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.
If you are a contractor, the odds are good that you want to claim as many business expenses as possible. To make the process of hunting for tax deductions more simple, we put together our list of the best ones for independent contractors and freelancers.
Note: First, check out our 1099 expense tracker for freelancers which makes tracking these tax deductions a whole lot easier. Our app will automatically organize and scan your tax receipts so you can save the most money during tax time. In fact, our users typically save $5,600 from their tax bill at the end of the year with our software. Try a 14-day free trial here.
Then, read on and discover deductions that you may not have ever thought of claiming as a 1099 contractor!
If you can take a careful record of all of your business costs throughout the year then you will save yourself a lot of money when you file your tax return and a lot of hassle when tax season rolls around.
Being your own boss means you are subject to keeping track of your revenue, tax withholdings, and expenses throughout the year and reporting them to the IRS. You must withhold a certain percentage of all self-employment income so that you can pay self-employment taxes. Remember to keep clean records of your receipts in case you get audited by the IRS.
Here's a list of the best tax deductions available for self-employed workers:
If you are a 1099 self-employed worker, it is pretty much essential to claim this tax deduction. Ironically, to avoid self-employment taxes, you can deduct the fees from your taxes.
If you are a freelancer, small-business owner, or any kind of contractor: you are eligible for the self-employment tax deduction.
The self-employment 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% of the self-employment tax. You can use our self-employment tax calculator to find out how much you'll owe.
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% self-employment tax.
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.
Many independent contractors aren't aware that you can deduct the expenses of running a small business home office.
With the home office deduction, you can cite the cost of utilities, deduct home repairs, and expenses for your home office's maintenance. You might also be able to deduct some rent or mortgage interest and property taxes. Track these expenses with our home office spreadsheet.
The IRS will only accept deductions if your home office is primarily used for business use, 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. You can deduct the square footage portion related to your home office by using Form 8829. Read more about how to use the home office simplified method to claim this deduction. Properly keep records of this write-off and report a reasonable amount or you could face a home office deduction audit.
You should only claim expenses for the phones and the internet for business use.
Invest in one dedicated cell phone to ease the calculations of your phone bill. If you multi-task with your cell phone and spend a percentage on business and a percentage for your personal life, you'll have to estimate the time you spend solely on business calls from your cell phone bill.
That’s how to use the device to keep it separate for business. So, what about handling the bill for cell phone tax deductions? There are two ways to approach these deductions:
The health insurance deduction can be one of the largest, you want to make sure to claim it if you can. If you're 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.
Rather than being directly related to your self-employment taxes, health insurance deductions are a personal deduction applicable to an independent contractor. This is an important distinction to keep in mind.
In other words, health insurance tax deductions are more like an adjustment. If you don’t have any 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.
Note: For the best way to scan receipts, try Bonsai Tax. our app automatically scans your bank/credit card statements to discover tax write-offs and save you money during tax time. You won't have to worry about categorizing expenses or keeping track of all them. The software will do all of that for you. Claim your 14-day free trial today and see for yourself.
While there are some specific criteria for what counts as a business meal deduction and what doesn't, 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
A taxpayer may deduct 50 percent of the food and beverage expenses associated with operating their trade or business.
There must be a business purpose for it to be a tax write-off. Also, entertainment and meal deductions 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.
Along with airfare and rental car 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 business cost. Additionally, you must demonstrate that you spent the night there and that the location was outside the general vicinity of your home office (so, keep track of 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. If you want to discover tax write-offs and track all your travel expenses, we recommend you use a travel tax deduction tracker.
For deductions of meal per diems, they are calculated according to federal M&IE rates.
You must be “actively engaged in business.” That means meeting with clients, participating in conventions, and other valid claims for a business expense.
A trip is only a business travel tax write-off if it is predominately for business.
There are two tax deductions or methods used for resources spent on your car for business: standard mileage deduction and the actual expenses method. 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 car expenses, 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 related to your business. Then, add up your "operating expenses" or car expenses. You can deduct the cost of your car expenses, oil changes, repairs and maintenance, gasoline expenses, the depreciated value of the automobile, fees for licenses and registrations, and car insurance.
Note: If you need help tracking and recording your business expenses, try Bonsai Tax. Our app can seriously save you a lot of money (the average user saves at least $5,600 from their tax bill!). You won't have to worry about what qualifies as a deduction, when taxes are due or how much money you'll owe. Our software will do everything for you. Try a 14-day free trial today.
Tracking miles for taxes and using deducting the standard mileage rate is a simplified method of calculating your write-off.
The standard mileage deduction rate changes annually. In 2020, it was 57.5 cents per mile. In 2021, the rate lowered to 56 cents. 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. Miles driven from home to work typically do not count as a tax deduction.
To claim interest on your mortgage, you will need to fill out form 1098.
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. Check out our full list of real estate agent tax deductions.
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.
If you want to track your deductions and save a lot of money during tax time, try Bonsai Tax. See for yourself, why folks are saying our tax software is the best for freelancers.
Noticed a trend in tax deductions for self-employed 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.
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 business expenses.
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 tax-deductible as long as you can demonstrate that it was critical to your business development.
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 fees for classes, books, and tuition must go toward furthering your current career or trade.
Not every independent 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 insurance, you are in luck! Those costs are also deductible.
Many freelancers, writers, producers, or creatives spend most of their time away from their homes when conducting business.
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!
You can deduct up to $5,000 in start-up costs as an independent contractor. To ease the collection process, here are some typical start-up costs:
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.
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.
Tax 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 clothing that promotes your firm is deductible. This includes both the cost of the apparel and the cost of imprinting your company's brand on it. So, you can write-off clothing for work that is promotional as a miscellaneous deduction on your tax return.
Just make sure you record all your advertising contracts before filing. The IRS regularly audits deductions claiming to be from advertising.
Intelligent business owners start early when investing in their retirement.
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.
Odds are, you regularly spend on office supplies. Paper, printers, computers–the list is endless. The only thing to do is search for the correct line item.
Office expenses don't stop at the physical equipment for your business either.
Do you hire professionals to clean your office space? 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.
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.
One good sign that a business is getting off the ground is outsourcing tasks to outside contractors.
Sometimes, small business owners need to hire out for projects in order to grow their business. For instance, 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.
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.
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 track your tax deductions, and calculate it with the standard deduction as well as an itemized deduction. As a business owner, you are always better off finding the higher deduction.
At the end of the day, though, the IRS wants to help fledgling and experienced self-owned businesses. They offer a ton of ways to reduce your duty like the Goodwill tax deduction. All that's left to do is search out the expenses or 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. If you are interested in getting a leg up on your year-end tax forms, check out our tax receipt organizer. 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 21 tax deductions from this list and more! Remember, you'll need to keep receipts for three years after filing in case you get audited. So, it is vital you have clean, organized records of your receipts.
Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax advisor for tax advice.