Independent contractors, freelancers, gig workers, and others who are self-employed typically use 1099-MISC to record their earned income when preparing their tax returns. Although working for yourself is very rewarding, it can also complicate taxes. For example, regular employees who receive a Form W-2 are only responsible for their share of payroll taxes on the money they earn. If you receive a 1099-MISC, however, you must pay both the employer and employee amount (also known as self-employment tax). Thankfully, lowering your taxes on a 1099-MISC is possible. Just follow our tips below to see how you can shave some money off your tax bill.
Maximize Business Deductions
One of the perks of being an independent contractor or self-employed is that the IRS treats you as a business. And, just like any other business, you’ll be able to deduct eligible expenses which can help reduce your tax liability. This may include costs to operate your business, as well as office supplies, travel expenses, meals, and other relevant expenses. Here is a small sampling of items you may be able to deduct.
- Mileage and vehicle expenses
- Credit card and loan interest
- Utilities, phone, and internet expenses
- Subscriptions and professional memberships
- Advertising costs
- Business meals
- Professional training or certification expenses
- Startup costs
Keep in mind that you must pay close attention to how some of these costs are split between personal and business use. You can only deduct the portion specifically used for business purposes.
Self-Employment Tax Deduction
Another business expense you can take is your self-employment tax. Remember when we mentioned that those with a 1099-MISC are responsible for both the employee and employer portion of payroll taxes? Well, the IRS helps alleviate that burden by allowing you to deduct half of your total payroll tax from your net income when calculating your income tax.
Home Office Deduction
Do you operate your business out of your home? If so, you can deduct a percentage of mortgage payments or rent, as well as other home-related expenses as a home office deduction. The total amount will vary depending on whether you use the simplified option (for spaces 300 square feet or less) or the standard method to calculate your deduction. Although the simplified option is easier to calculate, you won’t be able to deduct home depreciation, utilities, repairs and maintenance costs, or mortgage interest. It’s also limited to a maximum deduction of $1,500.
Insurance and Retirement Deductions
In addition to the self-employment tax and home office deduction, you may be eligible to deduct contributions made to qualifying retirement accounts, as well as certain insurance premiums.
Health, dental, and qualified long-term care (LTC) insurance premiums for yourself, as well as your immediate family, are fully deductible. This includes premiums paid for children under the age of 27, even if you do not claim them as a dependent on your tax return.
If you contribute to a Simplified Employee Pension individual retirement account (SEP-IRA), Savings Incentive Match Plan for Employees (SIMPLE) IRA, or a solo 401(k), those contributions can help reduce your tax bill. The amount you can contribute and deduct, however, depends on the plan type and the annual limits.
Property and Equipment Depreciation
Another way to lower your taxes on a 1099-MISC is through property and equipment depreciation. To take this deduction, you must own the property/equipment and it must be used to generate business income. The property or equipment must also last more than a year and have a determinable useful life. Examples of depreciable property include, but is not limited to:
- Buildings you rent to others for income
Any property used for personal use is ineligible. You also can’t depreciate assets that increase in value over time.
Change Your Business Structure
Changing your business structure from sole proprietorship to an LLC or partnership can help you save on self-employment taxes. Under these business structures, you can choose to be taxed as an S-Corporation (S-Corp) and pay yourself a salary (reasonable compensation for your industry). Although you’ll still pay the 15.3% self-employment tax on your salary, any additional money your business earns can be taken as dividends or distributions, which is not subject to the self-employment tax. Before incorporating as an S-Corp, however, we strongly recommend speaking with a tax advisor to determine if a change in tax status is the right move for you.
Get Help With Your Business Taxes
Confused about which tax deductions you can take as an independent contractor or sole proprietor? Tax Defense Network can help you file your business taxes accurately and keep you out of trouble with the IRS. For a free consultation, contact us at 833-803-4222 today!