Getting paid as a 1099? Here’s how you should manage your expenses
As a self-employed individual, contractor, freelancer, or gig-economy worker, you essentially own and run your own business. Owning your own business can be extremely rewarding and provide lots of flexibility, but you do wind up paying lots of out-of-pocket expenses on a regular basis. You need every tax advantage you can legally claim, and so deductible business expenses can be a real lifesaver. Below is a list of deductions you can feel safe in taking, as well as an overview of often-overlooked expenses you can claim.
Here’s a list of 16 deductions that you should know about:
- Self-employment tax deduction. The IRS considers the employer portion of the self-employment tax to be a deductible expense.
- Capital expenses. This includes utilities, office supplies, repairs, and advertising. You can claim up to $5000 the first year you are in business, and any remainder must be deducted in equal amounts over the next 15 years.
- Business travel. This covers items such as plane fare, taxis, lodging, meals, shipping business materials, telephone calls, tips and faxes. But remember: If you take your family, you can only deduct your own expenses.
- Fees paid. This includes fees to consultants, lawyers and tax professionals, and these can be deducted in the year they were incurred. Keep in mind, though, that if the work clearly relates to future years, such as in the case of a lawyer, the fees must be deducted over the life of the benefit you receive from the service.
- Auto expenses. This includes standard mileage rate plus business-related tolls and parking fees, as well as auto depreciation each year. The Standard Mileage Rate Deduction for ride-sharing drivers, independent truck drivers and other transportation workers is the business miles X $0.545 per mile for 2018. Note that claiming 100% business use of a vehicle raises IRS red flags, because ‒ let’s face it ‒ you are probably not using your vehicle exclusively for business purposes.
- Insurance premiums. This includes medical insurance, liability insurance, fire/theft/flood insurance, life insurance, unemployment insurance contributions, and professional malpractice insurance.
- Interest. You can claim interest if you use credit to make business purchases.
- Medical care expenses. If you pay for your own health insurance, you can deduct your health, dental, and long-term care insurance premiums, as well as the cost of premiums that you pay for your spouse or dependent.
- Charitable contributions, If your business is a partnership, limited liability, or S corporation, your business can pass the deduction through to you. If a C corporation, the corporation can deduct the contribution.
- Meals: You can deduct 50% of qualifying food and beverage costs. The meal needs to be business-related, and the taxpayer must be present, along with either a current customer, a client, or an employee. (The IRS cautions against “lavish or extravagant” meal costs, and this is pretty vague, but know that, if you are taking a CEO of another company, or a potential investor out, they will let you get away with a bit of a higher cost.) Food and beverage must be purchased separately from entertainment, and you need to keep the following records of the outing: The amount of each expense; the date and place of the meal; and the business relationship of the person you dined with. Note: Items like donuts and coffee for meetings can actually be 100% deductible.
- Telephone and internet expenses. Of course, you can only deduct the percentage related to business, so you would need to keep careful track.
- Taxes. You can deduct sales tax on items for day to day operation. Note that excise and fuel taxes are separately deductible expenses, and you cannot deduct federal income tax paid on business income. Also note that the annual personal itemized deduction for state and local taxes is limited to $10,000.
- Retirement contributions. Yep, you can deduct this!
- Education expenses. The expense needs to be directly related to maintaining or improving skills required for your business.
- Advertising and promotion. This is deductible as a current expense.
- Home office. If you can provide proof that you have home office space that is used exclusively and regularly for business, with regularly identifiable boundaries, then you can deduct a standardized $5 per square foot of your home that is used for business, up to a maximum of 300 square feet. Note that claiming this deduction is a common trigger for a tax audit.