How To Avoid Paying Taxes on 1099-MISC
There are many benefits to being self-employed like making your own schedule, not having to answer to a boss, and deciding who you want to work with, and who you don’t want to work with.
What many new entrepreneurs and self-employed individuals might not think about is how many more tax deductions they can make compared to a W-2 employee.
W-2 employees have their social security and medicare taxes automatically taken out of their pay each period while business owners get no tax withholding.
As an independent contractors or self-employed individual, you are responsible for paying your own self-employment tax.
In order to maximize on your savings, you will want to be sure you know all of the different deductions that you can take.
To help you out, here are four ways you may not have thought of that an Independent Contractor can Avoid Paying Taxes on their 1099-MISC or 1099-NEC.
Home Office Tax Deductions
The IRS allows you to take certain deductions if you regularly work from home but, you will want to make sure you understand the specific requirements before claiming this home office deduction.
Whether you own or rent your home, you can still take this deduction as long as you are regularly using part of your home to exclusively conduct business.
For example, if you have setup an extra room in your home to run your business from, you can take home office deductions for that space.
You must be able to prove that you use your home as your principal place of business, even if you conduct business at a location outside your home.
For example, you may have an office outside the home but you split your time between working from home and working at your office location.
Another example is that if you have in-person meetings with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business.
This applies to free-standing structures such as a studio, garage, or barn, if you use it exclusively and regularly for your business.
A photographer may have a studio as her principal place of business but may also have a barn at her home where she regularly does photography sessions as well, and therefore she can deduct expenses for this part of her home too.
To calculate your home office deduction, you will want to calculate the area of your home used for business and then allocate a percent of your expenses with the same percent.
If you use a bedroom as your home office that is 300 square feet and your home is a total of 2,000 square feet, then 15% (300 / 2,000) of your home is used for business.
Now that you know you use 15% of your home for business, you can calculate your expenses like utilities, insurance, home security, etc.
So you will calculate the total of all of these expenses and use 15% as a tax deduction.
If you don’t want to track your expenses, the IRS allows you to use what they call the “simplified method” to deducting home office expenses.
The simplified method uses $5/square foot as your deduction.
So in our example above, the 300 square feet of office space equals a $1,500 (300 x $5) tax deduction.
There are certain travel related expenses that the IRS allows you to deduct on your tax return.
As a small business owner, even though you may be the only person working for your company, you can deduct mileage and vehicle expenses.
For example, if you regularly travel to client offices or locations, you can deduct those expenses in one of two ways:
The easiest method for calculating mileage is by using the standard mileage rate which is $0.56 per mile as of 2021.
You will need to keep track of your mileage by creating a mileage log either in excel, or in a notebook or perhaps using a mileage tracking app.
To do this correctly you will want to track the beginning and ending odometer reading to calculate the total miles driven for each business trip.
For example, let;s say you are headed to a client meeting and your odometer reads 15,238 when you get in your car and when you arrive at your meeting it reads 15,252.
This means you drove 14 miles one way for your meeting. Multiply that by 2 to make it round trip and you have your total mileage of 28.
To calculate the deduction amount, you would do the following formula: (Miles x IRS rate/mile)
In this example the deduction will be 28 miles x $0.56/mile = $15.68.
As you can see, this deduction can really add up over time and is one that you don’t want to forget to include.
Another way to calculate your travel expense deductions is to do it by keeping track of your actual vehicle expenses.
This is not as simple but may bring you more of a deduction in some cases.
Here are the actual vehicle expenses that you can include:
- Car Insurance
- Maintenance and Repairs
- Registration fees
In order to use actual expenses, you will need to prove that you used your vehicle for business use 45% of the time.
For example, let’s say you drove 15,000 total miles in a year and your mileage log shows that you drove 7,500 of those 15,000 miles for business, you are eligible for this method.
Qualified Business Income Deduction
If you are a sole proprietorship, partnership, LLC, or S-Corporation, you may be eligible to claim certain qualified business income deductions.
Congress created the Qualified Business Income Deduction in 2017 and it can save you a sizable amount when calculated properly.
This deduction allows eligible tax payers to deduct up to 20 percent of their qualified business income, plus 20 percent of qualified real estate investment trust dividends and qualified publicly traded partnership income.
The calculations for this deduction is a little complex so you will want to either hire an accounting and tax professional or use the right software to help you navigate the process.
To see if your business qualifies and for more information, you can read the IRS Publication 535 here.
Become an S-Corporation
S-corporations are popular for their additional tax advantages.
S-corporations help you save money come tax time in two ways:
- You are required to take a “reasonable salary” and only pay self-employment tax on that salary amount
- You can take distributions/dividends that are exempt from self-employment tax
For example, say you take a salary of $70,000/year but your business made an additional $50,000 in net profit.
You will be taxed 15.3% self employment tax on the $70,000 salary ($70,000 x 15.3% = $10,710 tax liability) but you can take the additional $50,000 as a distribution/dividend and avoid paying $7,650 in additional tax liability ($50,000 x 15.3% = $7,650).
As you can see, there are several ways to save money come tax time and using tax software designed for those who receive Tax Form 1099 can help navigate you through the deduction process.
You are entitled to these tax savings on your income taxes and so there is not reason not to take them!
If you are not confident in filing your own taxes, you can hire a CPA or tax professional to navigate you through the entire process and make sure you take all of the deductions you are eligible for.
FundsNet requires Contributors, Writers and Authors to use Primary Sources to source and cite their work. These Sources include White Papers, Government Information & Data, Original Reporting and Interviews from Industry Experts. Reputable Publishers are also sourced and cited where appropriate. Learn more about the standards we follow in producing Accurate, Unbiased and Researched Content in our editorial policy.
IRS.gov "Home Office Deduction" Page 1 . April 28, 2021
IRS.gov "Qualified Business Income Deduction" Page 1 . April 28, 2021
IRS.gov "S Corporations" Page 1 . April 28, 2021
IRS.gov "Simplified Option for Home Office Deduction" Page 1 . April 28, 2021
IRS.gov "Publication 535" Page 1 . May 3, 2021
IRS.gov "Qualified Business Income Deduction" Page 1. May 3, 2021
IRS.gov "About Form 8832" Page 1 . May 3, 2021
IRS.gov "About Form 2553" Page 1 . May 3, 2021