Perhaps you’re here because you’re considering taking on work as an independent contractor and don’t quite know what to expect. Maybe you filed a tax extension and your self-employed tax return must be filed by October 15. Either way, you’re in the right place. Stick around and we’ll make sure you stay compliant and out of tax jail while keeping as much money in your pocket as possible.
The short answer is yes! if you get a 1099, you can and you absolutely should write off qualifying expenses. You are self-employed and expenses you incur in order to create an income are deductible as business expenses from your independent contractor (1099) taxes.
Writing off an expense isn’t the same as a dollar-for-dollar credit for what you’ve spent. It is, however, a key part of the equation used to calculate your net profit and helps you to arrive at a lower taxable income. Net profit (loss) equals gross income minus expenses. Your net profit will be shown on your Form 1040 and used to figure your tax due after any other deductions you may be eligible for.
The 1099 form will provide a summary of payments that were made to you in a given tax year but were not subject to tax withholding. Once the tax year is over, you’ll be sent a statement of all the money you raked in. Understand that your total non-employee compensation is just your starting point.
The 1099 won’t have details about the money you put out in order to service clients and run your business. At a minimum, you should expect to do your own record keeping or if your operation is robust enough, hire a bookkeeper. You’ll want to have proof of what you spend for two reasons.
First, you don’t want to miss any deductions. Secondly, you want to be prepared in the event you’re audited. The idea of IRS agents snooping around and asking questions is enough to make anyone quiver and sweat, especially if documents are not in order.
As an independent consultant or freelancer, you may not always receive an actual 1099 form. Although you don’t receive a 1099 form, you still need to keep a record of all the income you were paid and track 1099 expenses you incurred during the tax year.
In order for you to write off or deduct an expense, the IRS requires that it be both ordinary and necessary in your line of business. For tax purposes, a necessary expense is one that is helpful or appropriate in your trade or business. You may be surprised to learn how many expenses qualify and how much less tax you could be paying.
Have a cell phone that you use in order to conduct your business?
Do you pay for internet service so that you can freelance from home?
How about gas and maintenance for your car?
All of those may be legitimate write-offs depending on the work you do. Some common deductions include the cost of utilities, mileage, insurance premiums, work supplies, business travel, and meals.
In fact, an IRS Form Schedule C (used for calculating self-employed net profit) outlines 28 categories of deductible expenses (including business use of your home). Rest assured that for every side hustle and every self-employed operation there are deductions that you can take.
The only expenses that are explicitly off-limits for deductions as business expenses are amounts spent for personal, living, or family. In some cases, you’re permitted to deduct expenses even if they result in a net loss, but a few of the most frequently claimed deductions have stipulations.
The home office deduction is a very common write off independent contractors and other self-employed taxpayers claim. There are two ways to use this write-off, the simplified option and the regular method. Understand that in order to deduct expenses for a home office, the space must be dedicated for the exclusive and regular use of business activities.
Under the simplified method, you are entitled to deduct $5 per square foot up to 300 square feet. That leaves you with a maximum deduction of $1500 annually for your home office. Also consider that the total deduction may not exceed gross income minus business expenses.
The regular method may allow you to deduct a lot more in dollars, but it requires considerably more record keeping. It allows you to use actual cost as a basis including any related depreciation and it permits you to carry over deductions in excess of the gross income limitation.
Car expenses and mileage are well-known business expenses primarily because almost all 1099 workers or self-employed taxpayers have to travel for business related activities at some point in time. Also, being a member of the gig economy your car may be your main money-maker if you’re a rideshare or delivery driver. The IRS allows you to deduct actual expenses or you may use the standard mileage rate, which gets adjusted each year.
Meals are another expense that arises for independent contractors across most industries and has guidelines that need to be closely followed. Typically, meals are deductible at 50% of the total cost of the meal. You must also retain the following details about the business meal: the date, location, business purpose and list of those who were in attendance.
It takes money to make money and you’ve done what it takes to bring home the bacon. You’ve even held on to all those receipts for things you may have forgotten you paid for. But hold on a second, because the IRS does not want your shoebox of paperwork; they just need a neat summary of what’s in there. You may consider using an online service or app that will help you keep track of and categorize your expenses throughout the year and also alert you to tax deductions you may be missing. Here's a free 1099-MISC excel template you can use to organize your expenses.
Now that you know how to handle your self-employed tax deductions like a pro, you can move on to more interesting challenges. Deciding what you'll do with all of that money you managed not to pay the taxman will be exciting. Remember, each taxpayer’s situation is unique and the tax code is changing all the time. If you have questions or prefer to have someone guide you through the process, reach out to a qualified tax professional.
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