What Are The Benefits of 1099 Work?
Do you like the sound of being able to be your own boss?
Or perhaps setting your own schedule and working whenever you feel like it?
If you do, well I’ve got a treat for you. Let me introduce you to the beautiful world of being an independent contractor or 1099 worker. Although being self-employed can sound scary, I promise you it is not.
What Are The Benefits of 1099 Jobs...
There are actually a lot of positive benefits you can enjoy and look forward to when you work an independent contractor job.
In fact, let me give you the low-down on the key benefits to being a 1099 worker compared to that of a W-2 employee.
DETERMINE YOUR OWN SUCCESS
If you work as a W-2 employee, you may feel like your work doesn’t matter, your boss and co-workers don’t care, or all of your hard work is only profiting the owner.
As a 1099 worker… your hard work can directly translate into your own success! While of course there are uncontrollable factors, in general, your own actions and work ethic will determine the success of your business. If you are working overtime, chances are it is because you are enjoying your job and excelling at it.
BE YOUR OWN BOSS & SET YOUR OWN SCHEDULE
When you are a W-2 employee… you’ll likely have a boss who assigns you tasks and oversees your work. Maybe you’ll have a great boss who you’d love…but probably not. 😉 You probably will have a specific time you need to arrive at work and a designated time you could leave. Anything outside of this may require you to use your vacation time or a discussion with your boss.
When you get a 1099 form… you get to be your own boss! You have the freedom to set your own schedule. While your clients/customers may have requirements on when they need a job completed, you ultimately have the control to decide if that is a client/customer or job you want to take on. If you are not a morning person, you may be able to structure your schedule to where you get to sleep in. 😴
Or if you prefer to be done by 3:00pm to be able to pick up your kids from school, you likely can adjust your schedule to fit that. This independence can be a refreshing release from the confines of a “normal” job.
As a 1099 worker… almost every purchase you make for your business can become a tax write-off (or “expense”). Typically, the expense just needs to be “ordinary” and “necessary.” Ordinary simply means if it is common and accepted in your trade/business. Necessary means if it would be helpful and appropriate for your trade/business. For example, dog treats might be ordinary and necessary for a dog walker, but it would be hard to argue that for a construction contractor (sorry, Fido).
Write-offs are subtracted from your income - or in other words, the amount of money customers paid you - to get your net profit. That net profit is what is ultimately taxed. Thus, the more write-offs you have, the lower the net profit will be (which is good as far as taxation is concerned!). While this may seem overwhelming, Keeper Tax is an automatic 1099 expense tracker that can help.
While some expenses may be easy to identify (i.e. job supplies, advertising costs, etc.), here are a few of the most commonly missed write-offs.
- Home Office: If you have a home office (this doesn’t have to be an entire room – just a dedicated workstation), you can claim a portion of your home expenses as a deduction. Let’s say your home office space is 200 square feet and your home in total is 2,000 square feet. You could take 10% of your total home expenses to calculate this deduction (i.e. rent, utilities, repairs, etc.). You can learn more about the home office tax deduction here.
- Vehicle Expenses: You can also deduct a portion of your vehicle costs if your 1099 job involves driving. You can choose to track your true expenses (fuel, insurance, repairs, maintenance, etc.) or track mileage for taxes. If you determine you drive 70% for work, then 70% of all of your vehicle expenses can count towards this deduction. Check out our guide to learn more about the vehicle deductions.
- Cell phone: Do you use your personal cell phone for business purposes? Then a portion of that is a tax write-off! Let’s say you estimate your business usage to be 60% (you call and text clients, respond to emails, use Google Maps to drive to clients, etc.) on your $50 monthly phone bill. That would equate to an annual $360 write-off ($50 per month times 12 months times 60% business use).
Now let’s look at a simple example. While you earned $50,000 of income, you would only be paying taxes on the $36,000 of net profit since you were able to take $14,000 of write-offs.
So hopefully you can see the importance of tracking your expenses. After all, they decrease the amount of tax you will owe!
As a W-2 employee… if you spent money for your job, you wouldn’t receive a tax write-off for it (post-Tax Cuts and Jobs Act). The best you could hope for is that your employer would reimburse the cost; otherwise, you are just flat out of luck!
Here is a breakdown of what to do if you receive a W-2 and a 1099 in the same year.
THE QBI DEDUCTION
As a W-2 employee… this deduction is completely unavailable to you.
As a 1099 worker… you can benefit from a 20% deduction of your qualified business income (QBI)!
I left this deduction out of the tax write-off section, because usually you have to SPEND money to receive a tax deduction. Such is NOT the case with the Qualified Business Income deduction (also known as the Section 199A deduction). As part of the Tax Cuts and Jobs Act passed in 2017 and effective starting in 2018, many businesses - including you as a 1099 worker! - now may qualify for 20% deduction based on qualified business income.
Let’s continue with our previous example to illustrate this. The net profit on Schedule C was $36,000. First, the self-employment tax deduction must be calculated and subtracted from that net profit. Then you arrive at “Qualified Business Income.” This is the amount that is multiplied by 20% to calculate the QBI Deduction. So instead of your Taxable Income attributed to your Schedule C being $33,456, it is now $29,309. At an effective tax rate of 30%, this equates to savings of $1,244. And remember…you didn’t have to spend any money to receive it! (Note: This deduction only applies to income taxes. It will not impact self-employment taxes.)
The Bottom Line: Being A 1099 Worker Rocks!
Now of course being a W-2 employee has benefits of its own, and all jobs have their own challenges. But if determining your own success, being your own boss, setting your own schedule, receiving tax write-offs for business expenses, and getting an essentially free 20% business deduction - among many other benefits we didn’t dive into – is important to you, then being a 1099 worker may be very rewarding for you. 😊