Being a part of the gig economy comes with a host of benefits but those benefits come with the added responsibilities and costs. While legislation includes numerous tax codes to offset many of the expenses associated with working for yourself, understanding what deductions to take can feel daunting. And to add to that, the 2017 tax reforms created several changes that can make tax preparations even more tricky.
To shed some light and make itemizations a little less “taxing,” KeeperTax.com has compiled a quick summary of deductions you might qualify for, and should be sure to take, in order to minimize your costs and maximize your success.
1. Self-employment tax
This is probably the most confusing and improperly calculated tax for 1099 workers. To break it down, the self-employment tax refers to what is typically paid by an employer for Medicaid and Social Security. But if you are self-employed, this tax responsibility falls on you, which means you pay double as both the employer and the employee.
Here’s how the rates break down:
- 6.2% Social Security tax on the first $128,700 of taxable income
- 1.45% Medicare tax regardless of taxable income amount
In 2018, the standard tax percentage for self-employed individuals is 15.3% (whereas a standard employee would pay 7.65% and their employer would also pay 7.65%). And an additional 0.9% Medicare tax will be applied to the following:
So wait, where’s the deduction? While you just had to pay double the self-employment tax you now get to deduct half of that tax amount from your net income. So while you have to pay taxes for being your own boss, the IRS sees that extra cost as a business expense. On top of that, the self-employment tax is calculated on 92.35% of your NET not gross business income.
2. The Home Office Expense
Deducting your home office space can be complex, but essentially you can take a write-off for the cost of any space that is used regularly and exclusively for your business activities. This is true whether your rent or own your home and home-office space. While you are basically on the honor system when making this tax claim, should the IRS choose to audit you, you will want to be prepared to substantiate your deduction.
Because your home office expense will be calculated based on square footage in comparison to the rest of your home, it’s not a bad idea to make a diagram of your workspace with accurate measurements.
The real savings can add up when taking this deduction because the same percentage of square footage being claimed can also be applied to mortgage interest, depreciation, property taxes, utilities, home-owners insurance and home maintenance expenses. But if you can’t find all your records and expenses in time for tax filing, you can opt to take the simplified deduction of up to $1500. You can use the IRS form 8829, Expenses for Business Use of Your Home.
3. Internet, Phone, Laptops & Gadgets
Even if you don’t take the home office deduction, you can deduct the cost of a phone you use for work, fax, and internet expenses. But you want to make sure you are only claiming expenses directly related to your 1099 contracting work. So, if you only have one phone, you’ll generally claim the estimated percent of time you use the phone for work. But if you have a second phone line that you use exclusively for business, you can deduct 100% of that cost. The same rule applies to your internet bill.
When it comes to laptops, cell phones, tablets, and other tech and software that most of us run both our businesses and personal lives from, you have a choice on how to deduct the costs of those items.
Depreciation: spreading the deduction out over a number of years for what the IRS considers the “shelf-life” for any specific item
One Time Itemization: writing off the entire cost for the year of purchase
Consult with your tax preparer to determine if there is a best option for you.
Also, when it comes to claiming hardware as a business expense, it’s wise to use a percentage to calculate the business deduction. While you may have purchased that laptop solely for work purposes, a 100% deduction might be a flag for the IRS and you want to make sure you can back up your claim.
If you have a space outside of home that you work from and pay rent on you can deduct that amount. You can also deduct any rents you pay for business equipment. If you have to break a rental agreement and have to pay any fees, those fees are partially deductible as well. Just make sure you don’t own or partially own the property you are renting, as that could wreak havoc on your tax history and result in an ugly audit.
5. Business Insurance
If you’re paying any sort of liability or material insurance premium, you can deduct your premiums. It’s nice to have the cost of protecting your assets and yourself covered as a business expense.
6. Start-Up Costs
When it comes to starting your business, the IRS usually requires you to deduct the larger start up expenses over time as capital expenses rather than as a one-time expense in a single tax year. But deducting up to $5,000 in business start-up costs is allowed. Examples of tax-deductible start-up costs that can contribute to your $5k write off include industry research, travel related to starting your business (e.g. scoping and vetting potential business locations and employees), advertising, attorney fees, and accountant fees. If you have set up a corporation or LLC for your business, you can deduct up to $5,000 more for the costs associated with organization expenses such as state filing fees and legal fees.
The purchases of equipment or vehicles aren’t considered start-up costs, but they can be depreciated or amortized as capital expenditures, which we summarized above.
7. Professional and Legal Fees
Any fees paid to professional and consultant services, attorneys, accountants are deductible. These types of fees tend to be heavy for those who are self-employed, so be sure to save your invoices to claim away!
Did you pay for any Facebook ads, Google ads, a website, a billboard, a TV commercial, or print materials (business cards, flyers, postcards, mailers, etc.)? Anything you spent on services or materials for advertising your business are tax deductible. Even indirect advertising can be deducted such as costs associated with advertising for a local non-profit while referencing your business name. Like a sign advertising “Toys for Tots sponsored by KeeperTax.com, for example.
9. Retirement Contributions
If you want to lower your tax bill now and build a tax-deferred investment, claiming after tax dollars for Simplified Employee Pension (SEP) plan, or an Individual Retirement Account (IRA) contributions is definitely worth doing. However, one can be tricky to calculate because you need to understand what your “after tax” dollar amount is, in order to claim, so be sure to check with a tax consultant.
10. Training and Education
If you’re one of the millions of American’s who took out a loan to pay for higher education expenses for yourself, your spouse, or anyone you claim as a dependent, you may qualify for a deduction of up to $2,500, depending on your level of income (meaning if you make over a certain amount you will not qualify for this deduction).
Additionally, the Lifetime Learning credit is income based, but can provide students with an added benefit of a tax credit of up to $2,000 per year. And any training or seminars related to staying current with or increasing your professional skills for your existing business can be deducted. But don’t confuse this with any training preparing you for a different line of work.
11. Casualty and theft losses
Should you suffer a loss caused by theft, vandalism, natural disaster, car accident, etc. You can deduct the dollar amount of loss over $100. Should you be unfortunate enough to suffer more than one loss in a tax year, you can deduct $100 from the dollar amount of each loss less any funds received from your insurance policy. Once you have that dollar amount subtract the amount of what is 10% of your AGI. If there is a balance you can deduct that value.
Example: $8,500 casualty/theft loss - $1,200 Insurance Reimbursement - 10% AGI (10%x $36,000 = $3,600) = $3,700 deduction
12. Charitable contributions
It’s easy to lose track of this deductions because most people make several small donations throughout the year. But those small trips to Goodwill or the Salvation Army and donations to local and national charities add up big. Larger contributions of $250 or more require a letter or receipt from the recipient for tax documentation purposes. Keep a log of any donations you make and make sure you get itemized receipts from any Goodwill drop offs.
You can also deduct the cost of gas and other expenses for donating your time and expertise.
13. Home mortgage interest
One of the biggest perks of being a home-owner is the ability to write off your home mortgage interest. You can deduct interest on any load used to buy, build, or make home improvements. The amount of your deduction will be based on the year that you took out your loan, so be sure to check with your tax advisor for the correct amount.
14. Other Loan Interest
If you took out a loan from a bank, specifically for business purposes, the interest on that load is tax deductible. While credit card interest can’t be deducted for personal purchases, but if the interest applies to business purchases, it can be deducted. Keeping strong records or just keeping a separate card for business expenses is wise.
Obviously, not having to take out a load or use a line of credit is the most ideal way to handle business expenses since the deduction only gives you some of the money back and not all of it, but for the majority of self-employed tax payers, credit is a necessity and it’s nice to at least get something back.
15. Medical and dental expenses
The current cost of healthcare for most people can be nauseating. And believe it or not, the IRS is sympathetic to medical expenses. The standard write off for medical and dental expenses on Schedule A can only be taken if the amount exceeds 7.5% of your AGI. However, self-employed individuals who don’t have assistance with their health insurance coverage from the state or a spouse, may be able to deduct 100 percent of the premium cost. This amount is subtracted off your AGI rather than taken as an itemized deduction. You can also deduct premiums that you paid to provide coverage for your spouse, your dependents and your children who were younger than 27 at year-end, even if they aren’t dependents
16. Paying the babysitter
Working parents rejoice! The federal Tax Court ruled in favor of deducting the cost of childcare while you work or volunteer to work for no pay for a recognized charity. Just don’t get greedy and try to claim date nights.
17. Miscellaneous Business Expenses
There are a lot of “creative” business expenses that get overlooked or ignored because they seem so outside of the box. But the general rule is that if an expense exists for something that benefits your business and you can provide documentable evidence you can write it off. For example, bodybuilders can deduct the cost of tanning lotion used in competitions, and a junkyard owner might claim the cost of cat food he buys to keep stray cats around because they keep rodents away from the grounds, and a rodeo clown can write off the cost of his makeup and costumes.
18. Senior Tax Deduction
If you turned 65 or older in 2016 you may eligible for this additional tax deduction.
19. Earned Income Tax Credit
EITC often goes unclaimed by eligible taxpayers. This is an income-based tax credit and can range from $510 – $6,318.
20. Unresolved Debt
If you were a lender and were not repaid, you may qualify for a tax rebate.
While meals are a tax-deductible business expense, the IRS will ask for receipts if you are audited and if you’re buying $2,000 bottles of champagne then you are likely going to be out of luck. Personal meals are not eligible, and you’ll want to have some sort of documentation backing up the claim that the meal was business related. If you keep your receipts, you can deduct 50% meal costs actual cost. Or you can take 50% of the standard meal allowance based on records of time, place, and business reason instead of receipts. standard meal allowance if you keep records of the time, place and business purpose of your travel.
It’s common to combine a work trip with some personal pleasure, so record keeping is crucial for claiming this expense. A few things to keep in mind to make sure your travel expenses are above board:
Trip must last longer than an ordinary workday, require you to get sleep or rest and take place away from the general area of your “tax home.”
Must have a specific business purpose planned before you leave home and you must actually engage in business activity. Handing out business cards at the hotel bar in Vegas on a girls’ weekend won’t cut it. Keep all receipts and records because the IRS will often zero in on large travel expenses
What counts as a travel expense?
- Transportation (e.g. airfare, rental car, taxi, Uber, etc). (100% deductible)
- Lodging (100 % deductible)
- Meals (50% deductible)
If you are combining business with pleasure, be sure to only claim actual business-related expenses.
23. Vehicle Use
This is probably one of the larger and more beneficial self-employment deductions you can take. Just make sure that you keep excellent record of when you use your car for business, that includes the date, mileage and purpose. And you have the option to calculate your deduction using either the standard mileage rate (which is adjusted annually by the IRS) or actual expenses.
Most people opt for the standard mileage rate calculation because it involves less record keeping but the actual expense method could give you a larger deduction because it calculates the cost based on the percentage of driving you did for business all year as well as the total cost of maintaining and operating your car, including gas, oil changes, registration fees, repairs and car insurance.
Additionally, the cost of registering your vehicle may be eligible as a deduction.
24. Memberships, Publications & Subscriptions
It’s important to stay up to date and relevant in any field. Money spent on specialized industry publications, journals and books that are related to your business is a tax deductible. Other memberships or union fees can also be taken as a tax write off if they directly benefit your work.
25. Sales Tax
Taxpayers have the option to deduct state and local income taxes or state and local general sales taxes from federal income taxes.
If you do pay state taxes, taking the sales tax break on your federal taxes might be beneficial if you make a larger purchase like an engagement ring or a car. But because the standard deduction for 2018 has increased, it might be worth calculating both scenarios to see which will give you the better deduction.
Overall, the 2017 tax reform lowered the Individual Tax Rates (check your Tax Bracket here). And the majority of taxpayers who are self-employed will see additional reductions in their taxes with up to a 20% deduction on qualified business income. If you’re not sure whether a cost is a legit business expense, ask yourself if the expense is necessary and ordinary within your line of work.
Keeper makes it easy to identify and track qualified business expenses, as well as organizes and creates easy reporting for tax filing. To find out more about how Keeper can make your taxes simple and quick, click here.