With the flexibility of being an independent contractor comes the responsibility of staying on top of your tax obligations. You’re required to diligently track your income and expenses so that the tax owed to the government can be calculated accurately. In doing so, it’s always best to maximize the tax deductions for 1099 contractors as that helps lower your tax bill significantly.

You could potentially be leaving a lot of money on the table by not utilizing all the tax deductions available to you as an independent worker. Even if the amounts you claim are small, they can gradually add up and result in more money in your pocket. The following list includes some of the most common deductions that 1099 workers can claim to reduce their tax bill.

Who Can Claim 1099 Contractor Tax Deductions?

IRS form 1099s are used to record money that a person or entity other than your employer gave you. For example, online freelancers will receive a 1099 from the platform they use to find work and bill clients. Gig working platforms also send similar forms to their independent contractors. The form is essentially a confirmation that the IRS knows you’ve received money and that it’ll know if you don’t report that income on your tax return.

Simply receiving a 1099 form doesn’t automatically create a tax liability. You may be able to claim tax deductions if you’re working as an independent contractor, freelancer, or gig worker. You’ll be considered a 1099 contractor if you were told to fill out a W-9 form at the start of a new contract. Since taxes are not withheld on payments made to you, you’re required to pay all taxes owed on the income earned. 

You can make deductions for expenses incurred in pursuit of that work when filing your tax return to lower the final tax bill. When claiming deductions, you’ll need to file Form 1040 along with Schedule C.

Common Tax Deductions for 1099 Contractors

There are dozens of tax deductions for 1099 contractors that can be claimed. Not all will apply to your specific needs, but the following common deductions are important to consider when filing your return. They can help you significantly reduce your tax liability and put more money in your pocket.

Home Office

This tax deduction can be claimed if you work from your home, whether owned or rented. It’s specifically provided for the square footage that’s used regularly and exclusively for business out of the total covered area. 

It’s best to use accurate measurements when claiming this deduction as you’ll need to defend it in the case of an IRS audit. The home office expenses that can be deducted include rent, property taxes, mortgage interest, homeowners insurance, utilities, and repairs.

The simplest method to calculate the home office deduction is to multiply the rate determined by the IRS by the square footage of your home office up to a maximum of 300 square feet. For example, at the prevailing rate of $5 per square foot, a home office tax deduction for the maximum 300 square feet allowance would be $1,500.

Mileage

Vehicle expenses are deductible if you’re using the vehicle for business. It’s important that you keep detailed records of every trip and be mindful of never claiming personal trips as business travel because the IRS doesn’t look kindly on that. You can either opt to deduct actual expenses made or go with the IRS-determined standard mileage rate. 

The standard mileage rate for business use is $0.67 per mile for 2024. It’s the easiest option to use as you just need to record the business miles driven along with the date then simply multiply the business miles driven throughout the year with the rate provided by the IRS.

Health Insurance Premiums

This can easily be one of the largest deductions you can make, but it’s important to be careful when doing so as there are strict stipulations. For example, you can’t take this deduction if you’re on your spouse’s employer-provided health insurance plan or even if you’re eligible to be on their plan but didn’t take it.

All health insurance premiums can be deducted if you’re self-employed, including qualified long-term care insurance premiums. Premiums paid to provide coverage for the spouse, any dependents, and children under the age of 27 at the end of the year can also be deducted.

Meals

You can deduct a meal as a business expense provided that it was for entertaining a client or when you were traveling for business. It has to be a justifiable expense so no extravagant meals. This deduction can only be claimed for traveling meals, so lunches at your desk don’t count.

There are two ways you can claim this deduction – either deduct 50% of the actual cost of the meal, if you’ve retained the receipts, or 50% of the standard meal allowance if you don’t have the actual receipts but have recorded the time, place, and the business purpose for the meal.

Travel

If your business trip outside the general vicinity of your home lasts longer than one work day and requires staying the night, 50% of the expenses are deductible on the return you’ll file in 2024. The trip must have been for a specific business purpose and you must engage in business activities during it.

All expenses, including airfare, transportation, accommodation, rental car charges, and more can be claimed. Keep detailed records of business trips and retain all receipts so that the deduction can be justified if the IRS decides to audit you. You’ll find yourself in a spot of bother if the IRS can prove that the trip wasn’t predominantly for business.

Retirement Plans Contribution

Saving for retirement is one of the smartest financial decisions you can make. You’re entitled to a deduction for contributions made to your retirement plan, enabling you to bring your tax bill down now and increase your future tax-deferred gains. This can be done for contributions made to plans such as solo 401(k)s, SEP-IRAs, simple IRAs, etc.

Up to $23,000 can be contributed as deferred salary for the tax year 2024 with catch-up contributions of up to $30,500 in 2024 for taxpayers aged 50 and above. The total contribution eligible for the deduction can’t be more than $69,000 in 2024 for a self-employed 401(k). These limits are routinely adjusted by the IRS. 

Self-Employment Tax

Self-employed people are required to pay Medicare and Social Security taxes. This is currently at 12.4% for Social Security and 2.9% for Medicare, totaling 15.3%. As an independent contractor, freelancer, or small business owner, you’re required to pay the total self-employment tax on your own. 

There’s also an additional 0.9% Medicare tax if your income is above $250,000 if married filing jointly, $125,000 if married filing separately, $200,000 if single, head of household with a qualifying dependent, or a qualifying widow(er) with a dependent child. You can deduct half of your self-employment tax from the net income when filing your return. 

Startup Costs

Starting a business does come with some expenses. You’ll need to spend money on registering an entity, getting a lawyer for guidance, registering trademarks, buying business licenses, advertising, etc. The good news is that the IRS allows you to deduct startup costs in the first active year of business.

You can deduct up to $5,000 in business startup costs, including any legal fees and state filing fees when setting up an entity like a limited liability company. Future expenses, such as professional fees paid to accountants and lawyers, can also be subsequently deducted as they are ongoing expenses and not strictly startup costs.

Asset Depreciation

Depreciation can be claimed for assets that have worn down from business use. This includes assets like computers, vehicles, furniture, and other office equipment. The depreciation of this equipment can be deducted from the return.

It can be claimed for any asset that’s not inventory and has a life longer than one year. It doesn’t matter how long you’ve owned the depreciable asset, as you can start depreciating it when you start using it. You’re required to itemize deductions for depreciation using Form 4562.

Advertising

Businesses need to advertise to increase their brand awareness and bring in new customers. Whether you’re spending money on physical billboards or social media campaigns on Facebook, Instagram, or Google Ads, you’ll likely be incurring significant advertising costs to grow your business.

The business advertising costs can be deducted, including clothing used to promote your business, otherwise known as merchandise. As with all deductions, ensure that you’re keeping track of expenses and can justify the claims if the IRS ever requires you to.

Expenses that 1099 Contractors Cannot Claim as Tax Deductions

Not every expense made in the pursuit of business can be deducted. People will often mistakenly think that certain expenses are eligible, only to run into problems with the IRS later on. As you educate yourself on what deductions can be claimed, it’s equally important to understand what expenses are ineligible to be deducted, even if made in the course of business.

Clothing

You’d understandably want to look sharp when meeting clients and customers. Even if you make considerable investments in clothing, you can’t claim that as a business expense and deduct it from the tax return.

Maintenance

Expenses on maintenance and repairs can only be deducted in specific cases, such as when it’s for the upkeep of a property used for earning business income. You can’t claim under this head for your own labor or the costs of capital expense repairs.

Pets

Having a pet around the office or one that simply keeps you company while you work is a personal expense, not a business one. As such, you can’t deduct any pet expenses on your return.

Personal Expenses

Deductions can only be claimed strictly for business expenses. All personal expenses are ineligible. You can’t buy something for personal use and then claim it as a business expense.

How to Prepare for Tax Filing and Monitor Tax Deductions for 1099 Contractors?

The potential of significantly reducing your tax bill and ending up with more money in your pocket is exciting, but it’s important to be careful when making these deductions to avoid running into any problems with the IRS down the line. Here are a few tips that you should keep in mind:

Keep Records

If you get audited, the IRS will ask for justifications for the deductions claimed. You’ll need to show receipts, bills, and other documentary evidence. Your claims can be denied if you’re unable to back them up with evidence, so always make sure you’re keeping records of business expenses.

Consult Tax Professionals

There may be specific deductions that you can claim depending on the type of business you’re in. The tax code is complex and it’s best to consult with a tax professional so that you’re maximizing your deductions.

Streamline Bookkeeping

Effective bookkeeping is important when running a business, as it provides efficient income and expense tracking, making it easy to sort through all business expenses and make claims where required.

How to Claim Tax Write-Offs as a 1099 Contractor on Your Tax Return?

Tax deductions for 1099 contractors are claimed by filing a Schedule C annexure with the IRS Form 1040. You may also be required to complete additional forms or a worksheet for specific deductions. Schedule C is used to calculate profit and loss from the business. Taxes are then paid on the total profit once all deductions are accounted for.

Independent contractors also have to keep federal and state quarterly tax deadlines in mind in addition to the annual personal income tax deadline of April 15. The quarterly estimated tax payments have to be made by June 15 for income earned in April and May; September 15 for June through August income; and January 15 for income from September through December of the previous year.

Simplify Tax Deduction Calculations with doola

It’s only when you know precisely what the income and expenses of your business are that you can effectively claim tax deductions. That’s only possible with diligent bookkeeping, the kind that you experience only with doola Books. 

It’s a powerful bookkeeping software that lets you build automated rules for sorting income and expense transactions, upload receipts to transactions for expense justifications, connect multiple bank accounts for ease of management, view invoice reports, and more. You can also get expert CPA reviews of your financial reports and have a dedicated bookkeeping team of CPAs help you out, thus taking the stress out of tax season.

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