After the 2017 Trump Tax reform and new pass through deduction, the self-employed individual or 1099 contractor can now save thousands of dollars. If you are an independent contractor or freelancer or even a self-employed small business owner who manages to stay under certain high income limits, you pay considerably lower taxes than the W2 employees of equivalent pay.
The new pass through deduction 2017 GOP tax bill available to 1099 contractors, freelancers, side hustlers and sole proprietors, calculated the deduction as 20% of the qualified business income but cannot exceed 20% of the difference between the taxable income and any capital gains.
However, the new pass through deduction is subject to upper income limits, which can be quite complicated. The two income limitations are always based on the wage and property limit.
The first income limitation is the wage and property limit for everyone. The second income limitation is the wage and property limit 50% of the wages you pay to the employees or 25% of the W2 wages you pay to the employees + 2.5% of certain qualified business property depreciable equipment held for use.
If your income goes beyond the prescribed income limits, then you cannot apply the tax benefits of an independent contractor. Tax deductions are gold. Who knew that changing an employment status can be lucrative?
Here are some of the many classifications of 1099
- 1099-INT for interest
- 1099-DIV for dividends
- 1099-G for state and local tax refunds and unemployment benefits
- 1099-R for pensions and payouts from individual retirement accounts
- 1099-B for broker transactions and barter exchanges
- 1099-S for real estate transactions
The key to filling out the Form 1099 is using the ITS computerized matching as a guide. The form 1099 refers to the form you often receive if paid as a self-employed individual which includes contract-to-hire, independent contractor, or consultants. A 1099 is issued if you receive $600 or more of work during the year.
You may deduct the following expenses in your Form 1040
- Business Insurance
- Car and Truck Expenses
- Commission and fees
- Contract Labor (their fees are totally deductible)
- Home Office Expenses
- Interest Payments
- Legal and Professional Services
- Office Expenses
- Rent or Lease Payments
- Repairs and Maintenance
What about commuting costs? For example, if you are self-employed and you work from home, whenever you spend time driving to and from the client’s office, you can very well write off the mileage as a business expense. You can even include car expenses like gas, insurance, repairs and maintenance as a business expense.
However, you cannot deduct expenses that are personal because writing off even partial personal expenses may require a lot of record keeping so you don’t get a red flag from the IRS. You need to learn how to organize your record and always keep them accurate and updated.
The Tax Cuts and Jobs Act cuts individual income tax rates, doubles the standard deduction and eliminates personal exemptions. It practically dropped the individual tax rate to 37% but the changes will expire in the end of 2025.
Sharing economy workers who are independent contractors or self-employed are 1099. The only way they cannot be classified as 1099 is when they formed a corporation of the business. Don’t fail to miscategorize yourself!
In the 20% Pass Through Deduction, individuals who are independent contractors qualify for a 20% tax deduction without further requirements as long as they engaged in a trade or business and make less than $315,000 if filing jointly or $157,500 of taxable income filed in a single return.
Based on whether you pay wages or what trade you have, you can still avail the deduction even if you have a higher income. The easiest way is to become a one person company.
Wealthiest Americans can lower their tax rate to 30.3% that comprise of 15% tax rate plus 15.3% self-employment tax rate. There are many types of pass through businesses, such as the sole proprietorship, partnership and S Corporations. For individuals trying to avoid paying taxes, they usually register as a sole proprietorship which usually cost less than a $100.
Definitely, business owners are the big winners with the new tax break. As a business owner, you can deduct your meals but not the entertainment. The biggest change in the deductions comes from car depreciations. The first year you own it, you are allowed to take an $18,000 depreciation deduction for the new car. The SUV or truck is 100% deductible.
Alimony is deductible and there are more deductions for the medical expenses. If your medical expenses exceed by 7.5% of your adjusted gross income, they are deductible. This new tax law could get independent contractors a huge break.
The key actually lies with how you deal and opt for the pass through income as you move from W2 to 1099. For the most part, the new tax law will benefit freelancers, bloggers, tutors, gig workers and sole proprietors.
Freelancers often receive the Form1099-MISC for Miscellaneous Income. Working from home can be a benefit now. You are actually allowed to deduct home office based on the size of your home and office.
If the square footage of your home office is equivalent to the 10% of your home’s total, then you can claim it as an expense. You can also opt for the simpler rule that allows you to deduct $5 per square foot of your home office with a maximum write off of $1,500. You can file this on Form 8829 along with your Schedule C.
The new tax law also allows 50 to 100% depreciation percentage of a qualified property acquired such as computer or even a car it was purchased after September 27 2017 and before January 1 2023.
You can write off work related education as a business expense, including tuition, books, supplies and transportation.
Freelancers can put as much as $5,500 plus an additional $1,000 if 50 or older into the traditional IRA.
Diligent recording of business expenses is critical. You can do it by using a designated bank account and credit card for the business. There are apps you can use for this such as the Quickbooks Self-Employed, Expensify and the Shoeboxed.