Top Ten 1099 Tax Deductions
Navigating 1099 taxes is no easy task! When you earn money as an independent contractor, you are taxed as a “business-of-one” in the eyes of the IRS. Just like a company automatically withholds taxes from employees’ paychecks, you need to withhold for your own taxes.
The good news is that, also like a business, you get to deduct expenses to lower the amount you pay in taxes. When you calculate quarterly or year-end 1099 taxes, you can itemize deductions which factor into your business profit or loss (as reported on the Schedule C). For example, let’s say you are a Dasher for DoorDash. For every mile you drive while working, you can deduct 54 cents from your earnings. You can also write off a percentage of your cell phone and any supplies needed for the job. After keeping track of those deductions, you could even pay less in taxes than a traditional W-2 employee (7.6 percent).
Let’s cover the most commonly used 1099 tax deductions for independent contractors.
Top Ten 1099 Tax Deductions
#1 Car expenses and mileage
Of all deductions available to contractors, mileage and car expenses can provide one of the most sizable write offs. You’re allowed to write off any driving while working, driving between gigs, going to meet clients, or driving out of town for business. In 2016, the standard mileage rate allows you to write 54 cents off of every mile you drive for your business.
There are two methods for tracking and deducting mileage: the actual method and the standard mileage rate. The standard mileage rate takes into account gas, insurance, maintenance and depreciation and is much easier to keep track of and claim. In order to deduct it, keep track of your business miles and multiply the total mileage amount by .54 (the 2016 standard mileage rate). If you use this deduction, you can’t additionally write off insurance or gas because it’s already included in the rate.
Make sure you’re keeping adequate records of your mileage because this is also one of the most often audited expenses for contractors. The IRS recommends spending a few minutes a day (or whenever you drive for business) recording your mileage in a driving log. You will need to log the date, miles, business purpose, plus the starting and ending odometer amount.
#2 Home office expenses
If running your independent business from home, you can potentially count a portion of your home expenses a tax write off. There are two important conditions however to using this deduction:
- Primary place of business: Your home must be where you conduct the majority of your independent business. If you only sometimes work at home out of convenience, then you can’t count it as a deduction.
- Exclusively used for work: The space that you use within your home must be exclusively meant for work. For example, a room that is only your home office or a desk in one room that is reserved only for running your independent business. Ultimately you will write off only a percentage of your home space.
Like deducting mileage, there are two options for deducting home office expenses: the Simplified Method or the Regular Method.
- Simplified Method: You can multiply the square footage of your office by the IRS set rate of $5 per square foot for 2016, up to 300 square feet per year.
- Regular Method: Track all costs related to your home residence, and determine the portion to allocate to your home office using Form 8829.
#3 Supplies
Any supplies that you purchase to conduct your independent business is deductible. If you’re a cleaner you can deduct cleaning supplies. Other examples are office supplies, food for passengers in your car, new messenger bags for couriers — if it’s used for you to get the job done then it’s deductible. If you rented or leased any equipment for your business, that’s a write off as well.
#4 Health insurance premiums
If you pay for your own health insurance plan and your spouse doesn’t benefit from an employer-subsidized health insurance plan, then you could count those payments as a tax write off on your individual income taxes. If your independent business earned a profit for the year, you can report this on your 1040 form not your Schedule C (where you’ll report most deductions).
#5 Continuing education
Contemplating taking a class or online course to improve your skills? If any education is needed to “maintain or improve skills required in your present work” then you can count it as a tax write off. An important caveat is that you can’t write off education expenses for learning a new line of work, only for improving and honing your current skill set.
The IRS Publication 970 provides additional information about this deduction in Chapter 12.
#6 Cell phone
Do you use your cell phone for your contracting business as well as your own personal use? If so, then you can count a portion of your cell phone bill as a tax write off! You’ll have to make a close estimate as to what percent of your usage is personal versus business. But, for the amount that is business, apply that percentage to your phone bill and deduct it.
#7 Travel
If you ever have to travel for business, make sure to keep track of your airfare, cab, Uber/Lyft, hotel, rental cars and any other expenses. Those costs are deductible if your travel is for a business purpose. For example, do you have to travel to pitch or present to a client? Count that trip and any associated costs as a tax deduction.
#8 Parking
This is another expense that can add up for certain types of contract work. If you regularly pay for parking, keep those receipts as well. These too can count as a tax write off.
#9 Postage
Postage is one deduction that is often overlooked. But if you find yourself shipping and mailing for business often, keep track of these expenses as well.
#10 Fees, Dues, Subscriptions
If you pay for any services, trade organizations, or publications required for your business then those are tax deductible. For example, if you have a certification that requires a fee to maintain, then you can count that as a write off.
There are many more 1099 deductions that you can count so make sure to double-check with a tax advisor to best understand the full extent of what you can write off based on your particular work. The IRS Schedule C instructions also provide a great resource for better understanding how to claim those deductions when doing your taxes. By far, the most important takeaway is to keep incredibly diligent records of your expenses that you plan on deducting. That diligence can save you a lot of money in the long run!
