Figuring out your tax liability for income reported on your 1099 forms can get pretty complicated. We’ll make sure you reduce your tax liability to the lowest level allowed by the IRS by walking you through some of the most common 1099 tax deductions.
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. You will be taxed as a business of one.
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.
So, what kind of things can you deduct?
Well, because you’re an independent contractor, chances are that you use some of your personal resources for business. You can deduct part of your personal costs based on how often you use them for business. Here are some of the most common 1099 tax deductions to look out for.
This is one of the biggest 1099 tax deductions for 1099 employees. Any driving that you do during work, like traveling to meet with clients or going out of town on business, can be written off. The standard mileage rate in 2016 was 54 cents for every mile that you drive while on business.
In order to use the standard mileage rate, you need to keep careful track of your mileage. Multiply the total mileage by 0.54 (or whatever the current standard mileage rate happens to be). 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:
Your home has to be your primary place of business where you do the majority of your work. If you only work from home occasionally, you can’t write it off.
The space in your home where you work has to exist exclusively for your business and nothing else. It usually is an office just for the business, though you can also count a desk in one room that only functions as a business place.
There are two ways to calculate your tax deductions for your home office—the Simplified Method and the Regular Method.
Simplified Method: Multiply the square footage of the office by 5, according to the 2016 IRS rate. 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 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.
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.
According to the IRS, you can 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 work.
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.
Sometimes contractors can rack up a pretty large parking bill. If you are one of these people that frequently pays for parking, hold onto the receipts so you can use those expenses as tax deductions.
When you’re not a big enough company to qualify for the large shipping rate discounts, shipping can 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.
These are just the top 1099 deductions. There are a lot more, so you check with an expert, like a tax advisor.
Overall, keeping good, organized expense records is the best way to make tax season easier for you. It might be worth it to invest in some bookkeeping services with a company like ZipBooks that can even provide you with your own personal bookkeeper to help you pay only the absolute necessary amount in taxes.
If you need any help with the Schedule C forms, check out our guide.
Jenny is a content writer for ZipBooks and a graduate student at Brigham Young University.