With the freedom to organize your business comes the challenge of tracking expenses and deductions.
It can be overwhelming to find the right 1099 deductions to claim that will reduce your federal income tax bill.
If you are a contractor, the odds are good that you want to claim as many business expenses as possible. To make the process of hunting for tax deductions more simple, we put together our list of the best ones for independent contractors and freelancers.
Note: First, check out our 1099 expense tracker for freelancers which makes tracking these tax deductions a whole lot easier. Our app will automatically organize and scan your tax receipts so you can save the most money during tax time. In fact, our users typically save $5,600 from their tax bill at the end of the year with our software. Try a 7-day free trial here.
Then, read on and discover deductions that you may not have ever thought of claiming as a 1099 contractor!
Form 1099-NEC is used by contractors = when making payments to any individual who completes work for them but isn’t a full or part-time employer of the business. Examples include freelancers, independent contractors, the self-employed, and sole proprietors. In short – businesses use this form whenever they hire people – like you – who don’t work for your company.
The form is available from the Internal Revenue Service (IRS), where it can be downloaded as a PDF. It’s also worth noting that a 1099-NEC form isn’t the same as a 1099-MISC form. The latter is used solely to declare payments made to nonemployees who aren’t subject to self-employment tax. The NEC version of the form is used when those payments are subject to self-employment tax. Think of the form as a way for the IRS to track and verify that every payment a business makes, and that you receive, is legitimate.
Interestingly, Form 1099-NEC has something of a patchy history. First introduced in 1982 – with the current form sharing the design of that original – it was gradually phased out in favor of 1099-MISC. Up until 2020, all nonemployee payments were reported in Box 7 of 1099-MISC, with 1099-NEC being brought back in 2020 to address issues related to dual-filing deadlines.
The due date for the form is always January 31, with the recipient using the form to help them complete the appropriate sections of their own tax return. That’s where you, as a contractor, come in. A business should issue a 1099-NEC to you whenever you complete work for them. In addition to your fee, the company should note any commissions, prizes, or awards you’ve earned while working for them.
When you receive the form, you should see that the business paying you has sent “Copy B.” The IRS receives “Copy A,” and these versions of the 1099-NEC are scrutinized during audits. If you’ve received a “Copy A” from a company, you must raise it with them – that copy needs to go to the IRS and the company may land you in trouble if it sends the wrong one.
When examining the form, you should see that your personal information and the amount of money paid to you are all included. Again, check this against your records. The IRS will pick up on any discrepancies. You’ll also see boxes for federal and state taxes. These are typically left empty – you handle those taxes in your own personal tax return – unless you’re obligated to pay backup withholding to the IRS out of any money that you earn.
Requirements start with the business for which you work. They’re required to complete a 1099-NEC to send to you if the work you did for them totals $600 or more over the course of the year. For instance, you may be a freelancer who does three jobs for a company, each totaling $300. Combined, those jobs amount to $900 in nonemployee payments for the year, meaning those payments are subject to IRS guidelines. The employer has to file a 1099-NEC with you by January 31 of the year following the completion of the work to legally declare the payment.
Should the work total less than $600 for the year, it can be declared using the 1099-MISC form. Thankfully, that doesn’t change much for you as a contractor in your quest to reduce taxable income. Regardless of which form you receive, the money compensation stated on it can still be subject to the below tax deductions. You just require documentation from the business for which you worked to show that you earned the money as a self-employed contractor and are thus eligible for the deductions listed below.
As for your own filing requirements, you’ll use the amount of money stated in Box 1 of your 1099-NEC when reporting your self-employment income. However, the information doesn’t go directly into Form 1040, which is your individual tax return. Rather, your payments can be itemized on Schedule C to denote it as income you’ve received per your operation as a contractor or sole proprietor.
If you can take a careful record of all of your business costs throughout the year then you will save yourself a lot of money when you file your tax return and a lot of hassle when tax season rolls around.
Being your own boss means you are subject to keeping track of your revenue, tax withholdings, and expenses throughout the year and reporting them to the IRS. You must withhold a certain percentage of all self-employment income so that you can pay self-employment taxes. Remember to keep clean records of your receipts in case you get audited by the IRS.
Here's a list of the best tax deductions available for self-employed workers:
If you are a 1099 self-employed worker, it is pretty much essential to claim this tax deduction. Ironically, to avoid self-employment taxes, you can deduct the fees from your taxes.
If you are a freelancer, small-business owner, or any kind of contractor: you are eligible for the self-employment tax deduction.
The self-employment tax boils down to a 15.3% rate (12.4% for Social Security and 2.9% for Medicare tax). If you are an employee, you'd normally pay half of this rate. As an independent contractor, you will pay all of the 15.3% of the self-employment tax. You can use our self-employment tax calculator to find out how much you'll owe.
If you earn over $200,000 per year as a contractor ($250,000 per couple), the IRS requires you to pay an additional 0.9% self-employment tax.
There’s a cap on the amount of self-employment income that is subject to social security taxes. The Social Security tax rate for 2021 is 12.4 percent of your self-employment income, up to $142,800. You don’t pay Social Security taxes on your self-employment income above that.
Many independent contractors aren't aware that you can deduct the expenses of running a small business home office.
With the home office deduction, you can cite the cost of utilities, deduct home repairs, and expenses for your home office's maintenance. You might also be able to deduct some rent or mortgage interest and property taxes. Track these expenses with our home office spreadsheet.
The IRS will only accept deductions if your home office is primarily used for business use, whether you rent or own. Since the amount deducted depends on the office's square footage, take the time to draft your workspace's dimensions in case of an audit. You can deduct the square footage portion related to your home office by using Form 8829. Read more about how to use the home office simplified method to claim this deduction. Properly keep records of this write-off and report a reasonable amount or you could face a home office deduction audit.
You should only claim expenses for the phones and the internet for business use.
Invest in one dedicated cell phone to ease the calculations of your phone bill. If you multi-task with your cell phone and spend a percentage on business and a percentage for your personal life, you'll have to estimate the time you spend solely on business calls from your cell phone bill.
That’s how to use the device to keep it separate for business. So, what about handling the bill for cell phone tax deductions? There are two ways to approach these deductions:
The health insurance deduction can be one of the largest, you want to make sure to claim it if you can. If you're a member of a spouse’s plan, for instance, you won’t be eligible. You can't take the deduction if you were eligible for a spouse's employer plan, even if you didn't take it.
Rather than being directly related to your self-employment taxes, health insurance deductions are a personal deduction applicable to an independent contractor. This is an important distinction to keep in mind.
In other words, health insurance tax deductions are more like an adjustment. If you don’t have any insurance help, you will be able to deduct 100% of the costs of premiums.
You will also be able to deduct premiums you paid for a spouse and dependents younger than 27.
Note: For the best way to scan receipts, try Bonsai Tax. our app automatically scans your bank/credit card statements to discover tax write-offs and save you money during tax time. You won't have to worry about categorizing expenses or keeping track of all them. The software will do all of that for you. Claim your 7-day free trial today and see for yourself.
While there are some specific criteria for what counts as a business meal deduction and what doesn't, if you take care to record costs as an entrepreneur, you will likely be eligible for a standard meal allowance.
Keep in mind that the meals allowance is for traveling meals (eg away from your general area) as opposed to meals around town
A taxpayer may deduct 50 percent of the food and beverage expenses associated with operating their trade or business.
There must be a business purpose for it to be a tax write-off. Also, entertainment and meal deductions can't be extraordinarily costly depending on your income (sorry, no lobster every night!), and you must have had the meal while traveling on business.
You can also claim standard meal allowances for meals bought at conferences or meals shared with clients and colleagues.
Recently, the government passed a provision for 2021/2022 that allows you to deduct 100% of business meal costs instead of the previous 50% standard.
Along with airfare and rental car charges, you will be able to claim lodging and extended stay costs along with expenses you incurred while taking local transportation like trains, subways, and taxi services.
A trip must last longer than one workday to qualify as a legitimate business cost. Additionally, you must demonstrate that you spent the night there and that the location was outside the general vicinity of your home office (so, keep track of the receipts).
If a business partner accompanies you, it goes without saying that you will have to remove the cost of their trip from yours. Travel expenses are 100% deductible expenses. If you want to discover tax write-offs and track all your travel expenses, we recommend you use a travel tax deduction tracker.
For deductions of meal per diems, they are calculated according to federal M&IE rates.
You must be “actively engaged in business.” That means meeting with clients, participating in conventions, and other valid claims for a business expense.
A trip is only a business travel tax write-off if it is predominately for business.
There are two tax deductions or methods used for resources spent on your car for business: standard mileage deduction and the actual expenses method. You must choose one of two as they are mutually exclusive deductions.
The first method is quite simple and involves calculating your total mileage spent in your car according to the standard mileage rate. We will cover that deduction in the next item below.
The second method is called the "actual expense method." It takes a little more time to calculate car expenses, but it can potentially eclipse the deductions claimed from mileage. Better to calculate costs using both methods to ascertain which one will yield a higher deduction.
To calculate the actual expenses, determine what percentage of the time you use your car related to your business. Then, add up your "operating expenses" or car expenses. You can deduct the cost of your car expenses, oil changes, repairs and maintenance, gasoline expenses, the depreciated value of the automobile, fees for licenses and registrations, and car insurance.
Note: If you need help tracking and recording your business expenses, try Bonsai Tax. Our app can seriously save you a lot of money (the average user saves at least $5,600 from their tax bill!). You won't have to worry about what qualifies as a deduction, when taxes are due or how much money you'll owe. Our software will do everything for you. Try a 7-day free trial today.
Tracking miles for taxes and using deducting the standard mileage rate is a simplified method of calculating your write-off.
The standard mileage deduction rate changes annually. In 2020, it was 57.5 cents per mile. In 2021, the rate lowered to 56 cents. Make sure you read up on this year’s rates before you claim your deduction. Better yet, hire an accountant or tax advisor for help.
You should also note that your deduction rate changes depending on the purpose of your drive. If you are driving for charity purposes, the allowance drops to 14 cents per mile. Medical moving has a rate of 16 cents per mile. Miles driven from home to work typically do not count as a tax deduction.
To claim interest on your mortgage, you will need to fill out form 1098.
Did you take out a large loan to build the real estate you are using for your business? That's tax-deductible, along with the costs involved in buying land. The IRS publication 936 has all the details for you if you question whether a home mortgage is deductible. Check out our full list of real estate agent tax deductions.
Just make sure that the building you use for business and pay interest on isn't used for personal use as a home or family home. The IRS only allows contractors to deduct mortgage interest on building sites used exclusively for business.
If you want to track your deductions and save a lot of money during tax time, try Bonsai Tax. See for yourself, why folks are saying our tax software is the best for freelancers.
Noticed a trend in tax deductions for self-employed businesses? If the costs are split between business and personal life, you must calculate the percentage used exclusively for business. That trend doesn't end when trying to take advantage of other interest charges.
Do you have a business credit card? Maybe you opened a line of credit to get the business on its feet? Interest on car loan payments? You deduct any loan interest incurred for the business.
Part of becoming a member of an industry is reading cutting-edge literature and journalism covering the business world. That means you will need to buy publications and subscriptions, and those media materials are tax-deductible business expenses.
If you’re a freelance writer or journalist, it is more important than ever to keep records of all the professional books and publications you buy. They’re all tax-deductible as long as you can demonstrate that it was critical to your business development.
The IRS supports independent contractors of all stripes in continuing their education. You can deduct the cost of books, transportation, lectures, supplies, and even tuition if you choose to invest long-term in your education.
The key is you must demonstrate that educational costs are for "qualifying work-related education" to the IRS in Publication 970. Business expenses would be only deductible expenses if they helped you improve skills vital to your business.
In other words, your fees for classes, books, and tuition must go toward furthering your current career or trade.
Not every independent contractor invests in business insurance. However, suppose you do decide to go all-in. In that case, the IRS offers provisions for you to extract deductions from the cost of business insurance.
It is not only business insurance premiums for yourself that are deductible. If you hired new employees for the current tax year and you offered them accident and insurance, you are in luck! Those costs are also deductible.
Many freelancers, writers, producers, or creatives spend most of their time away from their homes when conducting business.
You can deduct the costs of rent for workspaces away from home. Say you work in a shared space, commercial kitchen, or an artist studio--if you pay rent to use that space for business you can deduct it.
By extension, if you end a rental agreement with the space you use as your primary place of business, you can also deduct some of the costs of breaking a rental contract. If you have outstanding bills with the landlord, make sure you pay those before claiming the deduction. You can include deducting home rent as a part of your home office deduction!
You can deduct up to $5,000 in start-up costs as an independent contractor. To ease the collection process, here are some typical start-up costs:
Formation costs for LLC’s vary from state to state. In addition to the original $5,000 in start-up fees, you can also deduct $5,000 more if you opened as LLC and accrued costs associated with licensing in the state and local economy.
Many contractors invest a considerable amount of advertising resources to promote their business. Promoting your brand’s image across media of various kinds helps to bring in more clients and customers.
Tax deductions for self-employed workers include provisions for advertising fees. All media types are valid deductions: Google Ads, Facebook ads, TV commercials, and traditional print media like business cards, flyers, and billboards.
Even clothing that promotes your firm is deductible. This includes both the cost of the apparel and the cost of imprinting your company's brand on it. So, you can write-off clothing for work that is promotional as a miscellaneous deduction on your tax return.
Just make sure you record all your advertising contracts before filing. The IRS regularly audits deductions claiming to be from advertising.
Intelligent business owners start early when investing in their retirement.
If you contribute to retirement plans now, you will be surprised at the gains you can make over a more extended period. The IRS website for self-employed retirement plans details what the different options are for self-employed people.
You won't be able to contribute more than you make annually. Consider investing in a self-employed retirement plan if you have plenty of profit left over.
Odds are, you regularly spend on office supplies. Paper, printers, computers–the list is endless. The only thing to do is search for the correct line item.
Office expenses don't stop at the physical equipment for your business either.
Do you hire professionals to clean your office space? Do you have monthly charges for maintenance and IT? While you might hire help for your office, be a bit more specific and expense payments to contractors as Contract Labor.
It is a great idea to deduct the costs of these assets' depreciation.
Any asset with a life longer than one year and isn't inventory should be depreciated, regardless of age or how long you've owned. For example, if you buy a new computer, you'd begin depreciating it when you 'placed it in service' (aka started using it). Depreciation begins when placed in service.
Itemizing deductions for depreciation of assets does, unfortunately, require filling out the separate Form 4562. When completing this form, you will be expected to record the lifetime under which your equipment aged.
One good sign that a business is getting off the ground is outsourcing tasks to outside contractors.
Sometimes, small business owners need to hire out for projects in order to grow their business. For instance, hiring a computer programmer to optimize a site’s code, or by paying a fleet of expert writers or laborers by the hour– the IRS sees that the business is improving and worth investing in.
Keep in mind, you can only deduct costs for contract labor in this category. If you have a lawyer on retainer or advance a previous contractor to a full-time employee, those costs should be deducted elsewhere. Bonsai’s Equipment Depreciation Calculator can give you an idea of how much an asset depreciates each year.
Sales tax, generally, is already included in the cost of items already deducted. For example, if you buy office supplies, you don't have to deduct the supplies and sales tax separately.
If you pay general sales tax, it's usually a better idea to take the sales tax break if you had large purchases in the tax year. We would count purchases of automobiles, long trips, or weddings among those.
In the end, it's always a good idea to track your tax deductions, and calculate it with the standard deduction as well as an itemized deduction. As a business owner, you are always better off finding the higher deduction.
The first thing you should do when you receive your 1099-NEC is to check “Box 1 – Nonemployee Compensation.” There, you’ll see the amount of money the business for which you worked says that they paid you for your services. Once you have that number, compare it to your financial records, such as the invoice you submitted to the company.
If they match, then great! You can now work out how much money you need to set aside to pay taxes on that 1099 income.
Your records are in order, and the IRS will see that, too. Remember that they have Copy A of your 1099-NEC and will compare it to the 1040 and Schedule C you submit to check that you are eligible for 1099 tax deductions.
Note: Try Bonsai’s Self-Employment Calculator to work out the numbers as accurately as possible and reduce the chances of an IRS audit.
Let’s say that a company paid you $2,000 for some consulting work. You charged that amount on your invoice and it’s what you received when you completed the contract. However, when you receive your 1099-NEC from that business, you see “$4,000” in Box 1.
That’s a problem. It looks like the company has double-reported what they paid you. If you don’t remedy the issue, the IRS will require you to pay income tax on $4,000 for a job for which you only earned $2,000.
Contact the company that issued the 1099-NEC immediately.
If you’re lucky, it won’t have filed “Copy A” with the IRS yet, allowing you to rectify the situation before the IRS is even aware of it. But if it’s already been submitted, make sure you have copies of written confirmation of the mistake by the business before contacting the IRS at 800-829-1040. You’ll be asked for your name, phone number, address, dates of employment, and Social Security Number, as well as details about the payer. The IRS should then get in touch with the payer to ask for the corrected form.
Sadly, this process can take a long time, potentially leaving you in a situation where you need to submit your tax returns before you have the corrected form. In these cases, the IRS recommends that you still submit your taxes by the deadline – which is April 18, in most cases – while using the above phone number to stay in touch about the issue.
Finally, if you receive the corrected Form 1099-NEC after filing your taxes and the information varies from the estimate you entered in your tax return, you’ll need to file an amendment. You can usually do this with Form 1040-X.
Receiving a 1099-NEC allows you to make deductions via your Schedule C, which is what you use to calculate profits and losses from your self-employment. The deductions we’ve listed here all count as ones you can make, and any others must be business-related expenses. The IRS offers more general guidelines for what those expenses might be:
Moving on to Schedule C, you’ll add all income noted on any 1099-NEC forms you receive to any self-employed earnings that aren’t reported on these forms together. Then, you subtract any relevant deductible expenses from your total business income. These deductions can be claimed by freelancers, contractors, sole proprietors, and the self-employed.
The resulting number is your net figure, which you transfer across to Form 1040 along with any other earnings, such as employee wages and work-based commissions, income, and deductions to reach your final taxable income. Many contractors use tax software for this purpose, especially if they receive income from several sources.
Any business for which you work as a contractor must submit Form 1099-NEC either by January 31 or the next business day should January 31 fall on a holiday or weekend. Failure to file the form could result in the business incurring a penalty – ranging from $60 to $310 per form – with the scale of that penalty depending on how far the form is past due.
Should your client intentionally disregard the need to provide a 1099-NEC form, they’re subject to a penalty of at least $630 per form. However, the specific dollar amount will be 10% of the reported income if that number is higher than $630.
The IRS says a business can ask for an extension to this deadline under selected hardship conditions. Furthermore, you may experience delays if you’re subject to backup withholding and have failed to provide an accurate taxpayer identification number to your client.
As for you, as the contractor, you don’t have to send Form 1099-NEC to the IRS. They should receive a copy at the same time as you receive yours, meaning your only task is to declare the income received as part of your taxable income on your Schedule C and Form 1040.
Your client should make two copies of Form 1099-NEC, with one being sent directly to the IRS while the other should go to you. These are called “Copy A” and “Copy B,” with you receiving the “B” copy.
Businesses may also create a “Copy C” of the form, which they’ll keep as part of their own records. Plus, the business may create two more copies – “Copy 1” and “Copy 2” – if your self-employed income needs to be reported on a state income tax return. The requirements for the latter forms vary by state and federal laws, with some states requiring their own copies of your 1099-NEC forms, while others take part in a combined federal and state program that means they have access as soon as “Copy A” lands with the IRS.
Coming back to “Copy B,” you should receive that form at your registered business address.
Let’s confront another question – should you become a 1099 independent contractor or a typical W-2 employee? It’s a tough question to answer. There are pros and cons to each situation, some of which can affect you when you try to apply for loans or if you desire stable earnings. So, you need to consider the advantages and drawbacks of going down the contractor route, with this breakdown helping you to make your decision.
We’ll start with the positive side – the pros of being a 1099 worker.
As a 1099 worker, you’re essentially operating a small business. That means you have more control – both over your schedule and the rates you charge – than a W-2 employee. For instance, let’s say that a business needs to create a piece of software. If you’re a W-2 employee, that task may fall under your work duties, meaning you work under the schedule your workplace dictates and likely receive no income in addition to your salary.
It’s different for a 1099 contractor.
The business will contact you about the project, after which you get to set the terms. So, you control the deadline – allowing you to suggest a realistic completion time – and set a price for the job. Of course, your client has the option of rejecting or negotiating your terms. But you’re far less likely to find yourself working under unfavorable conditions as a 1099 contractor.
You can work for as many people as you can handle when you’re a 1099 contractor. That’s ideal for those who wish to create multiple income streams because it means you’re not reliant on a single company for your income. If one client decides to end an agreement – or goes out a business – you’re free to seek out other clients due to your independent contractor status. Plus, existing clients have no control over whether you accept new clients while you’re working for them.
Of course, the more clients you have, the more 1099-NEC forms you’ll receive come January 31. But the point is that you have the option – work for one client to keep things simple or take on several to increase your cash flow. Additionally, the fact that you can take on as many clients as you like means there’s technically no ceiling to how much you can earn as a 1099 contractor. W-2 employees don’t have that benefit. They’re limited by their salary or hourly range, and may even be prevented from finding outside work per the conditions of their contracts.
All independent contractors are classified as self-employed by the IRS, meaning they can deduct relevant business expenses from their income taxes. You’ve seen 21 of those expenses in this article, and there may be more besides based on the “ordinary” and “necessary” guidelines the IRS provides. Such expenses can include:
Almost anything that’s required to do your work can be classed as an expense. As a W-2 employee, those expenses are often covered by your workplace, meaning you can’t claim them on your tax return.
Speaking of tax, a 1099 contractor doesn’t have to worry about a client deducting federal, state, or local taxes from their income. You handle those taxes yourself, meaning you receive the full dollar amount you charge rather than a salary that has pre-deductions.
While freedom – and payment flexibility – are massive benefits for 1099 contractors, there are some downsides you need to understand before going down the self-employed route.
The rules surrounding self-employment income – as well as 1099 forms – can change annually. As a contractor, you have to be aware of these changes as they occur to ensure you’re declaring the correct income and expenses on your Schedule C and Form 1040.
The very existence of the 1099-NEC form is a good example. It was taken out of commission in 1982, only returning in 2020. During that gap, any 1099 wages you received had to be reported in Box 7 of a 1099-MISC form. That form still exists, and is typically used for payments below $600, meaning you may have to take care of two types of forms to properly declare your income.
Other potential changes could include the filing dates for 1099-NECs and the minimum dollar amount for such a form to be filed. Check the IRS’s information about these forms every few months to ensure you don’t miss a change that could affect you come tax time.
While there’s no real ceiling on how much you can earn as a 1099 contractor, there’s also no certainty. You’re not salaried. That means you may have weeks – or even months – where you generate minimal income.
This lack of income predictability can also make it harder to apply for loans and mortgages. The lender has to go through extra steps to verify your income and may enforce stricter eligibility criteria on you than they would a typical W-2 employee.
Not being tied to a specific company offers plenty of benefits in terms of working freedom, but it also comes with the drawback of potentially feeling disconnected from your client. For example, let’s say your client holds a company barbecue. The nature of your work may mean that you operate inside their business and have built relationships with several of the client’s employees. But you’re still an “outsider.” So, you may not get invites to such events.
On the financial level, this lack of connection means you won’t receive any benefits from your client – unless they’re specified in your contract – and your contract could end at any time. There’s also the audit risk to consider. The IRS treats you as self-employed and may audit your tax returns if they suspect some sort of malpractice. That’s typically not an issue for W-2 employees as they don’t have to worry about handling their own business expenses.
At the end of the day, though, the IRS wants to help fledgling and experienced self-owned businesses. They offer a ton of ways to reduce your duty like the Goodwill tax deduction. All that's left to do is search out the expenses or deductions that are just waiting for self-employed workers to capitalize on. I mean, you want to reduce the total on your tax bill, right?
That's where Bonsai comes in. If you are interested in getting a leg up on your year-end tax forms, check out our tax receipt organizer. We have everything you need to run your freelance and contracting business. It’s free to get started, and who knows--maybe we can get you all 21 tax deductions from this list and more! Remember, you'll need to keep receipts for three years after filing in case you get audited. So, it is vital you have clean, organized records of your receipts.
Disclaimer: Tax rules frequently change and are highly specific to your situation. Please consult a qualified tax advisor for tax advice.
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