By Kevin Sandlin, Founder at @deductmor
It’s tax time. For tax accountants, it means filing extensions and sifting through piles of papers for clients. For W-2 employees, it means getting your stuff together to give to your tax guy. But for 1099ers, it means paying your taxes.
Didn’t use to be that way. Before 1943, everyone got all their pay in their paycheck, and everyone had to file and pay their federal taxes on or before April 15. During WWII, Congress introduced payroll withholding and quarterly tax payments with the vote of the Current Tax Payment Act of 1943. The U.S. Department of Treasury describes tax withholding as follows:
“It also greatly red
uced the taxpayer’s awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.”
You gotta love Congress, don’t you? There’s your history lesson for the day.
It’s 100% your responsibility to pay Uncle Sam just because you got a 1099. YOU and you alone are responsible for paying the full amount of payroll taxes on the amount listed on the Form 1099.
“The 1099 form by itself is nothing. A 1099 means you’re liable for self-employment tax.” - Thomas Jensen, managing partner of Portland, Oregon-based Vaerdi Financial
Here are ten 1099 tax tips that should help you get through April 15 a little easier.
- Health insurance premiums are tax deductible for the self employed. If you are self-employed, you may be eligible to deduct premiums that you pay for medical, dental and qualifying long-term care insurance coverage for yourself, your spouse and your dependents. Read the rules here.
- Do your 1099 taxes quarterly. Doing something painful a little at a time makes it less painful. Keep that in mind for # 4 as well. You generally have to make estimated quarterly tax payments if you expect to owe tax of $1,000 or more when you file your return. Do the math: if you make ~$5k/quarter, pay estimated quarterly taxes.
- Mileage: it’s your BIGGEST deduction. To get the maximum deductions for your business vehicle, you must maintain a written log of business miles. I don’t know anyone who does this. Instead, take a picture of the odometer every Monday. Make it a habit. Fifty-tive cents per mile adds up quick and big.
- Set 25% aside from every single payment you receive. If you were a W-2 employee, you would pay (ok, the government would withhold) half of your Social Security (FICA) and Medicare tax. Your employer pays the other half. But you’re not W-2, are you? So guess who your employer is? YOU! You pay ALL of your FICA and Medicare tax. Put it in a savings account so you can’t touch it.
- Know what you can and cannot deduct. Your taxable 1099 income is the same thing as your “net profit”, which is your 1099 income minus your deductible (‘ordinary and necessary to operate your business’) expenses.
- The home office deduction. Do. Not. Miss. This. Deduction. Create a dedicated space to work from home. Measure it in square feet. Figure out the percentage of that space in relation to your whole house. You can deduct that percent of all your home expenses: utilities, mortgage interest, cleaning, repairs & improvements, water, etc.
- Retire! OK, don’t retire yet, but think about it and put money towards it. The best tax write-off for the self-employed is a retirement plan. A person with no employees can set up an individual 401(k). As of 2012, the individual can contribute $17,000 as a 401(k) deferral, plus 25 percent of net income.
- Go back to school. Any educational expense is potentially tax-deductible.
- Keep every receipt. “Every receipt” means every receipt. Create a system that fits your 1099er lifestyle and stick with it. You want to reduce your taxable income (aka ‘net profit’) as much as possible. The IRS requires receipts for deductions.
- Go digital! And there’s an app for that (shameless plug). Sign up for the beta at deductmor.com and you can get this service completely free forever. deductmor lets you knock out #9 and #10 simultaneously. Keep every receipt by going digital. Take a picture of every receipt. deductmor stores it (securely, forever), and organizes all your receipts every quarter (#2, check!) and every year into a report your tax accountant will swoon over.
Full disclosure: I founded deductmor. There are several other very good services for capturing receipts with your smartphone. I encourage you to check them out, and use the one that’s best for you.