Common Tax Deductions For Small Business Owners – This gives you the freedom to make your own schedule and chart your own career path. It can be very exciting and is one of the reasons you choose to build your own business in the first place.
But unlike full-time employees who have taxes automatically withheld from their paychecks, your obligation as a 1099 employee is to withhold your own taxes from your earnings.
Common Tax Deductions For Small Business Owners
Fortunately, you don’t have to pay taxes on every dollar you earn. As a self-employed contractor, you have a 1099 form and pay taxes on the money you make minus the expenses of running your business.
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You can claim multiple deductions when you file your taxes on tax day. Your independent contractor 1099 deduction reduces the amount you’ll end up paying in taxes as a self-employed contractor.
“Not keeping track of your business expenses is one of the biggest mistakes a person can make,” says Matthew Silberstein, vice president of Lili, a banking app designed for freelancers. Freelancing can cause problems. “You can save hundreds—if not thousands—of dollars by splitting up and eliminating the purchases you make for your business.”
Both will lower your tax bill, but the tax credit will be slightly better because of the dollar-for-dollar reduction.
As an independent contractor, unless you set up your business as an LLC or corporation, you will report your taxes as a sole proprietor. This means that you will report your business profits and losses on your personal tax return by filing an IRS Schedule C form.
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Note: The advice in this article is not a substitute for the advice of a tax professional. Businesses and their tax needs vary and you should discuss all tax matters with a qualified and licensed professional.
Do you use your home office space solely for work and is it your primary place of business? If so, there are many options for calculating your independent contractor tax deductions in this category.
There are direct costs to consider, such as repairs and painting, as well as indirect costs, such as insurance, utilities and home repairs. Homeowners can also write off some of their property taxes and mortgage interest.
So how much can you pay for a home office? The simplest calculation is the ‘simplified method’ calculated by using square footage versus the ‘conventional method’ which requires the percentage of the house used for business purposes. For the simplified method, figure $5 per square foot up to 300 square feet for a maximum deduction of $1,500.
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Don’t forget to write off office supplies as part of your home office deduction. These include computers, printers, work-related software, pens, paper, postage, shipping, and more. You can deduct them as long as you use them for business purposes in the year you bought them.
Education expenses are potentially tax deductible. For example, webinars, virtual conferences, business-related books, and subscriptions to professional publications qualify for potential deductions when you file your taxes.
As an independent contractor, you can purchase property and equipment for your business. Over time, these items will lose value. For example, a printer you bought three years ago costs less than when you bought it. This is called depreciation.
According to the IRS, if your business purchases last more than a year, you can write off depreciation on their value on your tax return. Taxpayers can deduct repairs to property used for your business.
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If you spend your time commuting from job to job or running errands, sometimes your car can feel like your office. Fortunately, car and mileage expenses can be one of the biggest tax breaks for entrepreneurs.
The standard IRS mileage rate for tax credits is 56 cents per mile. The tax rate rules are updated every tax year, so you need to keep up to date.
Tolls and parking costs are also deductible. For long meetings or projects, they can result in significant out-of-pocket expenses for an independent contractor. Keep your receipts and add them to your 1099.
At this point, you may be asking, “Can I write off my car payment?” Unfortunately, the IRS’s answer is no.
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If a self-employed taxpayer buys a car exclusively for business purposes, you may be able to deduct some of the costs. Just be prepared for additional scrutiny from the IRS because 1099 workers rarely have vehicles just for work.
Are you meeting with clients out of state or attending industry conferences? When it comes to business travel, airfare, hotel expenses, taxis (including ride-sharing services like Uber) and 50% of your food expenses can be written off as business expenses.
Even if you extend your trip after business engagements are over, you can still include these travel expenses. Just make sure that the number of days off during the trip does not exceed the total number of working days.
For example, if you’re flying from California to Paris to attend a three-day photography conference, you might want to extend your trip with two extra days for sightseeing. Can deduct 50% of food and lodging expenses for the next two days, just like the first three days.
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Do you have a cell phone or internet connection for personal and business use? If so, you may be able to write off some of your monthly internet and cell phone bills. Like your home office, you’ll want to determine how much of your phone and online use is for work and personal use. You can then deduct a percentage of that account come tax time.
100% of your health insurance is one of many deductible business expenses for independent contractors to include on your 1099. You can deduct medical, dental, and vision insurance.
In addition to health insurance premiums, you can write off expenses such as eyeglasses, over-the-counter medications, and orthopedist visits. There may be benefits for your spouse.
Business insurance for the self-employed provides important coverage to protect you from unexpected expenses related to accidents or business mistakes. For example, a professional indemnity policy can help cover costs if a client accuses you of missing deadlines or making mistakes that cost them money.
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In some cases, customers or commercial landlords may require you to provide proof of insurance before they sign a contract with you.
If you make contributions to an Individual Retirement Account (IRA), you can take a tax deduction for those contributions. However, there are some caveats.
First, you may need to reduce or eliminate the deduction if you or your spouse contribute to an employee-sponsored retirement plan, such as a 401(k) or 403(b).
If you take out a bank loan to finance your business, you can deduct the interest as a business expense. If you used your loan for both business and personal expenses, you should keep track of how much was used for your business and deduct interest on that portion only.
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You can also deduct bank charges and business-related fees. For example, payment of replacement checks, monthly service fees and lost card fees. These fees add up as many traditional banking institutions often charge you fees.
Likewise, you can write off business credit card interest and any associated costs as annual fees. By the way, you don’t need to have a business credit card to deduct qualified interest. You can still take the deduction if you have an ID card used exclusively for business expenses.
If you start your business this year, you can claim deductions for many related expenses – up to $5,000. These related costs include website domain registration, business location travel, market research and employee training.
However, the purchase of equipment and facilities is not considered an initial cost. You can deduct them after a few years when they lose value.
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From business cards to flyers. Advertise on Facebook or LinkedIn. A billboard, TV ad or radio ad. Website design and maintenance. All of these are considered advertising costs.
For example, you may need to consult an attorney to answer a legal question. You can ask an accountant to help you manage your books or a financial advisor to help you determine your long-term goals.
Either way, if the fees are a necessary expense associated with running your business, write them off.
When you’re filling out your tax forms as a self-employed person, self-employment taxes can come as a shock. That’s because you pay Social Security and Medicare taxes to both the employer and the employee — which is a tax rate of 15.3% of net income.
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While it doesn’t reduce the actual amount of self-employment tax you pay, it can reduce your income taxes. (Self-employment tax and income tax are not the same thing.)
Good news: the qualified business income (QBI) deduction allows qualified self-employed individuals to deduct a portion of their business income.
QBI allows people with “pass-through income” — business income reported on personal tax returns — to deduct up to 20% of their business income.
There are many benefits to becoming a self-employed contractor. A qualified tax advisor can help you optimize your strategy when filing your 1099 tax deductions on independent contractor income.
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Although hiring a tax advisor may seem like an unnecessary expense, the tax preparation it provides can save you valuable time. A tax professional can help you itemize deductions, calculate your actual expenses and ensure you claim all available taxes
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