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If you are an independent contractor who receives 1099-MISC or 1099-NEC income, you are obligated to report this income on your tax return. Any time you receive these tax forms, the IRS gets a copy.
However, while people tend to talk about those dreaded “freelancer taxes” or small business taxes, there are ways that you legally avoid them by properly claiming eligible deductions on Schedule C. 1099 income spans an incredibly wide range of services and income types including rideshare driving and other gig work, royalties from digital media like YouTube videos, or providing professional services such as writing, law, or consulting. Despite these massive differences in the services provided or how the income is earned, the same deductions are available to all taxpayers and you may be eligible for some or all of these.
Here’s how you can avoid paying more taxes as an independent contractor, by taking note of these special deductions and keeping proper records for them.
Home Office Deduction
With the pandemic keeping more people at home than ever, and many looking to make a living as a freelancer or content creator instead of risking their health at a face-to-face job, it’s no surprise more people want to find a way to deduct part of their housing expenses.
You were allowed to do this long before the pandemic and still can. A business percentage needs to be calculated for your home based on the square footage or number of rooms. This area also needs to be used exclusively for business: for example, a recipe blogger who uses their apartment’s kitchen for both personal cooking and filming recipes would not be able to deduct that area, but they could deduct a spare bedroom used solely as office space. If the apartment is 600 square feet and the bedroom is 100 square feet, the business percentage is 16%.
This percentage is then applied to the rent or mortgage payment, utilities, insurance, and cleaning expenses. Direct expenses, like having your home office specially cleaned or painted, can be fully deducted. Homeowners get more deductions than renters, because a portion of the home’s actual purchase price plus real estate taxes are deductible instead of rent. This incredibly valuable deduction can quickly eat away at independent contractor taxes.
Co-Working Spaces and Mailing Addresses
As more people return to offices, this also includes self-employed people. If you pay rent at any time to share co-working space or get a dedicated desk or room, you can deduct this rent as a business expense.
Since many content creators also don’t want their fans sending gifts or mail to their home addresses, PO Box rentals and mail handling and forwarding services can also be deducted.
Mileage and Car Expenses
If you use your car for business purposes frequently, you can deduct your mileage or a percentage of the actual expenses of maintaining your car (including the lease or car note). You will need to calculate which method is more beneficial. Since most people rely on their cars to get around and don’t have the funds or space for a dedicated car to use for business, a business percentage can be used.
The standard mileage rate is $0.56/mile for 2021, while actual car expenses would be the following:
• Gas and oil
• Garage or lot rent
• Repairs and maintenance
• Car insurance
• Depreciation (purchase price)
Regardless of whether you use the mileage or car expense method, you can always deduct registration fees, vehicle property taxes, interest on car notes, parking, and tolls.
Diligent records need to be kept of how many total miles you drove in the year, to compare how many were driven for business or personal reasons. Unlike the home office expense percentage which is fixed based on how much space in your home you use, this percentage will vary year to year based on your personal car’s usage. A mileage app to help properly separate your business and personal miles is crucial for accurately determining the percentage that will apply to your car expenses.
Books, magazines, streaming services, video games, e-courses, and other content that helps you create content for clients or your own projects are deductible research expenses.
Events that you are paid to write about, like movies or sports matches, would also qualify. Generally, professional books and publications that help you understand more about your field, as well as content and excursions related to projects and work done for hire, are usually deductible research expenses that help beat down independent contractor taxes.
Taking Business Contacts Out For Coffee and Dinner
Meals, drinks, and other acts of treating business colleagues, clients, and leads are usually deductible by 50%. However, meals, coffee, and other refreshments for business purposes are temporarily 100% deductible from January 1, 2021 through December 31, 2022 to stimulate the restaurant industry after it was devastated by COVID-19.
This is even true of food and drinks enjoyed alone on qualified business travel, provided that they were at a dining establishment.
The ruling has been clarified that food purchased at grocery stores, convenience stores, and kiosks for both business travel and treating colleagues is only eligible for the 50% limit. Only food and drink eaten at restaurants qualifies for the temporary 100% deduction.
Even with the 50% limit, this deduction quickly adds up nevertheless if you frequently travel overnight for business purposes or entertain clients or colleagues frequently
Phones, Laptops, and Other Electronics
Similarly to our cars and homes, our electronics have become an integral part of daily life. Phones, laptops, tablets, and other devices that you use for both business and personal usage can have a percentage applied to them based on how much you use them for business and personal reasons. Most people use a 50% rate, but this can vary depending on how you use the device.
Phone, data, and wired Internet plans can also be deducted based on how much you use it for business.
Unlike cars and homes however, electronics are more affordable than ever today. The purchases of dedicated devices are 100% deductible, along with any separate phone, data, or Internet plans meant solely for business use. Since these plans can add up quickly and devices need to be replaced more than they did in the past, it’s an item you don’t want to overlook as it can legally reduce your tax bill significantly.
Occupational Clothing and Footwear
While white-collar professionals in fields like finance and real estate require sharp clothing to impress lucrative prospects, this kind of clothing is still suitable for wearing in public and thus is generally not deductible. This was clarified in the 1980 Tax Court case Hynes v. Commissioner, which ruled that despite Hynes relying on his appearance to keep his high-paying TV anchor gig, hair, makeup, and clothing expenses were personal expenses and not deductible.
However, a private-duty nurse who needs scrubs and shoe protectors, or a professional cosplayer who needs specialized wigs and costumes that would not normally be worn outside of events, would be able to write off these expenses as occupational clothing. Accountants jokingly refer to this as the “Tina Turner Rule”: if it’s a nice dress you could wear to dinner, it’s personal. If you need to be sewed into it, it’s business.
Hiring Professional Help
Self-employment brings a great deal of freedom, but it also brings responsibility. Not just for tax filings, but you may have additional bureaucracy to comply with at federal, state, local, international, and corporate levels.
You can deduct fees paid to attorneys, accountants, consultants, marketers, and other professionals who can help you with your filing obligations, business plans, contracts, and other aspects of working for yourself. Any other tasks you want to outsource like your website, content creation, and administrative duties can also be deducted, as they’re considered ordinary expenses needed to run a business.
If there’s work you did that you didn’t get paid for, you can also deduct your legal and court costs in going after that uncollected taxable income. This also rules true of hiring collection agencies, if you don’t have free programs like New York’s Freelance Isn’t Free Act.
Different types of insurance quickly add up, and can take a bite out of your tax bill if accounted for properly. They would include, but are not limited to the following:
• General business and liability coverage
• Error and omission policies for self-employed professionals
• Car insurance, which can be wholly or partially deductible
• Travel insurance for business trips
• Device insurance and extended warranties for electronics and equipment (can be fully or partially deductible)
• Tenant and homeowner insurance, as part of the home office deduction
Medical and dental insurance, plus long-term care insurance, can’t be directly deducted from your 1099 income. However, these three types of insurance can be written off on a different part of your tax return through the self-employed health insurance deduction. As of 2003, 100% of the premiums can be deducted if you are self-employed and not eligible for coverage through an employer plan, or your spouse’s employer plan.
This deduction can get fairly complex, particularly if you received a premium tax credit from ACA Marketplace plans or if the total premiums you paid during the year exceed your actual net self-employment income (as is common with side hustles or new businesses). Nonetheless, this deduction is extremely valuable and should not be overlooked.
Building Up Your Image
Any way that you market yourself and build up your brand, whether it’s online or on the streets, equates to a bona fide business expense.
Having business cards and other marketing materials made counts, as does hiring a graphic designer to create a logo and other branding artwork for you. Using marketing platforms, hiring professionals to help you craft an image or build a website, run ads and flyers, and other ways of getting your name out there will also count as deductible marketing expenses.
If you’re having professional photos taken, like headshots, they also count as ordinary expenses for building a brand and professional image. While you can deduct the fees paid to your photographer for the shoot and any touch-ups or reprints, fees paid to stylists and the purchase of non-occupational clothing for the shoot are considered personal expenses.
Software, Apps, and Other Tools
The world runs on tech and every independent contractor, even side hustlers, has likely incurred some kind of tech-related expense or another.
Any software subscriptions, one-time purchases, add-ons, and tools that you use to make your job easier can be deducted. This would include things like mileage apps, image creation and editing apps, bookkeeping software, premium versions of video game engines, productivity tools, and virtually anything else in your stack that you need to get your work done and keep records.
There are many ways that you can legally avoid paying taxes as an independent contractor. But whether you’re doing gig work to supplement your income or you’re pivoting to becoming a full-time content creator, keeping excellent records is a must. Keep your receipts where you can easily reference them and if feasible, get separate bank accounts and credit/debit cards for your business transactions (this is critical once transactions begin to mount). For some expenses, like business meals and travel, you need to keep additional documentation beyond the dollar amount that also proves it was genuinely for business purposes.
While most companies will give you a 1099 for income you earned, no one automatically tracks expenses for you. You can start with a spreadsheet to keep track of your expenses, then graduate to a cloud-based bookkeeping solution you can use on your own or with a tax professional once you have more transactions that need to be recorded. Good recordkeeping is the cornerstone for making tax time painless, not paying more than what you legally owe, and even finding deductions that you didn’t know you were eligible for.
Disclaimer: Please keep in mind that the content of this post is not intended as tax, accounting or legal advice. The information presented here is for informational and educational purposes only. Before engaging in any transaction, be sure to discuss these matters with a trained, licensed professional.