How to Track 1099 Expenses
Starting a business and becoming your own boss offer several benefits. You no longer have to subscribe to strict office hours, you can work from wherever you're most productive, and you have the power to make all of your own career decisions. Want to take a vacation? No need to ask for time off. Work better late at night than in the morning? Start your workday late — it's up to you!
That being said, there are still several drawbacks to working for yourself. Without an employer, you're not subject to the tax withholdings you normally would be. You're also likely walking away from a comfortable salary and benefits package. When you're working for yourself, you're the one sending and following up on all invoices, keeping up with all regulatory requirements, and staying on top of business expenses.
And when you're working as a 1099 contractor, there's a lot to keep track of. To get the largest tax break possible, you'll want to keep a detailed log of all business-related expenses so you can report these when it becomes tax season.
Want to learn how to track 1099 expenses? Here's everything you need to know.
Know what qualifies before you track 1099 expenses
Before you start tracking, you'll need to know what's worth tracking and what's not worth your time. The difference comes down to what is considered a business cost and what is a personal expense.
According to the IRS website, a business expense is anything that is “ordinary” and “necessary” to the business.
For example, if you're a web designer, the annual cost to maintain all of your design software subscriptions, like Adobe, can be included as a work expense. However, if you have another software program that you use to play games, that won't count.
If you're flying to a work conference, the cost of your lodging and flights and meals qualify. However, getting a manicure and new outfits to look good at the conference do not.
Here is a list of 1099 deductions small business owners can take advantage of to save money on their taxes.
Ways to track expenses
Ready to start tracking your business expenses? Here are several ways to do it.
1. Take pictures and keep track of receipts
Today, a lot of receipts and invoices come via email or electronically. For these instances, keep a dedicated folder on your computer to store all business-related expense information.
In addition to your digital folder, you should also have a physical folder to keep all of your paper receipts for taxes. If managing digital files is easier for you than physical ones — or you just don't want to risk losing a receipt — you can make digital copies of your physical receipts for safekeeping. You'll find they're much harder to lose track of that way.
It's in a contractor's best interest to carefully record all of your business costs and keep receipts filed accordingly. However, many people tend to procrastinate in these activities. If you can't dedicate yourself to the meticulous organization, save your receipts in a safe place at the very least.
One idea is to store a manila envelope in your car with the month written on it. As the month goes on, slide any business receipts into the folder as soon as you get in the car. At the end of each month, upload the receipts to your digital folder and get a new envelope for the next month.
After filing your annual taxes, don't delete all of your receipt files! You should hold onto your tax returns and any receipts for at least three years in case of an IRS audit. If you run into a bad debt situation or file for a loss, hold onto those documents for seven years.
2. Keep a spreadsheet
Spreadsheets are a great way to track both your income and your expenses as an independent contractor.
To get started, create four columns. They should be labeled item, cost, date, and then receipt. You can make notes about where the receipt is located (maybe an email folder or a physical file). Here is a free excel template for 1099 contractors you can download and use.
Sticking to a system like this will streamline your expense tracking process and make filing your quarterly estimated taxes that much easier.
Excel offers a 1099 excel template if you want something that comes already made! If you want a more sophisticated option to organize your invoices and track expenses, you could also look into a program like Freshbooks, Intuit, Zoho, or Quickbooks. Just keep in mind that most of these programs come at a fee. However, that cost could qualify as a business expense!
3. Use an expense tracking app
Manual tracking can be tedious and cumbersome. However, several tools can make it feel less boring.
On your phone all the time? A 1099 expense tracking app can make keeping your expenses straight as easy as spending a few extra minutes on your phone. These apps can connect with your business debit or credit cards so you can categorize each expense as either personal or business.
It organizes all of your tax information at the click of a button. If you are worried about the pricing of these accounting software or apps, don't worry. Many of them are very affordable.
Some apps can also help you track things like your gas mileage and understand what kind of deductions you could qualify for. In fact, see exactly why Keeper Tax is considered the best app to track receipts for taxes. These apps make electronic filing or e-filing a cinche. In fact, Keeper Tax has a ton of great reviews.
Should I still track expenses for part-time 1099 work?
We get this question a lot from part-time independent contractors and freelancers or subcontractors who get an 1099 IRS form. Here's the answer.
1099 expenses and the standard deduction
The standard deduction is a tax write-off that every American gets, just for being a resident. In 2018, it was $12,000 (for single people). What this means is you’ll only get taxed on income greater than the standard deduction amount.
What about itemized deductions?
There are two types of itemized deductions - personal and business.
The standard deduction trades off with personal itemized deductions. That means if you have less than $12,000 in itemized personal deductions (very likely), then you shouldn’t bother tracking those because it’ll be better to claim the standard deduction anyway.
A lot of freelancers are confused about if they can take the standard deduction and deduct business expenses. Tax deductions related to your 1099 work, however, are completely independent. They are claimed on top of your standard deduction.
Part-time 1099 worker expenses
Let’s say you earn $50,000, but only $5,000 of that is from a bit of 1099 work you do on the side (ex: driving uber on weekends, or renting a room out on Airbnb).
In this case, after you calculate your freelance taxes owed, you’ll still need to pay around $1,500 in taxes on your 1099-MISC income (assuming the standard 30% effective tax rate for 1099 income). That’s not nothing!
By remembering to track expenses related to your 1099 work will still save you a ton of money. If you are not writing off your business expenses, you are leaving money on the floor.
Even something small, like parking fees for $10 per week, could be over $200 back in your pocket at the end of the year.
Bottom line: You should always track 1099 work expenses, even if you only work part-time!
File estimated quarterly taxes
The last piece of the 1099-MISC expenses puzzle is paying your quarterly estimated taxes.
Paying all that you owe in taxes in one large payment come tax day can be a financial burden, so the IRS has made it easier to spread your tax payments out over the course of the year through estimated quarterly payments instead of all at once at the end of the year.
You could use this estimated quarterly tax calculator for your figures from the last year to determine a fair estimated tax payment.
You may owe a bit more or even be owed a refund come tax time, depending on what your final numbers come down to. This is the case if you made a lot of money in the previous year. But either way, a majority of your taxes will have already been paid, which gives you peace of mind.
Start off on the right foot as a 1099 contractor
Starting a career as a 1099 contractor can be exciting and overwhelming at the same time. Start on the right foot by tracking your monthly expenses, keeping all your receipts in a safe spot where they can stay long-term, and paying your quarterly estimated taxes on time. Doing all of this will make filing your form 1099-MISC an easy job at the ned of the calendar year.
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At Keeper Tax, we’re on a mission to help freelancers overcome the complexity of their taxes. That sometimes leads us to generalize tax advice. Please email firstname.lastname@example.org if you have questions.