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Tax Benefits Of 1099 Income

The IRS states that the Form 1099MISC or 1099G are ways to report payment of services rendered but offers a bit of freedom for taxpayers. The 1099 caters to independent contractors and those working as subcontractors who has absolute control of the method of work performed. Being a 1099 offers more flexibility and the following benefits

No taxes withheld. Customers do not withhold the taxes of 1099 contractors. This means that they received more money after each task or project completed. However, you must report the income and file your personal tax return including the self-employment tax for the Social Security and Medicare.

The person you worked for keeps tracks of your payments for the year and provides you a record of it using the 1099MISC. The 1099MISC form is used to report the amounts paid to independent contractors or non-employees and you are going to receive yours usually by the end of January so the information can be included in the tax return.

Claim deductions. You can now itemize things and claim it as a deduction. For example, you can treat a part of your house as an office expense if you use it for your business. The office space is just one of the few things you can deduct in your house.

In addition to the business home office space, you can include the home depreciation, property taxes, utilities, homeowners insurance, mortgage interest and even the home maintenance. For example, your home office occupies 50% of your home, then you can deduct 50% of your electricity bill also.

Some would deduct using the simplified method, which is calculated at $5 per square foot and max of 300 square feet. That is about $1,500 a year too.

Internet and phone bills can be listed under deductions. You are allowed to deduct your business phone, fax and internet expenses. However, you need to deduct only the expenses that were directly related to the business. Meaning, you cannot deduct your entire bill. It is okay to deduct a second line if that is dedicated for the business only.

Travel and meals are deductible if you travel and use meals for entertaining a client. You can deduct 50% but should keep a record of the specific date, time and place including the purpose of the business. Travel may include transportation cost to and from your destination such as gas, plane, bus or subway tickets.

Car trips using your personal vehicle can be based on mileage. Parking is another expense you can deduct. Just keep the receipts.

Credit card interest and purchases related to the business are tax deductible. Books and subscriptions including advertising and retirement plan contributions are legitimate expenses.

Also, you pay lesser self-employment tax because you are allowed to deduct half of it from your net income. The IRS treats it as a business expense. You need to pay self-employment tax that involves the Social Security and Medicare programs.

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Own working hours and style. If you are an independent contractor, the customer cannot control your hours and working style. They cannot control what and how it will be done but they have all legal rights to how the services are performed. The pay can be based on the output and not on the number of hours worked.

Make sure you are keeping track of everything. Spend a few minutes a day recording your expenses for the day especially your mileage log.

Charity. You may deduct charitable contribution of money or property to a qualified organization. Generally, you may deduct up to 50% of your adjusted gross income. However, in some cases, there are 20 or 30% limitations. The 50% limitation applies to all public charities, all private operating foundations and certain private foundations.  

SUV or truck as business expense. If you need a vehicle for your business and want it tax deductible, you should buy over 6000 lbs brand new SUV. The SUVs and pickup trucks are often used for business activities. You can deduct 100% of the cost using bonus depreciation.

The IRS is very keen on writing off cost of vehicles, so make sure you keep a detailed log of your business. The total number of miles driven during the year and the total number of miles driven just for business should be well accounted for. You can also deduct interest on auto loan, registration and property tax fees including parking fees as long as you list them and can prove they are business expense.

Depreciation is the wear and tear of the vehicle that you can deduct as an expense. New heavy vehicles are eligible for first year bonus depreciation. This means writing off the entire cost of the vehicle in year one.

Yes, the recent change in tax law allows people to depreciate an unloaded gross weight over 6,000 pounds up to 14,000 lbs SUVs and trucks that you intend to buy for use in the business. IRS allows no limits on depreciation for heavy vehicles.

Customers benefits. No withholding of the contractors, income taxes or even pay their Social Security and Medicare taxes. May not maintain any relationship with 1099 contractors after delivery of the form.

One small mistake and you will find yourself filled with fines and penalties. A customer may not give you a 1099MISC if you only earn less than $600 in a year, but it doesn’t mean you should not include, report and file that in your tax return.

Another thing is to make sure you pay your quarterly estimated taxes. You may find yourself facing penalty if you won’t file on time. Independent contractors are doctors, dentist, lawyers, accountants, carpenters, electricians, home remodelers, web designers, babysitters and the like.

As an independent contractor you can maximize your tax deductions and maximize your income for the year. Report payments of services with your 1099 and not goods. Know the conditions to determine whether you qualify for the 1099MISC.

The due date for filing 1099MISC is every 31st of January. You can use paper forms or software in preparing and filing the tax. I would advise you hire an accountant. Penalties are still huge when you classified the items erroneously.

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