The joys of self-employment are many. From work flexibility, not having to answer a boss, and working on the things you are passionate about, the perquisites of being a 1099 worker are profound and veritable. Unfortunately, however, the 10.07 million self-employed persons in the United States have to navigate through the labyrinth of yearly taxation, which is very complex to manage singlehandedly.
As a 1099 worker, you have to pay self-employment taxes in addition to the yearly taxes. Likewise, the quarterly estimated tax payments add fuel to the fuel. However, there is light at the end of the tunnel, as self-employment tax deductions emerge as the beacon of hope. So, without further ado, let us dive into the nitty-gritty of tax write-offs for 1099 workers.
WHAT IS SELF-EMPLOYMENT TAX – A CRISP OVERVIEW
Simply put, we can understand self-employment tax as a combination of Social Security and Medicare. Unlike W-2 or salaried employees who have a portion of their wages automatically withheld, 1099 workers must settle whenever they file their income taxes. The self-employment tax rate is 15.3 percent: 12.4 percent for Social Security and 2.9 percent for Medicare. It is important to remember that the Medicare tax applies to all your income, including wages, tips, etc. However, the Social Security Taxes only apply to the first USD 142800 of your income. Thus, if you earn USD 150000, the self-employment tax for the last USD 7200 will be only 2.9 percent.
Now that we know the basics of self-employment tax let us understand the A to Z of self-employment tax deductions.
THE BEST SELF-EMPLOYMENT TAX DEDUCTIONS TO PROFIT FROM IF YOU ARE A 1099 WORKER
As we have already hinted above, being one’s boss can be expensive as over the income tax, 1099 workers are also burdened with the 15.3 percent self-employment. Furthermore, as a self-employed person, you can pay more above a certain threshold, an additional 0.9 percent of Medicare Tax. The threshold impinges upon the filing status –
- Single – USD 200000
- Married filing jointly – USD 250000
- Married filing separately – USD 125000
- Head of household – USD 200000
- Widow or widower with dependent child – USD 200000
Another crucial dimension is that the threshold does not include only your self-employment income. It also includes any wages, tips, or income you have earned from a regular job. So, for instance, if you are single and earn USD 200000 at your day job and make another USD 50000 through your side hustle, the total income will be around USD 250000. Thus, you will have to pay the extra 0.9 percent on the last USD 50000 income as a single filer.
In a nutshell, nobody likes to pay extra taxes. Thankfully, numerous self-employment tax deductions exist that 1099 workers can reap. They are usually write-offs for business-related expenses or things that an employer usually provides. If you take advantage of deductions, you will realize that the additional burden of self-employment is not all that cumbersome.
Home Office Deduction
It is one of the most complex yet rewarding deductions for 1099 workers. Home office deductions entail the cost of any workspace you use ‘regularly and exclusively for your business. It does not matter if you rent or own the office, as the write-offs are still applicable. However, home office deductions come with a lot of conditions, and for your ‘residence’ to qualify as a ‘home office,’ it has to meet the following criteria –
- You ‘exclusively and regularly’ use your home for business reasons.
- It must be equipped with the tools and equipment required to facilitate trade, such as desks, chairs, computers, Wi-Fi, printers, etc. On the contrary, a lounge, living room, or an empty, unoccupied room does not qualify as a home office.
- Most of your business duties must happen within that portion of your home, which you call the home office. More than 50 percent of the taxpayer’s responsibilities must be performed within the concerned home office.
- You cannot utilize the office space for alternative purposes.
It is pivotal to remember that you are basically in the honor system; it is best to be prepared beforehand to defend your deduction in case of an IRS audit. The primordial step in this direction is to prepare a diagram of your workspace with accurate measurements. Lastly, apart from the office space itself, you can also deduct other costs from your home office, including the business percentage of the deductible mortgage, depreciation, utilities, etc. For example, if 15 percent of your home serves as the office, 15 percent of your annual electricity bill becomes tax deductible.
If you rent out an office space, you can deduct the amount you pay for rent. You can also write off amounts paid for any equipment that you rent. Likewise, if you have to pay a fee to cancel a business lease, that expense also becomes a part of the self-employment tax deduction. However, you cannot discount rent expenses on any property you own, even partial ownership. Consequently, the rent amount you pay should be reasonable. The test for ‘reasonability’ usually arises when you and the owner are related. The rent is deemed valid if the amount is akin to what you would pay to a stranger.
Vehicle Use Deduction
Another necessary self-employment tax deduction that can bring down your tax burden is associated with vehicle usage. If you utilize your car for business, the expenses for the drives are tax deductible. However, you must keep clear and lucid records of each trip’s date, mileage, and purpose. In addition, do not try to claim personal car trips as business car trips. There are two ways to calculate vehicle use deduction –
- Standard Mileage Rate – You can use the standard mileage rate method devised by the Internal Revenue Service to calculate the expenses of business trips. Currently, the standard mileage rate is 58.5 cents per mile. It is an easy tactic that requires you to keep minimal records and divulges rudimentary computations. All you have to do is write down the business miles and the dates you drive them. Then, you have to multiply the total annual business miles by the standard mileage rate. Viola, you have your vehicle use tax deductions handy.
- Actual Expense Method – It entails calculating the percentage of driving you did for your business throughout the year and the cost of operating your car, such as depreciation, oil changes, gas, registration fees, repairs, car insurance, etc. If you have $3,000 in annual car expenses and use your car for work 10% of the time, you can deduct $300 from your self-employment tax deduction.
The stand mileage rate is applicable when you use the vehicle in the first year of business. In the later years, you can choose the actual expenses method or stick to the IRS mileage rate.
Business Insurance Deduction
Another way to profit from deductions is through the premiums you pay to protect your business. If you have opted for fire, credit, business liability, or car insurance on a business vehicle, you can deduct your premiums. Some people perceive insurance premiums as a waste of money if they never have to file a claim. Still, the business insurance tax deduction alters that mindset by serving as a way to discount the tax burden of 1099 workers.
Retirement Plan Contributions Deduction
Contributions to an individual retirement arrangement qualify for a tax deduction, making this the fifth most crucial tax write-off available. Contributions to retirement plans such as a Simplified Employee Pension-individual Retirement Account (SEP-IRA), a solo 401(k), a Saving Incentive Match Plan for Employees (SIMPLE) IRA, etc., can help reduce your taxable income and build up tax-deferred investment returns for the future.
In addition to the five write-offs mentioned above, as a 1099 worker, you can resort to other tax self-employment tax deductions, such as startup cost deductions, advertising deductions, interest deductions on business bank loans, advertising deductions, and so forth.
WRAPPING IT UP
It would not be erroneous to assert that self-employment tax deductions are the knight in shining armor for 1099 workers. They can bring down the tax burden to quite an extent and provide much-needed financial relief. However, managing all the deductions is not pretty easy and takes hours on end to complete. Thus, a self-employment deductions calculator, such as Flyfin, becomes essential. It is an Ai-driven, highly accurate, and speedy tool that can take away 98 percent of your taxation duties. Now, you can focus on more pressing needs, like operating your business, while the calculator deals with the calculation of tax deductibles and offers a 100-percent accurate report.
Also Read: How Can You Use Data Analytics For Your Business.
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