It’s never too early to prepare for that dreaded time of the year. No, not the holidays (you grinch!), we’re talking about tax season. If you're a contractor or freelancer, you’ll be filing a 1099 form instead of a W-2, which means you may want to use this extra time in advance to familiarize yourself with what you can expect.
Filing as a contractor means you are responsible for reporting the income that you receive and paying the appropriate amount of taxes. But this also means you have the ability to make independent contractor tax deductions, which may greatly decrease the amount you owe the government (or increase your refund).
Here are some of the most important things to remember to help maximize your 1099 deductions while filing your taxes:
1099 deductions for your business expenses
First things first, let’s look at where you’ll list your expenses. On your standard 1040 form, you will see a line under your “Income” section labeled “Business income or (loss)”. Attach Schedule C or C-EZ.” Imagine this line item as an online button that expands into its own screen when you click it. That expanded screen would be the Schedule C. This form is where you justify all of the expenses that your business incurred, adding them up so that the line item on your 1040 gets as big as possible. You will notice that you get to subtract Schedule C business expenses from the final taxable income on your 1040, so you want every legal deduction that you can get!
ordinary and necessary expenses
When listing expenses on your Schedule C, you must be able to prove your claims are both ordinary (common in your field) and necessary (immediately helpful to your business). These expenses include, but are not limited to:
- mobile phones (yours only — DO NOT include family members)
- office supplies
- licensing fees
Be realistic with your claims. If you own a car and use it for work, the IRS will allow you to deduct the miles, gas and some maintenance fees for business purposes. On the other hand, if you try to deduct a new car purchase, you’ll probably be facing an audit, as the IRS does not allow 1099 write-offs for those kinds of costs. Keep detailed receipts of your expenses that are exclusively for business purposes and use those receipts to determine what you should try to deduct. The best advice: if you’re uncertain if a purchase qualifies as a business expense, it probably doesn’t.
putting it all together
Manually filing your tax forms can be challenging. If you’re up for the challenge, we recommend using one of the many tax preparation programs available. You’ll have to pay for the software, but they will guide you through each section of your tax return and help you select the proper 1099 deductions. If you’d rather receive help from a real person, it’s a good idea to retain an accountant or an attorney with a specialty in tax law. The amount of money that you can deduct for the above expenses may change from year to year, and the tax code is quite long, so if you’re wondering how to get a bigger tax return, enlisting the help of a professional may be the best way.
The number one thing to remember is that whether you are called a "business owner" or not, your 1099 form means that you are legally a business. Act like it. Keep all receipts organized and if possible, separate your business bank accounts or credit cards from your personal accounts.
Of course, maximizing your tax deductions is just one way to increase your earnings. For more on salaries, benefits, pay rates and more, visit the Randstad salary comparison tool.