Tax season is no walk in the park for the self-employed who have to pay their own payroll tax, in addition to their own income tax.What’s more, in many cases, tax information can become quickly outdated, sometimes within a year.
Fear not, my fellow independent contractors of the Internet.
Here are some hot, fresh and relevant tax tips for filing your 1099-related tax returns for 2013.
Keep Your Receipts — All of Them
If you haven’t already been keeping your receipts, then you’re probably out of luck for 2012. But moving forward, your 2013 receipts will be useful when you file your taxes next year.
At the very minimum, just taking a picture of all your receipts and keeping them in a folder on your phone will make your deductions a lot easier come tax time next year.
As an independent contractor, you should be keeping track of every deduction you’re legally entitled to. Every deduction you don’t take advantage of will cost you, so keep those receipts!
When it comes to your deductions, think big. For example, a writer friend of mine has a food column and she deducts all her food costs. She considers them a business expense because every meal she has is research.
If you are self-employed, you can deduct expenses related to your business. Did you pay for parking when you went to a business meeting? How many times did you have your home office cleaned this year?
Don’t think too “creatively” when it comes to your deductions, but don’t think small, either.
Consult a tax professional if you have any questions about business deductions and always keep this in mind: Only deduct expenses that can truly and logically be applied to running your particular business.
If a significant portion of your income is from a 1099, you might want to consider incorporating. Filing as an “S Corp” offers many advantages, including being able to pocket a portion of your earnings as a dividend rather than income.
The downside to incorporating?
Once you’re a corporation, filing your own taxes becomes more elaborate. There is tax preparation software for corporations if you are comfortable filing on your own, but just know that the tax code becomes more complex once you incorporate.
Commonly Overlooked Deductions
There are a number of deductions that are big money savers, but are often overlooked by harried 1099 workers trying to put together their taxes on the fly.
Some of the things you’re likely to overlook that can end up saving you money include:
- Medical Expenses: Your health insurance costs are dollar-for-dollar deductions. Medical expenses paid out-of-pocket add up quickly and can save you money on your taxes.
- Business Mileage: You can’t deduct the mileage for every single time you use a car. You can, however, deduct a standard mileage rate for every time you used your car for business. Keep a detailed log in your car in case of an audit.
- Homeowner’s Insurance: If you have a home office, you’re allowed to deduct a portion of your rent or mortgage. The amount is based on the percentage of your home that is a dedicated home office (size of space and other rules apply). The deduction doesn’t end with what you pay for the space, however. You can also deduct a percentage of the utilities and homeowner’s or renter’s insurance.
- Business Gifts: You’re allowed to deduct $25 per person per year. That $25 bouquet of flowers you got for a client’s secretary? Totally deductible. The $100 bottle of Scotch you bought a fellow contractor? One quarter of that is deductible.
- Business Travel: There is good news for you 1099ers that travel a lot. Most of the things you spend money on while you are travelling for work are considered business expenses. A few rules do apply, of course: You have to be gone for more than a day and the costs must be related to your business trip. For example, you can’t deduct the “I went to San Francisco and all I got was this lousy t-shirt” you got. This is just one example, and there are more exceptions, so do your homework before you start claiming business travel deductions.
The Golden Rule of Deductions
Before you get carried away claiming deductions, imagine yourself standing before an auditor with the receipt in hand. Would you feel comfortable arguing that it was a business expense? If so, deduct it. If you have a shadow of a doubt, skip it.