If you’ve been self-employed for more than a year, you probably already know that you have to pay the entirety of your self-employment tax. This means that the average self-employed taxpayer or business owner will pay significantly more than the average employee.
To offset these costs, self-employed individuals may claim a number of deductions in lieu of the standard deduction. If the costs of your individual deductions are greater than this year’s standard deduction, $12,000 for single filers and $24,000 for married couples filing jointly, you can save money and reduce your taxable income by itemizing your expenses.
Table of contents [Hide]
- Why Deductions are Key for Self-Employed Taxpayers
- The Most Common 1099 Tax Deductions for the Self-Employed
- Deduction 1: Educational Expenses and Materials
- Deduction 2: Home Office
- Deduction 3: Travel
- Deduction 4: Outrageous Costumes
- Deduction 5: Office Supplies and Equipment
- Deduction 6: Working Meeting Meals
- Deduction 7: Licenses and Permits
- Deduction 8: Work from Other 1099 Contractors
- Deduction 9: Advertising and Promotional Materials
- Final Thoughts
Why Deductions are Key for Self-Employed Taxpayers
Employees get more legal and financial protection than independent contractors. Employees must be paid a minimum wage, they must enjoy scheduled and regular breaks, and they must be properly insured by their employers if their job requires specialized machinery or other liabilities. When you are an employee, your employer is also required to pay half of your required contributions to Social Security and Medicare.
To make up for these increased liabilities and costs, you may choose to itemize deductions in lieu of taking the standard deduction. Though you don’t have to be self-employed by definition to itemize, most employees will not incur enough deductible costs to override the standard deduction. For 2018, the standard deduction for single filers is $12,000 and $24,000 for couples filing jointly.
You can incur more costs of doing business than what’s covered by the standard deduction by itemizing your expenses, which saves more money than by capping expenses at the standard deduction.
The Most Common 1099 Tax Deductions for the Self-Employed
Many self-employed taxpayers are surprised to learn just how many business expenses are deductible. When it’s time to begin filing taxes, check to see if you’ve incurred these common deductions:
Deduction 1: Educational Expenses and Materials
Did you take a class or course to further your career? Educational expenses are deductible if they relate directly to your industry or skill set. Educational expenses can include the cost of the course, as well as any supplemental materials or supplies required to complete the course successfully. As every good student knows, education doesn’t stop when you exit the classroom, and your deductions don’t have to, either.
Deductions for educational materials may also include research materials purchased outside of the realm of formal education (for example, a book or magazine purchased to complete a specific project), an online webinar on a subject pertinent to your area of expertise or subscriptions to trade-related magazines, newsletters and other periodicals.
Deduction 2: Home Office
The home office deduction is one of the most misunderstood deductions, but it can be incredibly valuable if you qualify. Regardless of whether you own your home or you rent a space, you may deduct a percentage of your housing expenses that corresponds to the percentage of space that your home office takes up. You may also deduct that percentage from your utilities, property taxes and homeowners insurance.
For example, let’s say that you own a 3,000 square foot home and your home has an office that’s 300 square feet; it takes up 10 percent of the total space in your home. In this instance, you could deduct 10 percent of most of your home’s expenses. The definition of what is and isn’t an office can be blurry. The IRS simply defines a home office as a room that’s used exclusively for work and on a regular basis.
This doesn’t mean that your entire office space has to be used only for work, but it should have very clear boundaries pertaining to where you get your work done. A library with a desk, a laptop and a stack of romance novels would typically qualify as a home office as long as you have a section dedicated to work. Be sure to take photos of your workspace just in case you’re questioned by the IRS.
Deduction 3: Travel
If you travel to meet clients in a different city or state, you’re an entertainer who spends a lot of time on the road or you left home to learn new skills to enhance your business, you can deduct many of your travel costs from your taxable income as long as these expenses are reasonable and not lavish. If you travel via public transportation or you fly, you may deduct the costs of tickets and passes.
If you drive, you can deduct your mileage based on the IRS’s standard mileage rate. For 2018, you may deduct 54.5 cents for each mile traveled for business and 14 cents per mile for each mile driven in support of a registered charity. You may also deduct any tolls that you pay while traveling to your destination. The IRS issues a standard per diem (“per day”) rate for lodging and meal expenses while traveling for business.
Every city has a unique lodging and meal expense rate depending on the area’s standard costs of living. For example, the IRS has determined that you may deduct $291 per day for a hotel in New York City but only $93 per night in Cheyenne. Visit www.FederalPay.org/perdiem to learn exactly how much you may deduct per day for your business trip. Spent less than the per diem rate?
No worries — you can still deduct the per diem rate even if your actual lodging or meal costs were less than deemed necessary by the IRS.
Deduction 4: Outrageous Costumes
If you’re an entertainer and you channel your inner Lady Gaga during your performances, you may deduct the costs of costumes as long as they’re used for performances only and “not suitable for everyday wear.”
Remember, just because you wear a garment or pair of shoes on stage does not make it a costume in the eyes of the IRS. If you wouldn’t get weird looks wearing your costume on the subway, it’s probably not considered deductible. Make sure you take photographs and save all receipts as proof.
Deduction 5: Office Supplies and Equipment
Any office supplies or equipment that you purchase solely for business are fully deductible. The office supply deduction includes pens, paper, notebooks or sticky notes but it can also include larger office items such as printers, computers and professional software programs as well. If you run a business that’s not home-based, you can also deduct the cost of your equipment as well.
For example, if you run a lawn care business, your new weed wacker and lawn mower may be deducted as long as you don’t use them to touch up your own lawn.
Deduction 6: Working Meeting Meals
New laws now limit the amount that you can deduct when you take clients out to lunch, but you may still deduct 50 percent of your total bill for business entertainment. Keep your receipts and make some quick notes on what you and your client discuss during meals.
Deduction 7: Licenses and Permits
Any fees that you pay to maintain your business licenses and permits are deductible. For example, if you run a hair salon and you need to renew your cosmetology license every two years, you may deduct the costs of your renewing exam as well as any supplies you are required to purchase to complete the exam.
You may also deduct the cost of subscriptions to professional services and organizations — for example, a lawyer may deduct the cost of his or her annual subscription to PACER.
Deduction 8: Work from Other 1099 Contractors
If you’ve incurred costs form other 1099 contractors to supplement your work, you may deduct the costs invoiced to you. For example, if you are a novelist who has hired a graphic designer to create a few illustrations for your book, you may deduct these costs because they are directly related to how you make money.
If you have paid a 1099 contractor more than $600 in a single tax year, remember to record each payment made and send the contractor the right tax documents at the end of the year.
Deduction 9: Advertising and Promotional Materials
Any money that you spend advertising your business, products, or services may be deducted from your taxable income. The definition of “advertising” is extremely broad and can include everything from the cost of business cards, fees to marketing agencies or promotional consultants, the costs of sponsored posts on social media and PPC or SEO campaigns.
You may also deduct any amount of money that you donate to a charitable cost in return for advertising during an event. For example, if you donated $5,000 to a half-marathon in exchange for the marathon organizer to print your business’s name on the race numbers, you may deduct this cost as an advertising expense even though it is technically a contribution to charity.
The deductions listed above are just a few of the many write-offs that business owners and contractors can take advantage of to save during tax season. If you are self-employed, consider investing in special tax software for self-employed individuals. These programs offer valuable information about deductions and credits, many of which you may not even know that you qualify for.
The best tax software programs can even help you organize your expenses throughout the year so you can quickly pull up receipts and payment records once it’s time to claim your deductions.