Working in the gig economy has several advantages but those advantages come with additional costs and responsibilities. Taxes can be dicey. While regulations include several tax codes for many of the expenditures linked with working for yourself, knowing the deductions on your tax forms is tedious too.
Don't worry about getting a form 1099-NEC. Here is an insight into tax deductions, apart from your normal office expenses. Here is a summary of tax deductions you may be eligible for, and you take for sure, to lower your expenses and enhance savings on your tax return.
Self-employment tax
It is regarded as the most confusing and inefficiently assessed tax for 1099 employees. Self-employment tax means an employer usually pays for Medical and social security. However, for a self-employed worker, the tax is for you; it means you pay twice, as the employer and the employee.
For employees:
- Social security tax is 6.2% on the first $128,700 taxable income.
- Medicare tax is 1.45% of the taxable income amount.
The average self-employment tax percentage in 2022 was 15.3%, while for a normal employee and their employer, it was 7.65% percent. An extra 0.9% of Medicare tax was included later.
Then, where is the tax deduction? While you pay the self-employment tax two times, you can easily deduct half of the tax amount in your net earnings. Though you are paying taxes to be your boss, the IRS acknowledges the additional business expense. Along with it, the self-employment tax is assessed on 92.35% of your net income and not gross business income.
Home office expenditures
You can take a write-off for the cost of any room in your home that is used regularly for your business. It happens when you rent your own home and home office area. It works on the honor system, but if the IRS chooses to audit you, make sure you are prepared to validate your deduction.
The home office expenses are calculated depending on the square footage compared to your home; you can make a diagram of your home office space with precise square feet measurements.
The savings add up when you take the deduction as the same square footage percentage being claimed is applicable on mortgage interest, property taxes, home maintenance expenses, depreciation, and more. But, if you don't have all the records and expenses while filing tax, you can opt for the simplified home office expense deduction method of up to $1500.
Mobile, internet, and other gadgets
You may not opt for the home office deduction, but you can deduct the phone cost for work and internet expenditures. However, you should ensure that you claim expenses related to your 1099 work. So, if you have one phone, you should claim the expected percentage of time the phone is being used for work. However, if you have a business phone completely used for business, you can subtract 100% of the cell phone bill. The same is applicable for internet expenses.
Speaking about gadgets and software used to run businesses, you have an option of deducting the cost of these add-ons, as they qualify as business expenses.
- Depreciation: Disseminate the deduction over a specific number of years for what the IRS calls shelf-life.
- Single-time itemization: Write off the total cost for the purchase year.
When checking your 1099 expenses and claiming hardware, it is suggested to use a percentage to assess the business deduction. For instance, though you use your laptop only for work purposes, a 100% deduction may be a red flag for the IRS, so ensure you have proof to back up your claim.
Rent
For freelancers who have space away from their home to work and pay rent, you can deduct the sun. You can also deduct all the rents you pay for business from your independent contractor taxes for self-employed workers. If you break a rental agreement to pay fees, the fees are partly deductible.
Business insurance
You can deduct your premium as a deducible expense if you have any liability or material insurance premium to pay. It is profitable to have business insurance to safeguard your assets and get a deduction when it comes to paying taxes.
Startup expenses
If you have started your business, the IRS mandates you to deduct the bigger startup expenses with time as capital expenditure and not a one-time expense in one tax year. However, you can deduct around $5000 in business startup costs. Tax-deductible startup costs examples are industry research, travel-related expenses to commence your business, promotion and marketing, lawyer's fee, accountant fees, and more. Those setting up a corporation or LLC can deduct $5000 more for the expenses linked with organizational expenditures such as legal fees and state filing fees.
Professional fees
Legal and professional services of attorneys, accountants, and others are deductible business expenses. Legal fees are higher for self-employed workers.
Advertising
Have you paid for Facebooks ads, Google ads, or TV commercials? If you have spent on advertising your business, these taxes are deductible. Even indirect advertising is subtracted, such as costs linked with promoting a local NPO.
Retirement savings
If you want to reduce your tax bill and create a tax-deferred investment, claiming money for your retirement plan, it is worth doing. However, it may be complex to calculate as you should know your ‘after-tax’ amount. To get tax advice, speak to a qualified tax advisor.
Training and learning
According to your income level, if you are one of the Americans who took a loan for their higher education expenses, you can qualify for an additional deduction of $2500.
Moreover, the Lifetime Learning credit is based on your income, but it can offer students additional tax credit advantages of up to $2000 every year.
If you are undergoing any training to boost your skills, it comes under ‘tax deductions’.
Any casualties
If you have suffered a loss because of accident, theft, vandalism, you can lower your amount in dollars for a loss of more than $100. If you have experienced loss more than once in a tax year, you can reduce $100 from the dollar amount of every loss, the funds the insurance company pays you.
Charitable deductions
You may not easily assess these deductions because most people make small donations throughout the year. If you have made donations to local or national bodies which are reputed, you can surely add them. Major donations of $250 or more need a receipt letter from the recipient for tax documentation. Maintain a record of the donations you make to ensure you receive itemized receipts.
Home mortgage interest
A major perk of being an owner of the house is to write off your home mortgage interest. Any load used to construct your real estate can be deducted with ease. The deduction amount is based on the year you took your loan. Speak to a tax professional to know the exact amount.
Medical and dental expenditures
Healthcare expenses are extremely high. Whether you agree or not, IRS sympathizes with medical bills. The normal write-off for medical and dental expenses can only be available if the amount is more than 7.5% of your AGI. However, an independent contractor who doesn't have health insurance premiums from their spouse or the state can subtract 100% of the premium cost. The amount is deducted from your AGI instead of itemized deduction.
Business expenses
Small business owners have different business expenses to look up to. But, as per the general rule, if there is an expense for something that benefits your business and you can prove it, then it is a qualified business income deduction. For instance, a model can deduct the expenses of the tanning lotion he/she uses. Tax-deductible business expenses can help you save up a decent corpus.
Travel expenses
People often mix business and pleasure travel. Hence, recordkeeping is essential. To make your business trip count as business travel, you should have a business plan before leaving home. Hand your business card at the hotel. Keep all the receipts because the IRS often assesses your travel expenses.
Car use
Car expenses are a larger and more valuable self-employment deduction. Ensure to keep a good record of when you use your car for business. Always write the date, mileage, and goal. You can calculate the actual car expenses using mileage rate or actual expenses.
Choosing mileage rate deduction is better as it includes less recordkeeping. At the same time, the actual expense method can involve a bigger deduction as it involves calculation, depending on the percentage of business-related driving done and maintenance cost, oil changes, car insurance, gas, and more.
Sales tax
Taxpayers can subtract two taxes from the federal income taxes- state and local income tax or state and local general sales tax.
If you pay state taxes, take the sales tax break to benefit you by making big purchases such as a car.
Wrapping up
The IRS aims to help professional self-owned businesses. It offers several methods to lower your duty, such as goodwill tax deduction. You have to search for the expenditures and deductions for self-employed workers to take advantage of.
If you need an upper hand on your tax forms:
- Use the Bonsai tax receipt organizer.
- Find out all about the self-employment tax deduction from the list given above and get started now to avail all the benefits.
- Keep all the receipts for the last three years to have clean and organized records.
