A Guide For The Self-Employed on How To Save Money On 1099
Being self-employed means you are liable to compute, file, and pay your own taxes. Form 1099- NEC will tell you how much you have earned from each client you had during the year. Knowing how to save money on 1099 is equally important as knowing how much taxes you owe. The more deductions you are eligible to claim the less your taxable income will be. This will in turn reduce your tax liability.
In this article, we are going to learn about. What is 1099? When are taxes due? And how to save money on taxes as an independent contractor?
What Is 1099?
If you are your own boss you might be given different names such as independent contractor, freelancer, gig worker, self-employed, and sole proprietor but it all boils down to the same thing which is the income you generate is a non-employment income.
This means while considering the tax consequences you have to look at the 1099 form that you received from each client that hired you. It tells you how much 1099 revenue you’ve earned during the tax year. You will compute and file your tax return based on the information provided in 1099.
When Are Taxes Due?
You are required to pay taxes to the tax authority as you earn. Self-employed people have to pay tax quarterly if their expected tax liability is estimated to be more than $1000. A logical question would be how do you know beforehand how much you are going to earn and how much you owe to the tax authority?
Remember this is an estimated tax. Simply look at the figures in your preceding years' tax returns and base your estimation on historical results. If you expect to pay less than $1000 you can pay once a year.
Don't forget to pay these taxes on time to avoid any penalties. Estimated quarterly taxes are due on April 15, June 15, September 15, and January 15.
How To Reduce Taxes On 1099 Income By Claiming Deductions?
Still, wondering how to save money on 1099? The IRS allows you to deduct business expenses that are ordinary and necessary in your trade. Here are the tax deductions that you can claim to reduce your taxable income.
Mileage
As the pandemic began there has been a major shift in the way the buyers purchase stuff. Online marketplaces have seen a huge surge. This means more independent contractors become Instacart shoppers, Doordash drivers, and so on to fulfill emerging demands from customers. One of the top tax deductions these freelancer drivers can claim is the self-employed mileage deduction.
You get 100% deductions if you exclusively use your car for business purposes. However, if you also drive it to run your personal errands then you can only deduct the portion related to your business travel.
Before you take this deduction you need to determine your eligibility for either of the two methods prescribed by the IRS. One is the standard mileage rate and the other is the actual expense method.
Standard Mileage Rate
According to the IRS:
To use the standard mileage rate, you must own or lease the car and:
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line,
- You must not have claimed a Section 179 deduction on the car,
- You must not have claimed the special depreciation allowance on the car, and
- You must not have claimed actual expenses after 1997 for a car you lease.
The IRS also prescribes using the Standard mileage rate in the first year you use your vehicle for your business and then in later years you choose to go with either method if you are eligible for both.
However, if you have a leased car you don't have a choice. You are only permitted to use the standard mileage rate for as long as the lease period lasts including renewal periods.
You have to keep a mileage logbook to record your business mileage during a tax year.
Let’s say you need to attend a business meeting and your milometer shows 13,860 miles when you start driving. Upon reaching your destination it shows 13,885 miles. You drove 25 miles. After the meeting, you drove back home. 50 miles is the total miles up for tax deduction.
When tax season arrives you can multiply your total work-related mileage with the standard mileage rate prescribed by the IRS, which is 58.5 cents for 2022 to compute your tax deduction.
Continuing the above example your 50 miles will give you a tax deduction of $29.25 (50 miles * 0.585).
Actual Expense Method
While using this method you can include expenses such as fuel, insurance, repair & maintenance, etc. To compute your deduction you need to determine how much you have used your car for business purposes during the tax year.
For instance, if you have used your car 60% for business-related work and incurred a total cost of around $4500 then your allowable deduction would be $1,350 ($4,500*30%).
If you used the standard mileage rate your tax deduction would have been $2632.5 ($4500*0.585). In this case, opting for a standard mileage rate will save you more money. You should opt for the method that gives you the maximum savings provided that you qualify for both.
Home Office Deductions
During the Pandemic, everyone was working from home and most of the Millenials and Gen Z do not want to switch back to a full-time commitment. Chances are this is going to be the new normal.
This means all the self-employed people who are working from home will be able to claim a home office deduction regardless of whether you are a landlord or a tenant.
Let’s say you are a makeup artist and have a dedicated space to serve your client at home or you are a content creator who has an editing room. Whatever business activity you have undertaken If you use your home space as your office you are permitted to deduct a portion of the cost you spend on maintaining your residence.
In order to qualify for a deduction, the IRS requires you to either use this space regularly and exclusively for business or it should be your principal place of business.
There are two ways you can compute the home office deduction.
Regular Method:
If the total area of your home is 1200 square feet and you use 250 square feet then you use 20.8% of your home for your work (250/1200). If this sounds too complex because you have to keep track of a lot of expenses then don't worry the IRS offers a simplified method to compute your home office deduction.
Simplified Method:
In the simplified method, you use $5 per square foot as your deduction. So continuing the example above, the 250 square feet of office space is equal to 1250 ($5*250).
Qualified Business Income Deduction
You might be eligible to claim a qualified business income deduction. The IRS permits you to write off up to 20% of your qualified business income. But this deduction is allowed for pass-through or flow-through entities where the business income is taxed as the investor's personal income.
So if you are a sole proprietor or a member of LLC or a shareholder of S corp you may qualify for this deduction. Note that Income earned through C corp is not eligible for this deduction. It is noteworthy that QBI does not lower your self-employment taxes. It only reduces your income taxes.
Other deductions you can claim are:
- Health Insurance Premiums
- Supplies
- Travel
- Mobile Phone cost
- Business Insurance
- Depreciation
- Commissions or Fees
This is not an exhaustive list. Consult a tax specialist who can guide you well on how to save money on 1099? Tax advice from a professional will ensure that you don't miss out on important write-offs that are relevant in your particular case.