For self-employed workers and independent contractors, taking advantage of 1099 write-offs is one of the most important things you can do to maximize your potential earnings. A significant difference between being self-employed and working in a more traditional role is that instead of taxes being taken out of each check, you must file for your taxes each tax season.
Writing off deductible expenses and understanding how self-employment tax works to avoid audits or penalties can help sole proprietors and freelance workers prepare their tax forms, keep track of what they owe, and save money.
Whether you drive for Uber, Lyft, or Grubhub on the weekends to earn a little extra cash, or you are the sole owner of your LLC, if you earn income as an independent contractor, you must file a 1099 form with the IRS. When you file a 1099, you will calculate what you owe for your self-employment tax, as well as the federal income tax and potentially a state income tax (depending on where you live).
Many independent contractors lose tons of money each year by overpaying their taxes because they don’t even know about some of the things they can write off. Here is a list of some of the things you can write off on your 1099 if you are self-employed:
Mileage and Car Expenses
Often, the largest expense that independent contractors and self-employed workers report is mileage. If you use a different vehicle for personal use and work, it might end up being a little easier to keep track of the miles you drive for work, but if you use the same car for work and personal use, it can get a little tricky.
The best tip is to keep a detailed log of all vehicle expenses and take note of the following: miles driven, gas purchases, repairs and maintenance, licensing and registration fees, car insurance, lease payments, car washes – these are all costs associated with your vehicle that you can write off. By saving receipts and keeping detailed notes of your purchases, you can make tax season easier and save money from your tax write-offs.
There are two options for reporting your vehicle costs to calculate your tax write-off: the standard mileage rate and the actual expense report.
If you use the standard mileage rate, you end up calculating 56 cents for each mile driven, which estimates gas, repairs, and all other vehicle costs. If you report using the actual expense, you must have detailed and accurate logs of miles, repairs, maintenance, and all other vehicle expenses to report an exact amount.
Home Office Deductions
Another important deduction for self-employed workers is related to their home offices. If you pay for a workspace – whether you own or rent the space, the cost can be deducted from your 1099. Like all expenses, you are always at risk of an IRS audit, so make sure to keep good records and save receipts.
One trick for home office deductions is to keep a blueprint diagram of your home office space – with accurate measurements and notes from any work or repairs incurred.
Other than the actual space itself, if your home office is inside your home, you can also deduct interest from your mortgage payment, depreciation value of the house, utilities, costs for homeowners’ insurance, and any other repairs or work done. A general rule of thumb to use when calculating your home office expenses – if your office takes up 10% of your home, you can deduct 10% of your utilities, mortgage, and other home expenses.
Similar to calculating vehicle expenses, there are two options for calculating your home office write-off amount. With the standard calculating method, you must use detailed notes about your expenses to show each itemized cost. The simplified option is calculated by the square footage of your home office, up to 300 square feet, allowing you to write off 5 dollars per square foot. So, the most you can deduct with the simplified method is $1500. If you incur more costs than that for your home office in any given year, you will want to keep detailed records of your costs and use the standard calculating method.
Internet and Phone Bills
If you are self-employed and use your phone, computer, or tablet for work, you can deduct the cost on your 1099. If you have a separate line or internet plan for work, you can deduct 100% off the cost. However, if you share plans for personal use, you should only deduct the amount that accounts for your business use.
Suppose you are self-employed and pay for your health insurance. In that case, you can deduct all health, dental, and long-term care insurance costs, as long as the costs are qualified and you do not have eligibility for another plan (like through a spouse’s employer, for example).
As a self-employed worker, you can also deduct health insurance costs incurred to pay for coverage for dependents – like a spouse or any children under 27 – even if they are not listed as dependents on your taxes.
When you are traveling for business – whether you are going to a meeting, at a professional organization conference, or entertaining a client, for example, there are several expenses that you can write off on your 1099.
To be considered business travel, you should show records of the specific business purpose and business activity, so make sure to keep detailed records of all the expenses and the business activity logs. Travel expenses that can be written off include flights, gas, lodging, and meal expenses during the trip.
The new Consolidated Appropriations Act of 2021 (HR133) grants a temporary allowance for full deductions for all business meals. If the expense is for a business meal (doesn’t include your lunch or meals you eat by yourself) and an itemized receipt that includes all of the items purchased, you can write off 100% of the costs.
Interest on Loans
If you are self-employed and have business loans, the interest paid can be deducted from your 1099. Again, it simplifies record-keeping if you keep your accounts separate for personal and business uses. However, if a portion of the loan is for your business, you can write off that portion of the interest. For example, 40% of the loan funds are for your independent contracting business, 40% of the interest can be deducted.
If you use a business line of credit or another business credit card, the interest paid on business expenses can also be deducted. If you use a personal credit card for a business expense, you can still deduct the interest paid for that purchase, but you should have a receipt or record of the cost.
Other expenses you can deduct on your 1099 include publications and subscriptions. If your work requires you to use software that costs a monthly fee, for example, or you subscribe to a specialized journal or newspaper that directly relates to your self-employment, the cost can be included in your 1099 write-offs. Another example could be expert books or study materials that will help with your job.
Continuing education is another example of an expense that can be written off on your 1099 if you are self-employed. Earning additional licenses or certificates and taking courses relevant to your field can be tax-deductible and included in your 1099 write-offs.
Another expense that can be written off on your 1099 is office space, equipment, and supplies. If you rent office space, your monthly cost for rent can be deducted. If you lease or rent any large equipment or supplies for your work, those costs are all tax-deductible.
Any supplies you constantly keep in the office – like pens, paper, and other things used day-to-day – can be deducted. Other expenses, like computers or special equipment, can also be deducted, but they may need to be reported as a depreciating asset if they are used for longer than a year.
Any cost that you spend on advertising for your business can be deducted from your 1099 tax form. Whether you paid for advertising on Facebook, Google Ads, local TV spots, or any other advertising costs you incur, you can write off those costs as an independent contractor on your 1099.
Starting your own business can be expensive. From state filing fees and legal fees, professionals, consultants, accountants, and attorneys needed to get the ball rolling – there are a number of costs that might catch you off guard when you start on your own. The IRS allows you to deduct up to $5,000 in business startup costs after your first year of active business.
A new business expense that can be deducted from your 1099 is the cost of childcare. If you pay for a babysitter, daycare, or other kinds of childcare service while you work or travel for work, the cost can be written off.
If you are self-employed and contribute to a retirement plan, such as a SEP-IRA, SIMPLE IRA, or a solo 401(k), deferred salary contributed to the investment plan can be written off on your 1099. However, several contribution limits vary by retirement plan, and the maximums fluctuate annually.
Tips for Tax Season
When preparing your annual tax report, there are some tips and tricks that can help make tax season easier. Some easy tricks include keeping all of your receipts and logs of your miles, but here are some tips that you might not know about yet:
Log your tax deductions
Look at the list above of the things you can deduct from your taxes. This list is not exhaustive, and sometimes it helps to seek counsel from a tax professional, especially if your work has nuances that might not have been included here. Once you know what can and cannot be deducted, make a spreadsheet or log where you can begin tracking all deductible expenses. There are even some expense-tracking apps that you might find helpful
Separate personal and work accounts
An excellent way to keep track of your expenses is to keep your bank accounts or credit cards separate. If you keep them together, it will take a lot more work later to try and figure out which costs were for personal things and which costs for work.
Other Things You Need to Know About Your 1099 Write-Offs
As a self-employed individual, you are responsible for covering the entire tax amount for your Medicaid and Social Security. These taxes typically fall on employers for individuals that work in more traditional roles, but as an independent contractor, you must pay as employer and employee. So, instead of an employer paying half, you pay the full amount, but you get to deduct the half that you pay as the employer as a business expense.
Write-Off Personal Expenses
If you don’t have the luxury of separating your personal and business accounts – like your bank accounts, loans, car/internet plans, etc. – make sure to keep track of what is used for your business and what is used for personal use. By writing off partial personal expenses, you can deduct the amount that is used for business. For example, if you use your personal phone for your delivery job and show that 50% of the usage on the phone is for work, you can deduct 50% of the phone bill on your 1099.
When filing your taxes, try and be as accurate as possible when reporting your income and write-offs. The easiest way to do this is to keep detailed records as you go throughout the year, rather than scrambling to find receipts come tax season. Here are some tips to avoid receiving an IRS audit:
- Make sure that your reported income is consistent – across all your tax forms (W-2, 1099, etc.).
- Carefully document your expenses – for your vehicle (mileage, gas, repairs), your home office (utilities, repairs, etc.), and meals; keep your receipts!
- Be honest and accurate – keeping receipts and detailed records/logs is the easiest way to back up what you write off.
Check the IRS guidelines for the Schedule C Form to know more about the expenses the government requires and allows. While you can do your own taxes, it’s better to find a tax prepare who specialized in self-employment tax. They can help you maximize these deductions and keep much of your income.