Tax Deductions and advice for 1099-Misc Independent Contractors
A few tasteless occupations that receive a 1099-Misc are sub contractors, real estate brokers and insurance agents. Independent contractors who have their wage reported on a 1099-Misc are considered self-employed by the Irs, and are responsible for paying their own taxes. To put it most simply, none of their taxes are withheld during the year.
Tax Deductions and advice for 1099-Misc Independent Contractors
This can be a double-edged sword for many independent contractors. For those with sufficient tax knowledge, or entrance to a distinguished tax professional, receiving a 1099 can absolutely be a good thing. But for those who are new to an work that reports wage via the 1099, or believe they are a turbo tax expert, receiving a 1099-Misc can be a disaster at tax time.
In most circumstances, an employee's (someone who receives a W2 by January 31) net wages have already had federal, state and payroll taxes withheld. Employee's are not totally responsible for their own taxes, but an independent undertaker of a package deal is. The first thing that the self-employed has to do is pay their taxes quarterly. The total number you have to pay quarterly is the smaller of these two numbers, either 100 percent of last year's tax liability, or 90% of the current year's tax liability. Failure to pay in sufficient throughout the tax year will succeed in an estimated tax penalty on your tax return.
The second and most crucial part of being an independent undertaker of a package deal is tracking your firm expenses during the year. Taxpayers who receive 1099's are allowed to deduct their expenses from firm activities just like a firm owner can, in fact, some small firm owners and independent contractors use the same form to record their income, a program C.
The most prominent cost for independent contractors to keep track of are their auto expenses-namely firm miles driven. The Irs allows taxpayers to deduct 50 cents for every firm mile driven during 2010, the proper mileage rate cannot be taken in addition to actual car expenses like gas, repairs, depreciation, and insurance. Independent contractors must rule either or not they want to use actual expenses, or the proper mileage rate.
Something else that an independent undertaker of a package deal must take in to consideration in regards to mileage is the definition of firm miles, not all miles driven are considered firm miles. Miles driven from home to your office are considered commuting miles, not firm miles. Miles driven from the office to your work site or appointment are considered firm miles. And obviously miles that your drive while not at work are considered personal miles and cannot be deducted.
For those who rule to use the actual expenses method, your deduction can be figured by totaling up your auto expenses and multiplying that number by the ratio of firm miles driven. For example, if you drove 30,000 miles for the year, and half of them were firm miles, then you could take half of your auto cost for the year as a deduction.
Other expenses that can be deducted from wage for the self-employed include:
• Advertising expenses
• Office supplies
• Cost of uniforms/Equipment
• Utilities
• Insurance,
• Interest paid
• Legal/professional services
• Meals and Entertainment Expenses
• Lodging expenses
One last topic that independent contractors need to reconsider is the home office deduction. If you use a part of your home exclusively for firm purposes, you can take the deduction. This will enable you to not only deduct a part of your living expenses, along with rent/mortgage interest, insurance, taxes and utilities. The home office deduction will also allow you to turn some of your commuting miles in to firm miles.
You can comprise commuting miles as firm miles if you are a small firm owner or self-employed person, and you have two offices or work locations: one exterior the home, and one inside the home. You will need to fill out form 8832 in addition to a program C to correctly file the home office deduction.
The best way for small firm owners and independent contractors to save money at tax time is to understand what they are allowed to deduct. An cost and deduction using an excel spreadsheet or QuickBooks is a good way to get started.
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