22 Best 1099 Deductions for Independent Contractors

19

Min Read

Michael Eckstein, EA

With the freedom to organize your business comes the challenge of tracking expenses and deductions.

It can be overwhelming to find the right 1099 deductions to claim that will reduce your federal income tax bill. It’s even harder to find those deductions without an accurate record of your business expenses. 

You don’t want to make a mistake or miss a valuable tax credit when trying to maximize deductions for yourself. If you do, that means you could leave a lot of money unaccounted for that could lower your taxable income by thousands of dollars.

Note: A deduction and tax credit are technically different things. A credit reduces tax. A deduction reduces taxable income.

If you are self-employed, the odds are good that you want to claim as many business expenses as possible. To make the process of hunting for 1099 deductions more simple, we put together our list of the best tax deductions for independent contractors and freelancers.

First, check out our tax and accounting app that makes tracking these expenses a whole lot easier. Try Bonsai Tax.

Then, read on and discover deductions that you may not have ever thought of claiming as a 1099 contractor!

The 22 Best 1099 Tax Deductions for Self Employed Contractors

  1. Self-Employment Tax

If you are a 1099 self-employed worker, it is pretty much essential to claim this tax deduction. However, new contractors often misunderstand the self-employment tax, and it can cause some headaches if improperly filled out.

The self-employment tax is equivalent to the taxes you'd pay an employer for Social Security and Medicare. It is like FICA that your employer would pay. If you are a freelancer, small-business owner, or any kind of contractor: you are eligible for this deduction.

This tax boils down to a 15.3% rate (12.4% for Social Security and 2.9% for Medicare tax). If you are an employee, you'd normally pay half of this rate. As an independent contractor, you will pay all of the 15.3%. 

If you earn over $200,000 per year as a contractor ($250,000 per couple), the IRS requires you to pay an additional 0.9% tax. While the self-employment tax may seem high, many contractors often report being surprised at how reasonable and accommodating it is. 

There’s a cap on the amount of self-employment income that is subject to social security taxes. The Social Security tax rate for 2021 is 12.4 percent of your self employment income, up to $142,800. You don’t pay Social Security taxes on your self employment income above that. 

  1. Home Office Expenses

Many independent contractors are aware that you can deduct the costs of running a business home office. The home office deduction is one of the most common for contractors to seek out.

It is essential to be careful with what you claim as a part of this deduction and what you can't. With the home office deduction, you can cite the cost of utilities, repairs, and expenses for your home office's maintenance. You might also be able to deduct some rent or mortgage interest and property taxes.

The IRS will only accept deductions if your office is primarily used for business, whether you rent or own. Since the amount deducted depends on the office's square footage, take the time to draft your workspace's dimensions in case of an audit.

Of course, many independent contractors will opt for the standard deduction of $1500. This amount is the IRS’ Simplified Method for the Home Office deduction: a standard deduction of $5 per square foot, up to 300 square feet. We recommend you take this option if you can't locate records of business expenses before April 15. Use IRS form 8829 and attach it to your Schedule C.

  1. Internet and Phone Bills

In today's 24/7 business climate, small business owners spend a lot of time interfacing on the internet and by phone. Luckily, internet and cell phone costs are deductible expenses.

Some of the preparation for claiming internet and cell phone bill costs can be complex. Essentially, you should only claim expenses for the phones and the internet you use for business.

Invest in one dedicated device to ease the calculations. If you multi-task with your phone and spend a percentage on business and a percentage for your personal life, you will have to estimate the time you spend solely on business calls from your phone bill.

That’s how to use the device to keep it separate for business. So, what about handling the bill for tax deductions? There are two ways to approach these deductions:

  • Deduct device costs one time by writing off 100% of costs for the year you bought it.
  • Calculate depreciation by distributing the purchase cost over the lifetime of the device.

The cost of purchasing equipment for your business, like computers, cell phones, and other technology is certainly a tax write off you should take advantage of. 

  1. Health Insurance Premiums and Medical Costs

Claiming deductions for health insurance premiums is imperative if you work alone or run your own business. Without the support of a company, you have to take advantage of this benefit.

The health insurance deduction can be one of the largest, you want to make sure to claim it if you can.  If you are a member of a spouse’s plan, for instance, you won’t be eligible. You can't take the deduction if you were eligible for a spouse's employer plan, even if you didn't take it.

While it may seem that this deduction is business related, it’s not. Rather than being directly related to your self employment taxes, health insurance deductions are a personal deduction applicable to the self employed. This is an important distinction to keep in mind.

In other words, the health insurance deduction is more like an adjustment. If you don’t have any health insurance help, you will be able to deduct 100% of the costs of premiums. 

You will also be able to deduct premiums you paid for a spouse and dependents younger than 27.

Ultimately, it is clear that self-employed workers shouldn’t let this deduction pass by.

Note: This article is about self-employed 1099 contractors, which is different than S-corps/partnerships, but some readers may not realize this. There are additional hoops to jump thru when S-corps/partnerships deduct owner health insurance.

  1. Meals

While there are some specific criteria for what meals are deductible and which are not, if you take care to record costs as an entrepreneur, you will likely be eligible for a standard meal allowance.

Keep in mind that the meals allowance is for traveling meals (eg away from your general area) as opposed to meals around town

According to the latest we’ve heard from the IRS on meals and entertainment expenses, “taxpayers generally may continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business, including meals consumed by employees on work travel.”

There must be a business purpose for it to be a deductible meal. Also, meals can't be extraordinarily costly depending on your income (sorry, no lobster every night!), and you must have had the meal while traveling on business.

You can also claim standard meal allowances for meals bought at conferences or meals shared with clients and colleagues.

Recently, the government passed a provision for 2021/2022 that allows you to deduct 100% of business meal costs instead of the previous 50% standard.

  1. Business Travel and Standard Meal Allowances

For many independent businesspeople, car expenses and meal costs go hand in hand. Unfortunately, you will have to claim eligibility for travel deductions on a separate Schedule C line (24a).

Travel expenses aren't only limited to airfare and rental car costs. Along with these charges, you will be able to claim lodging and extended stay costs along with expenses you incurred while taking local transportation like trains, subways, and taxi services.

A trip must last longer than one workday to qualify as a legitimate travel cost. Additionally, you must demonstrate that you spent the night there and that the location was outside your home office's general vicinity (so, keep the receipts).

If a business partner accompanies you, it goes without saying that you will have to remove the cost of their trip from yours. Travel expenses are 100% deductible expenses.

For deductions of meal per diems, they are calculated according to federal M&IE rates.

It is generally a good habit to keep extensive notes and receipts of trips you plan to deduct. You must be “actively engaging in business.” That means meeting with clients, participating in conventions, and other valid claims for a business expense.

Some people think one meeting makes an entire trip deductible. A trip must also be predominately for business in order for it to be deductible.

  1. Vehicle Use

There are two methods used for maximizing deductions for resources spent on your business car. You must choose one of two as they are mutually exclusive deductions.

The first method is quite simple and involves calculating your total mileage spent in your car according to the standard mileage rate. We will cover that deduction in the next item below.

The second method is called the "actual expense method." It takes a little more time to calculate, but it can potentially eclipse the deductions claimed from mileage. Better to calculate costs using both methods to ascertain which one will yield a higher deduction.

To calculate the actual expenses, determine what percentage of the time you use your car for business. Then, add up your "operating expenses" or car expenses. These include your car expenses, oil changes, repairs and maintenance, gas, the depreciated value of the automobile, fees for licenses and registrations, and car insurance.

  1. Mileage

Continuing the itemized "actual expense method" above, now we'll look at the standard mileage deduction method. For many independent contractors, this deduction could be the most expensive.

The IRS’ requirements for using the standard mileage rate are:

  • You must own or lease the car
  • 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.
  • To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use the standard mileage rate or actual expenses.
  • For a car you lease, you must use the standard mileage rate method for the entire lease period (including renewals) if you choose the standard mileage rate.

Deducting standard mileage is easy, and there are several locations online that will help you calculate your optimal deduction. Since most expenses (charges, repairs, and trips to the mechanic) occur due to excessive driving, mileage is the main culprit for lots of hidden costs you might have to pay for your car. We recommend taking the mileage deduction.

The standard mileage deduction rate changes annually. In 2020, it was 57.5 cents per mile. In 2021, the rate lowered to 56 cents per mile. Make sure you read up on this year’s rates before you claim your deduction. Better yet, hire an accountant or tax advisor for help.

You should also note that your deduction rate changes depending on the purpose of your drive. If you are driving for charity purposes, the allowance drops to 14 cents per mile. Medical moving has a rate of 16 cents per mile.

  1. Interest on Home Mortgage 

Interested in deducting personal mortgage interest for your home office? To claim interest on your mortgage, you will need to fill out form 1098 (the form you receive from your mortgage company reporting interest paid to you).

Included in the provisions for claiming deductions on a home mortgage for a business location are costs that many self-employed people are wary of paying. 

Did you take out a large loan to build the real estate you are using for your business? That's tax-deductible, along with the costs involved in buying land. The IRS publication 936 has all the details for you if you question whether a home mortgage is deductible. 

Just make sure that the building you use for business and pay interest on isn't used for personal use as a home or family home. The IRS only allows contractors to deduct mortgage interest on building sites used exclusively for business. 

((It feels like you’re talking about two things here - 1, deducting personal mortgage interest for your home office, and 2, deducting mortgage interest for a business-only property))

  1. Other Loan Interest

Noticed a trend in deduction claims for self-owned businesses? If the costs are split between business and personal life, you must calculate the percentage used exclusively for business. That trend doesn't end when trying to take advantage of other interest charges.

Do you have a business credit card? Maybe you opened a line of credit to get the business on its feet? Interest on car loan payments? You deduct any loan interest incurred for the business. (No deducting gas for that cross-country trip for a class reunion!)

This is why it’s so crucial to keep your personal and business accounts separate as a 1099 contractor. It gets a lot harder to figure out other loan interest when you use personal loans for your business and vice-versa.

  1.  Publications and Subscriptions

For many hard-working self-employed business owners, it is critical to stay on top of the current trends and opinions of market experts in their industry.

We would go so far as to say that you'd be missing out on the competitive edge that makes freelancers successful if you neglected to do so.

Part of becoming a member of an industry is reading cutting-edge literature and journalism covering the business world. That means you will need to buy publications and subscriptions, and those media materials are tax deductible.

If you’re a freelance writer or journalist, it is more important than ever to keep records of all the professional books and publications you buy. They’re all deductible as long as you can demonstrate that it was critical to your business development.

  1. Education and Training

Running a business full-time as a self-employed owner requires a lot of vigilance. But beyond the fact that you will have to stay on top of market trends, it is vital to continue your education as you climb the ladder to success.

The IRS supports independent contractors of all stripes in continuing their education. You can deduct the cost of books, transportation, lectures, supplies, and even tuition if you choose to invest long-term in your education.

The key is you must demonstrate that educational costs are for "qualifying work-related education" to the IRS in Publication 970. Business expenses would be only deductible expenses if they helped you improve skills vital to your business. 

In other words, your classes, books, and tuition must go toward furthering your current career or trade. Unfortunately, no classes or courses for personal hobbies will count for this deduction.

  1. Premiums for Business Insurance 

Not every self-employed contractor invests in business insurance. However, suppose you do decide to go all-in. In that case, the IRS offers provisions for you to extract deductions from the cost of business insurance.

It is not only business insurance premiums for yourself that are deductible. If you hired new employees for the current tax year and you offered them accident and health insurance, you are in luck! Those costs are also deductible. 

The form to fill out is Schedule C. But here's a pro tip: the deduction used for business insurance can easily get mixed up in the deduction for health insurance premiums.

Remember that these deductions feature separately on the IRS forms, so even if you calculate them together, you will have to present the IRS with two distinct amounts for the two deductions.

  1. Rent

The regulations for claiming deductions relating to rent can be confusing for some self-employed business owners. But in the end, the rules are pretty simple.

Many freelancers, writers, producers, or creatives spend most of their time away from their homes when conducting business. In larger cities, the IRS shows that a good majority of self-employed workers pay rent to landlords other than their own.

You can deduct the costs of rent for workspaces away from home. Say you work in a shared space, commercial kitchen, or an artist studio--if you pay rent to use that space for business you can deduct it.

By extension, if you end a rental agreement with the space you use as your primary place of business, you can also deduct some of the costs of breaking a rental contract. If you have outstanding bills with the landlord, make sure you pay those before claiming the deduction. You can include deducting home rent as a part of your home office deduction!

  1. Start-up Costs

You can deduct up to $5,000 in start-up costs as an independent contractor. Additional costs can be amortized/capitalized, but sometimes it is difficult to put together all the expenses included in "start-up costs." To ease the collection process, here are some typical start-up costs:

  • Advertising
  • Interviewing employees
  • Fees for tax advice
  • Fees for accountancy tasks
  • Buying business licenses
  • Researching industry trends
  • Vetting possible business locations
  • Travel spent on starting the business
  • Hiring Lawyers and Experts for Guidance

Formation costs for LLC’s vary from state to state. In addition to the original $5,000 in start-up fees, you can also deduct $5,000 more if you opened as LLC and accrued costs associated with licensing in the state and local economy.

  1. Advertising

Many contractors invest a considerable amount of advertising resources to promote their business. Promoting your brand’s image across media of various kinds helps to bring in more clients and customers.

1099 deductions for self-employed workers include provisions for advertising fees. All media types are valid deductions: Google Ads, Facebook ads, TV commercials, and traditional print media like business cards, flyers, and billboards.

Even if you advertise in non-profit locations, you will be able to take deductions. Just make sure you record all your advertising contracts before filing. The IRS regularly audits deductions claiming to be from advertising.

  1. Retirement Plan Contributions

Intelligent business owners start early when investing in their retirement. From SEP-IRAs to solo 401ks and SIMPLE IRAs, the choices are wide-ranging. Costs can be low to start, but consistent investment can reduce even the most well-prepared entrepreneurs' business income.

If you contribute to retirement plans now, you will be surprised at the gains you can make over a more extended period. The IRS website for self-employed retirement plans details what the different options are for self-employed people.

You won't be able to contribute more than you make annually. Consider investing in a self-employed retirement plan if you have plenty of profit left over. So if you can, start investing in retirement to build up your nest egg sooner rather than later.

  1. Office Expenses

Odds are, you regularly spend on office supplies. Paper, printers, computers–the list is endless. The federal government wants to help you deduct those costs, and most state governments will also accept them. The only thing to do is search for the correct line item.

Be careful you don't also include the cost of rent, utilities, and other expenses that you may have calculated for home office expenses. Since the office supplies category is closely related to your business and the home office, we recommend checking with an accountant before sending in your federal income tax forms.

Nevertheless, office expenses don't stop at the physical equipment you purchased to make the office operational.

Do you hire professionals to clean your workspace? Do you have monthly charges for maintenance and IT? While you might hire help for your office, be a bit more specific and expense payments to contractors as Contract Labor.

  1. Depreciation of Assets

We have talked a little about the costs that brand-new self employed people might have to manage. If your business is more experienced and your equipment is getting on in age, then it is a great idea to deduct the costs of these assets' depreciation.

Any asset with a life longer than one year and isn't inventory should be depreciated, regardless of age or how long you've owned. For example, if you buy a new computer, you'd begin depreciating it when you 'placed it in service' (aka started using it). Depreciation begins when placed in service.

Itemizing deductions for depreciation of assets does, unfortunately, require filling out the separate Form 4562. When completing this form, you will be expected to record the lifetime under which your equipment aged. It is always best to be accurate and keep written records for this.

  1. Contract Labor

One good sign that a business is getting off the ground is outsourcing tasks to outside contractors. By extending your business's reach and opening the door to expertise you didn't have before, you explore a more diverse range of contract labor.

It is likely that you cannot accomplish every duty your business needs. For instance, by hiring a computer programmer to optimize a site’s code, or by paying a fleet of expert writers or laborers by the hour– the IRS sees that the business is improving and worth investing in.

Keep in mind, you can only deduct costs for contract labor in this category. If you have a lawyer on retainer or advance a previous contractor to a full-time employee, those costs should be deducted elsewhere.

  1. Sales and Income Taxes

Sales tax, generally, is already included in the cost of items already deducted. For example, if you buy office supplies, you don't have to deduct the supplies and sales tax separately.

When filing for deductions on sales tax, one thing to keep in mind is the IRS's standard deduction. It changes every year. If you pay general sales tax, it's usually a better idea to take the sales tax break if you had large purchases in the tax year. We would count purchases of automobiles, long trips, or weddings among those.

In the end, it's always a good idea to calculate your deductions with the standard deduction and also an itemized deduction. As a business owner, you are always better off finding the higher deduction. When in doubt, hire a qualified accountant to make the comparisons for you.

Final Takeaway

It's true: completing forms for deductions at tax time can be daunting.

At the end of the day, though, the IRS wants to help fledgling and experienced self-owned businesses alike in as many ways as possible. All that's left to do is search out the deductions that are just waiting for self-employed workers to capitalize on. I mean, you want to reduce the total on your tax bill, right?

That's where Bonsai comes in. Although it's entirely possible to tackle tax preparation on your own, our tax and accounting solution can help to ease your way towards maximal 1099 deductions before you pay your taxes.

If you are interested in getting a leg up on your year-end tax forms, check out our Tax & Accounting software. We have everything you need to run your freelance and contracting business. It’s free to get started, and who knows--maybe we can get you all 22 1099 deductions from this list and more!

Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax professional.


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