Every taxpayer wants to know that one secret IRS loophole: the one that will magically bring their tax payments down to zero, clear their pores, and water their lawn. Unfortunately, that particular secret doesn’t exist.
But did you know there are six tricks that freelancers, 1099 independent contractors, and other self-employed people can use to significantly lower their tax bill — and it’s all completely legit?
In fact, the IRS specifically builds provisions for these situations right into the tax code. Welcome to the world of tax avoidance, the completely legal art of reducing, minimizing, and avoiding taxes!
Most freelancers overpay their taxes. Let’s make sure you’re not one of them. Below, we’ll share one trick to reduce your self-employment tax, and five tricks for lowering your income tax.
But first, let’s go over the basics.
Do you always have to pay taxes on a 1099?
Yes, you almost always get taxed on your 1099 income. If you make more than $400 as a self-employed worker, you’ll have to file taxes. You can avoid paying quite a bit of tax on your freelance or small business earnings, but you can’t wriggle out of it all.
Why 1099 workers start paying taxes at $400
For most people, taxes only kick in if you earn more than the standard deduction. That’s about $12,000 if you’re single and $25,000 if you’re married.
So why only $400 for freelancers and contract workers? It’s because self-employment earnings get taxed differently than other kinds of income. (That’s true of all self-employment income, whether it’s a part-time side hustle or a full-time career.)
The difference between a 1099-MISC and a 1099-NEC
When we talk about “1099 income,” what we mean is self-employment income — named after the form that independent contractors get from clients.
What 1099-MISC is used for
The most common version of a 1099 used to be the 1099-MISC. However, the 1099-MISC has been repurposed to cover only miscellaneous income, such as rental income and legal settlements.
What 1099-NEC is used for
Instead of putting income from contract work on form 1099-MISC, the IRS created form 1099-NEC, which stands for “Nonemployee Compensation.”
This is the form most freelancers and 1099 gig workers get — though if you get paid via PayPal or other electronic platforms, you might get a 1099-K instead. (You can read more about the difference between these forms in our guide to the 1099-NEC vs. 1099-MISC.)
What to do with your 1099 forms
Regardless of what types of income or 1099s you receive, you’ll need to report it on your federal tax return. And even if you didn’t receive a 1099 for your work, you’ll still need to report and pay taxes on your self-employment income as long as you’re past the $400 threshold.
Is it true you pay more taxes as an independent contractor?
Unfortunately, yes. There are ways to lower your 1099 tax bill — that’s what this article is about, after all! But generally, self-employed people are taxed at a higher rate than someone who works for an employer.
Why 1099 workers pay more taxes
When you work as a W-2 employee for a company, you automatically have 7.65% of your income withheld from your paycheck for taxes. This is known as FICA and covers:
- Social Security taxes
- Medicare taxes (collectively known as FICA)
At the same time, your employer is paying the IRS an additional 7.65%.
But when you work for yourself, there is no employer footing that half of the bill — you are your own employer. Which means you need to pay both halves, for a combined total of 15.3%.
This combined tax rate is commonly called self-employment tax and yes, it is the bane of every freelancer’s existence.
How business write-offs can help you pay less tax
On the bright side, self-employment tax is not applied to your total gross income, only your net profit.
The IRS recognizes that running a business costs money. Consequently, it not only allows — but encourages — you to subtract all those business expenses first. This is known as your taxable income.
And that’s where our first small business owner tax secret comes in!
Tax trick #1: Write off all your business expenses
Okay, so we spill the beans on this “secret” all the time — but that’s because most people still don’t write off all the business expenses they qualify for! Even though it’s the best way to lower their-self-employment tax.
You can claim these write-offs on top of the standard deduction, so don’t skip it. And yes, grab these savings even if you’re earning less than $12,000 — the more you can shave off that tax bill, the better.
Remember, they’re the key to lowering your self-employment tax, so take as many as you reasonably can for your type of business.
If you’re not sure which write-offs you can claim, take a look at this list of common deductions for 1099 workers. And to make things easier, try Keeper, the app that finds write-offs for you based on your job.
Write-offs in action
If Rasheeda were to list her taxable income as the entire $40,000, she’d have to apply that 15.3% self-employment tax rate to all of it — instantly handing over $6,120 of her hard-earned cash.
Now, let’s say instead she downloads Keeper. She already knows that she should be writing off the cost of paint, brushes, and canvases — though sometimes she buys new colors on a whim and doesn’t remember to save her receipt.
That’s okay! In addition to noticing her purchase at Julio’s Art Mart and adding it to her deductions, Keeper also found:
- 📸 The new camera and lighting rig she bought to take pictures of her work
- 🌐 Her website hosting bill
- 🖱️ Her yearly subscription for Photoshop
- 📚 The art books she uses to study up for her work
- ☕ The times she met up for coffee with her other artist friends to brainstorm how to grow their businesses
- 💵 The money she paid her sister to help pack and ship her latest batch of portraits
- 📮 The packing and shipping supplies they used
- 🌲 The cost of her annual artist retreat
- ✈️ The business trip she made getting to and from the retreat site
- 🎨 A portion of her rent as a home office deduction, to cover the square footage she uses as a studio
You get the idea.
Now, instead of paying taxes on her full $40,000 earnings, she can write $10,000 off as business expenses and pay taxes on only $30,000, reducing her tax bill by $1,530!
All businesses, big and small, get to take advantage of these savings. But did you know there are unique deductions available only to freelancers and other self-employed small business owners?
Tax trick #2: Deduct your self-employment tax from your income tax
If this one is making you go, “Wait, that can’t be real” — let us assure you, it very much is!
Remember the justification the IRS uses to make you pay extra in FICA taxes: you needed to cover both the employer and the employee portion? Well, here’s where you get to use that same logic against them!
Because you are both your own employer as well as the employee, you can write off the employer’s half of your FICA taxes when you file.
We know, it sounds sneaky. But far from being tax evasion, this calculation is actually built right into your Schedule SE! Meaning, if you forget about it, the IRS is likely going to send you a letter correcting the mistake and refunding the difference.
Tax trick #3: Cut 20% of your taxable income with the QBI deduction
Because this one has so many rules and exceptions to wrap your head around, most 1099 workers and other freelancers don’t realize that they’re missing out on a huge savings opportunity.
Introduced in 2018, the qualified business income deduction allows freelancers, independent contractors, and most small business owners to take up to 20% off your taxable income, no questions asked.
To qualify for the full amount, you just need to:
- Earn less than $326,600 when married, filing jointly or
- Earn less than $163,300 when filing any other way
Yup, you read that right: An extra 20% off your taxable income, simply because you’re self-employed.
Talk about a tax secret! This deduction is so simple that it feels like it must be a 1099 tax loophole, but nope — it’s totally legit.
Tax trick #4: Use your self-employment health insurance to save on income taxes
Again, when you’re a full-time W-2 employee, the company that employs you pays a portion of your health insurance plan. But that costs them money, so your employer gets to write off that expense.
Since you’re technically a small business owner, you can take the cost of health insurance off on your taxes, too — for the most part.
Be aware that self-employed health insurance deductions work a little differently than most business expenses. To start, you do not list it on your Schedule C with the rest of your write-offs. That’s because it lowers your income tax tax, not your self-employment tax.
Most 1099 workers have to foot a much larger bill to get good health insurance than people with 9-to-5 jobs. Being able to take such a hefty amount off your taxes — regardless of which tax — might help you sleep better!
Tax trick #5: Put money in your retirement accounts
In addition to insurance expenses, you can also deduct contributions to your retirement account.
Self-employed individuals have the option to create a variety of retirement plans, including:
- SIMPLE IRAs
- Solo 401(k)s
Contributions to your retirement account allows you to defer taxes on the money you put in, until you cash out your plan!
How much you can defer will vary from plan to plan and year to year. The IRS updates their guidelines annually, but for some context, in the 2022 tax year you can contribute:
Not every 1099 worker makes enough to create retirement accounts from their profits, but it’s definitely something full-time freelancers will want to consider!
Tax trick #6: Get paid through an S corp (if your income is high enough)
Think that corporate perks are only available to multi-billion-dollar media conglomerates? Think again!
Let’s check back in with Rasheeda. After a couple more years of hustling, her pet portraits have continued to grow, and now she’s earning an average of $90,000, net.
At that income level, being smart about her tax deductions still leaves her with bigger income tax payments than she’d like. So what does a business-savvy woman do? She creates an S corp!
After filing the appropriate paperwork, Purrfect Pet Portraits is now a separate business entity. The business is still earning $90,000, but now Rasheeda sets her personal salary at $75,000, leaving Purrfect Pet Portraits with a net profit of $15,000.
How S corp can help you save on your taxes
Here’s where the benefits come in: Purrfect Pet Portraits is now paying FICA taxes based on Rasheeda’s personal salary of $75,000 rather than the entire business’s income of $90,000. Meaning, she’s not paying FICA taxes on the remaining $15,000 of business profit.
Why you can’t set your S corp salary too low
Before you get too excited, let’s make one thing clear: You can’t set your personal salary at $1 to avoid paying FICA taxes on the rest of your business income.
Sadly, the IRS saw through that potential loophole immediately. They keep a pretty close eye on S corporations and require that all salaries be “reasonable compensation” for the work done.
It’s up to each business to determine what counts as “reasonable,” depending on the nature of your work. But a few factors will include:
- How important the person is to business operations
- How much time is being spent at their job
- How much education and experience they bring to the table
In Rasheeda’s case, she’s the only employee. And without her artistic talents, Purrfect Pet Portraits would have to close up shop. It only makes sense for most of the business profits to go into her pockets.
When not to get an S corp
If you’re earning less than around $80,000 from your work, a formal business structure like an S corp might be more trouble than it’s worth.
If you don’t want to pay the fees
Here are two big ways in which an S-Corporation will cost you:
- Legal fees to draw up formation documents and to register with all the state and federal agencies
- Accounting fees to file your business tax returns and to maintain your books and records
From setup fees to payroll taxes, S corporations are a big responsibility. For freelancers like Rasheeda — who make a comfortable, full-time income off their jobs — it may well be a solid investment, saving more than it costs. But not everyone is in the same position.
If you don’t want to deal with the hassle
Arguably the best thing about being a sole proprietor is that it keeps things simple. You can include your business taxes with your personal 1040 return. You can include your business taxes with your personal 1040 return.
As soon as you incorporate, though, you’ll need to complicate things. That means having to:
- File a separate tax return for your business
- Maintain financial records that include a balance sheet
How to claim tax savings on your 1099 income
If you want to save money with these tax tricks, you’ll need to fill out some forms. (No one’s idea of a good time, but it beats paying taxes!)
Don’t want to deal with all that paperwork on your own? File through Keeper. We’ll help you claim all your savings and take care of every form for you, so you can get on with your life.
If you’d rather file your own business taxes, though, read on to make sure you don’t miss out on any savings.
Claim your business write-offs with Schedule C
Here’s where you’ll:
- ✓ Report your earnings from self-employment
- ✓ Write off your business expenses to determine your business’s total taxable income
You can learn more about how to fill it out in our complete guide to Schedule C.
If you’re claiming a home office, you might also have to fill out Form 8829.
Deduct half of your self-employment tax on Schedule SE
This form goes hand-in-hand with your Schedule C. Schedule SE is where you’ll:
- ✓ Calculate your self-employment tax, based on your taxable income
- ✓ Use your self-employment taxes to save on income taxes
Get your QBI deduction on Form 8995
If you have higher taxable income — more than $170,050 for single people and more than $340,100 for married couples — you’ll use a different version of the form called Form 8995-A.
Claim your other income tax savings on Form 1040
On your Form 1040, you’ll claim tax savings on your:
- ✓ Health insurance
- ✓ Retirement contributions
There’s no “one weird trick” to dealing with the IRS. But there are definitely plenty of legal methods for avoiding extra taxes on your 1099 income.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. That sometimes leads us to generalize in our educational content. Please email email@example.com if you have questions.