1099 Tax Deductions: What Every Independent Contractor Needs To Know
Dan Levenson July 15, 2015
Working as an independent contractor comes with great benefits: flexible schedules, choosing your own work, and occasional work sessions in pajamas are favorite perks among freelancers. At tax time, however, independent contractors often get the short end of the stick, partly because they don’t always know how to take advantage of 1099 deductions.
The payments made to independent contractors by businesses are usually reported to the IRS on a 1099 form. If you, as an independent contractor, completed a W9 form when you began working for a client or company, then any income related to that organization is likely to be reported on a 1099 and you will have to claim it when you file taxes.
Because taxes are not withdrawn from payments made to an independent contractor, the contractor must file and pay all his own taxes. On an annual tax return, 1099 tax deductions can help contractors reduce what can otherwise be a heavy tax burden. Here are some of the most popular types of deductions for independent contractors:
Home Office Deduction
One of the easiest—and most dangerous—deductions to claim, the home office deduction gets a bad rep for causing audits. Claiming a home office deduction doesn’t automatically put you in red-flag territory with the IRS, but you do have to ensure that you use the space you claim solely for running your business. If you work at your dining room table during the day, but you use it for the kids’ homework and dinner in the evening, that space isn’t eligible for the deduction.
Home office deductions are entered as a percentage of your entire square footage, so you’ll need measurements for your office space, your entire home, and the value of your home or mortgage payment to claim this deduction. The IRS doesn’t typically require additional documentation for most home office deduction claims.
Self-employed individuals can contribute a certain portion of income each year as a 401k deferral. In 2015, the total contribution amount allowed by the IRS is $18,000 per person. While these salary deferrals may be tax-free, early disbursements from the retirement plan will be taxed and may come with a penalty, making it important for independent contractors to understand both current and future financial needs before committing to a salary deferral.
Contractors that use their vehicles for business purposes can either deduct a standard mileage rate or actual vehicle expenses on tax returns. For 2015, the standard mileage rate for business travel is $0.57 per mile. To deduct mileage, you simply claim the total amount of miles driven for business purposes in a year on your return.
You’ll also need to report the starting and ending mileage for the vehicle for the year, which may show more mileage than you drove for business purposes if you use a vehicle for personal driving too. You don’t have to provide the IRS with a mileage log, but you do need to keep a log of all trips and mileage for audit purposes.
Sometimes, claiming vehicle expenses instead of mileage nets you a larger deduction. Most people don’t go this route, though, because you have to keep copies of all insurance, registration, depreciation, loan payments, licensure, maintenance, parking, and toll receipts.
Independent contractors that purchase and use equipment for their business may be able to take a depreciation deduction each year. Equipment might include vehicles, special tools, and machinery. A seamstress might take deductions on a sewing machine; a painter might take deductions on a pressure washer used to prepare the exterior of homes for painting.
The IRS requires that property meet some conditions to be eligible for depreciation:
- The property must be in use over a period of one year
- The contractor should be able to estimate the useful life for the property
- The contractor must own the property
- The contractor must use the property to generate income
Health Insurance Premium Deductions
Self-employed individuals may be able to deduct the amount paid in health insurance premiums each year. If your health plan is eligible for the deduction, you simply claim the total paid on your return each year. Keep receipts or check stubs proving you made the payments to back up your claims.
Hundreds of 1099 tax deductions exist for small businesses and independent contractors, so it’s often best to consult a professional when handling tax returns each year. Remember: To claim 1099 tax deductions each year, you’ll need to complete a Schedule C and file the long 1040 form rather than the 1040EZ form. Some deductions may require completion of an additional form or calculation worksheet, but it’s well worth the extra effort to make sure you don’t run into any problems down the line!