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Home Business Finance What Expenses Can I Deduct as a 1099 Contractor?
One downside to being a W-2 employee is that you don’t have access to many tax write-offs. However, if you’re a 1099 contractor, the Internal Revenue Service (IRS) lets you deduct all ordinary and necessary business expenses on your tax return.
That language sounds a bit stiff, but it basically means that you can deduct the expenses someone in your line of business would reasonably need to pay. If you’re unsure what those might be, here are some great ideas to get you started.
As a small business owner, you’ll need to find a way to generate interest in your product or services. Unless you have a vast network of pre-existing clients or customers, that means you’ll probably have to advertise your company somehow.
Fortunately, you can deduct those expenses, even if they take a variety of different forms. For example, you might write off the cost of your ads on social media platforms, direct mail campaigns, and business website.
If you drive your car as part of your business, you might be able to deduct some of the expenses you incur for the vehicle. That typically includes things like gas, maintenance, registration fees, and auto insurance premiums.
That said, you can only deduct the portion of your auto expenses that corresponds with your business use. For example, if you have a car you use for business trips 25% of the time and personal trips 75% of the time, you can only deduct 25% of your car expenses.
Alternatively, you can use a standard mileage rate issued by the IRS to calculate your deduction, which involves multiplying your miles driven for business purposes by $0.56 in 2021 and $0.585 in 2022.
If you start with the standard method, you can switch to the actual expense method whenever you like. However, if you decide to use the actual expense method, you have to stand by that choice until you retire the car.
Note that driving to your primary place of work doesn’t count as business use of your car. However, if you typically work out of a home office and take a trip to a client site, that trip would count as business use.
As a 1099 contractor, it’s often a good idea to purchase business insurance, though the type can vary depending on your trade. Fortunately, your premiums are tax-deductible, as long as it makes sense that you would need the policy.
For example, you’ll probably need general liability insurance if you work in construction. It helps cover the costs of a lawsuit if you ever accidentally damage your client’s property and is often required by state regulation.
As a 1099 contractor, you don’t benefit from employer-sponsored retirement plans, but that doesn’t mean you don’t have access to any retirement accounts. In fact, you have some great options that employees don’t.
For example, the Solo 401(k) is a fantastic retirement account for independent contractors with no employees. You can contribute the following amounts per year:
Contributing to retirement plans reduces your gross income for the current tax year directly. In addition, the dividends and capital gains you earn within the accounts are tax-deferred, which means you don’t pay tax on them until you withdraw your funds.
Because of the multiple tax advantages of retirement plans, contributing to them is one of the best deductions available to 1099 contractors. In any case, the funds will come back to you someday, and you can’t have too much money in retirement.
In 2021, the average health insurance premium for single coverage was $7,739, which works out to about $644 per month. That’s a massive expense, and if you’re a 1099 contractor, you have to pay for it all without the help of an employer.
Fortunately, you can typically deduct the cost of your health insurance premiums, along with whatever you pay for dental insurance. If you have a spouse or a dependent, you can write off their premiums too.
However, there is one significant caveat. To take a business deduction for health insurance premiums, you can’t be eligible for coverage through a spouse’s employer.
If you run your business out of an office in your personal residence, you may be able to write off some of your housing expenses. That typically includes your rent, mortgage interest, property taxes, utilities, and maintenance.
To be eligible for the deduction, your home office needs to meet two criteria:
If you pass both tests, you can write off the housing expenses that correspond with the business use of your home. For example, if your home office is 100 square feet and you live in a 1,000 square feet home, you can write off 10% of your actual costs.
Alternatively, if you’d prefer not to track all your home expenses, you can use the simplified method, which involves multiplying the square footage of your home office by $5.
It’s generally best to calculate your deduction using both options to determine which will save you the most money.
As a small business owner, you’ll likely take out a credit account at some point. Fortunately, you can write off the interest that accrues on all of your business debts, whether they’re installment or revolving accounts.
For example, say you’re a freelance photographer and use a credit card to pay for your day-to-day business expenses. If you ever carry a balance over from one month to the next, you can write off whatever interest you accrue as a result.
That’s another reason why it’s best to keep your personal and business transactions on separate accounts. If you use the same credit account to pay for both, it can be hard to determine what portion of your interest is tax-deductible.
It might not seem like a meal could be an ordinary or necessary business expense, but it can be in certain situations. However, the rules for deducting them are pretty specific, and the IRS pays close attention since people may be tempted to cheat here.
Generally speaking, a meal must involve the discussion of business matters with a business contact to qualify for the deduction. For example, that might include:
If a meal is deductible, you have two options for calculating the size of the write-off. You can deduct 50% of the actual cost of the meal, as long as it’s not an extravagant amount, or you can use a flat allowance set by the General Services Administration.
Notably, in the 2021 and 2022 tax years, the IRS has temporarily lifted the 50% limit for meals that come from restaurants to help the industry recover from the effects of COVID-19.
As a self-employed worker, you can take a tax deduction for whatever percentage of your phone and internet usage is for business purposes.
If you rent an office space with its own internet connection and pay for a second phone line just for your business communications, you can deduct the entire cost of both services.
However, if you have a home office or use your personal cell phone number for work, you can only deduct the business portion of the related expenses. Unfortunately, it can be particularly difficult to calculate that split for your phone and internet costs.
The qualified business income (QBI) deduction can significantly reduce your tax bill as a 1099 contractor. In simple terms, it lets you write off 20% of your business earnings, though that doesn’t include things like capital gains or interest on company investments.
To be eligible for the write-off, you must have pass-through income, which primarily excludes C-Corporations. In addition, there’s a maximum income restriction, and if you exceed it, the size of your deduction depends on the type of business you run.
As you can probably tell from that description, calculating the QBI deduction can be pretty laborious. There are a lot of nuanced rules to navigate, and it’s not a good idea to try and tackle them without the help of a tax expert.
For more details, you can read the IRS publication Instructions for IRS Form 8995.
The self-employment tax deduction is one of the best ways to reduce independent contractor taxes because your eligibility doesn’t have anything to do with your line of work. As long as you’re self-employed, you can probably claim it to some degree.
The self-employment tax is a 15.3% tax comprised of two parts: a 12.4% Social Security tax and a 2.9% Medicare tax. It applies to 92.35% of your net earnings. Employees get to share that cost with their employers, with each party paying 7.65%.
However, self-employed taxpayers don’t have that luxury. The self-employment tax deduction lets you write off the employer portion for income tax purposes, easing the additional tax burden.
For example, say you report $50,000 of net earnings as a sole proprietor. You’d have to pay $7,065 in self-employment taxes. However, you could reduce your taxable income for state and federal income tax purposes by half that, which is $3,825.
An independent contractor might be able to write off some of their food expenses, but it depends on the circumstances. In general, you can write off 50% of the cost of meals during which you discuss business matters with a professional contact.
For example, that might include a meeting with a potential client over lunch where you try to sell them on your product or service.
Alternatively, if tracking the cost of your business meals is too much work, you can claim a flat allowance for the meal. The General Services Administration sets a fixed amount per day.
That said, there are many more situations where food costs are not deductible. For example, any meal you eat by yourself is not automatically a tax write-off.
residence. More specifically, they must have a home office that has no personal use and is their primary place of business.
In other words, you have to designate a small section of your house and use it exclusively for the majority of your business. You can’t sit at the coffee table in the living room sometimes and call it a home office.
If your home office qualifies, you can deduct the percent of your home expenses that correspond with your business usage. For example, if you have a 200 square foot office and a 1,000 square foot home, you can write off 20% of expenses like:
Alternatively, you can multiply the square footage of your home office by $5 and take that as your home office deduction.
The best way to keep track of your business expenses is to open up separate credit cards and bank accounts for your business funds and connect them to an expense tracking software that can categorize transactions for you.
With this approach, your bookkeeping process becomes almost entirely automatic. Just make sure you schedule regular check-ins to fix any miscategorized expenses, monitor your cash flows, and stay on top of your estimated tax payments.
Nick Gallo is a Certified Public Accountant and content marketer for the financial industry. He has been an auditor of international companies and a tax strategist for real estate investors. He now writes articles on personal and corporate finance, accounting and tax matters, and entrepreneurship.
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