $0.545 per mile. Some self-employed individuals will choose to deduct their actual outlays instead, but you are legally allowed to deduct the standard mileage rate even if your actual costs are lower.
In order to use the standard mileage rate, you need to keep careful track of your mileage. Multiply the total mileage by 0.545. This rate takes money spent on gas, insurance, and maintenance into account, so you don’t need to write those off separately.
Note: Mileage is one of the tax deductions that the IRS most frequently audits. You have to be sure to keep pretty meticulous records so you can avoid any miscalculation.
The best way to keep track of your mileage is to get a driving log. You should record the date, the amount of miles traveled, the business reason you were traveling, and the total miles on the odometer. It should only take a few minutes, but it might save you a lot of hassle later.
Working from home means flexibility and convenience, and now it also means a potential tax write off. If you use part of your home as an office, you can sometimes write off a portion of your home expenses.
Here are a couple things you need to qualify for this deduction:
There are two ways to calculate your tax deductions for your home office—the Simplified Method and the Regular Method.
Simplified Method: If you choose the standard option, you can deduct $5 per square foot. You can do this for up to 300 square feet per year.
Regular Method: Keep track of all your home expenses and then use Form 8829 to calculate which ones you can write off. You’ll need to calculate what percentage of your home the office takes up. You can deduct electricity, heat, mortgage and other utility costs that apply to this percentage.
You can deduct any supplies you buy for your business. For instance, if you run a cleaning business, you can write off cleaning supplies. You can also deduct things like office supplies, rented or leased equipment, food for your clients, and anything else that you need to run your business.
For the typical freelancer, equipment expenses include the hardware needed to finish a job. A computer is an obvious one, but less obvious could be the internet router and modem. You can also categorize the printer and paper as either equipment or material expenses.
Some independent contractors, like painters or others involved in the construction industry, have to spend a lot of money buying supplies to keep the business running. These contractors will need to calculate the cost of goods sold to write off this inventory expense.
Health insurance premiums are a big expense. Health insurance is required in the US due to the Affordable Care Act. So, independent contractors can use this deduction to help recoup some of the money spent on medical care premiums. However, tax deductions may not be greater than the income collected from the business (personal salary).
In order to qualify for this, you have to be paying your own health insurance and your spouse can’t have a work-provided health insurance plan. If you fit that description, you can write off your health insurance premiums on your individual income taxes.
These tax deductions can include things like liability insurance or malpractice for those with riskier self-employment. You can also deduct car insurance, but only if the car is actually used for day-to-day business. Just make sure to keep a paper trail to show the IRS that you are playing fair.
Independent contractors with kids should know that they can use child and dependent care tax credit. The credit repays what you spend on childcare while working. This includes daycare, babysitters, summer day camp (not overnight), and more.
These types of expenses for children under 13 and disabled adults all qualify toward the maximum of $3,000 coverable per dependent (or up to $6,000 for two or more dependents). However, the tax filer will only recoup a maximum of 35 percent of that money.
If you sometimes use your personal cell phone for business purposes, you can write off part of your cell phone bill. You have to keep pretty close track of your minutes or amount of data used in order to make a close estimate about the percentage that was used for business as opposed to personal use. Then you can take that percentage and apply it to your phone bill and deduct that much from your taxes.
Keep track of any expenses for airfare, taxi fare, car rental, Uber or Lyft fare, hotel or Airbnb stays, and any other travel-related expenses when you are traveling for business reasons. If you’re traveling to meet with a client or otherwise do business, these costs can be counted as a tax deduction.
Conventions and things done away from your home office are another way to deduct from your taxable earnings. However, you shouldn’t double-dip. If a contractor participates in a conference, they may not count it as both a travel expense and an advertising expense.
Additionally, some contractors can rack up a pretty large parking bill. If you are one of these people that frequently pays for parking when visiting clients, hold onto the receipts.
Sorry readers, this part isn’t as juicy as we would like it to be (pun intended). But it certainly has enough rules and exceptions to feed an entire family reunion with tax jargon.
Plus, the TCJA brought all kinds of changes to the 2018 tax year. Here’s the low-down:
|Meals with clients||50%|
|Office snacks and meals||50%|
|Company wide-party or meal||100%|
If you’ve been deducting meals and entertainment since 2017 or earlier, you’ll notice two significant changes: Entertaining clients changed from a 50% to 0% deductions and office food dropped from 100% to 50%.
Client meals are only classified as a tax deduction up to 50 percent. Meals have to be directly associated with a trade or business, and take place before, during, or after a substantial business discussion. Treating a client for hot dogs at a baseball game where you “talk shop” won’t cut it.
And of course, no more tax-free golf games or concert tickets.
Think advertising expenses are just for the big companies? Think again! Small businesses need to use these available deductions to keep taxes low. Promoting your business on social media channels, and having business cards printed are both examples of common expenses that fall into the advertising category.
Operations expenses are common for small businesses in today’s digital arena. Hosting fees for a business website, and the cost of other internet-based services (even paying for the internet itself) count as operations expenses.
When you’re not a big enough company to qualify for the large shipping rate discounts, shipping can also get pretty expensive. If you’re a product-based sole proprietorship, you can deduct any business-related shipping and mailing expenses.
Anything like membership fees or trade organization dues for your business can be counted as a write-off. That also applies to publications that are required for your business.
The amount you pay each year to your state or local governments for business licenses can be written off. This includes annual regulatory fees. However, fees paid to get initial licensing are not deductible.
Additionally, the IRS lets you write off any education that helps you “maintain or improve skills required in your present work.” That means you can count any certification courses or business classes that help you improve your skills at your current job. However, you can’t deduct any classes that teach you new skills that aren’t already connected to your present line of work.
Small businesses are often considered pass-through businesses (an organization that is not taxed at the corporate level, such as S corps and most LLCs). The recent Tax Cuts and Jobs Act allows pass-through organizations to deduct up to 20% of your business income.
These are just the top 1099 deductions. There are a lot more, but keeping smart, organized expense records is the best way to make tax season easier for you.
Cloud-based accounting programs are the norm today and they are incredibly secure and easy to use—plus, some of them (like ours) are free! These software products can be accessed any time of day, from any platform and sync seamlessly with your bank transactions. Integrate your bookkeeping with other applications like reputation management and receipt scanning tools to get the most out of your software.
It’s easy to breakdown expenses and win at taxes with the right software.
Thanks to the incredible team (and ZipBookers) at easel.ly who created this sharable Top 10 infographic!
Tim is Founder and CEO of ZipBooks. He keeps his desk really nice and neat.