Receipts, Deductions & Quarterly Tax Payments
A self-employed Independent Contractor (IC) or 1099 worker can save money on their taxes when they know the law and take steps to improve their tax situation. An IC who works 40 hours per week and is compensated at $50 per hour for example, earns $2,000 for the week. When compensation is received it will be for the full $2,000, or the gross amount they earned. This means that a portion of their compensation needs to be saved to pay quarterly and year-end taxes.
How does an Independent Contractor save on their income taxes?
The most important way to save on taxes is to save all receipts and to record every expense incurred. The best way to track expenses is to have an Excel spreadsheet where expenses are entered as they are incurred, or use online software such as QuickBooks. This will insure that the IC always knows what was spent, when they spent it, and what they bought. When the time comes to file year-end taxes, they will have all the information needed to do so. Knowing what can be deducted will reduce the tax bill, but contractors must keep good records and save all their receipts.
If an IC travels to their client, mileage to and from their client’s location can be expensed and is tax deductible. One way to keep track of this is to have a journal in the car to record the date, day of the week, starting and ending mileage between home and the client. Some ICs record all their mileage no matter where they are going, but enter the miles they can deduct on a separate line. That way, should the IRS ever audit the expenses, the IC can show all the miles driven along with the actual miles driven for business purposes. While audits are rare, it is important to be able to produce a journal that documents business travels. Just saying, “I drove back and forth to the assignment” is not enough. After the first week, most people won’t remember which dates they worked, where they went, or who the client was without a record.
The major expenses incurred by contractors can be deducted too, and they include things such as these:
- Health insurance premiums
- Interest on business loans
- The cost of publications or books directly related to their job
- Additional training courses
- Education, such as advanced degrees, coursework or certification
- Business association membership
- Business insurance
- Self-employed retirement plan contributions
- Miles driven to medical appointments, schools, or seminars
- Advertising and marketing costs to promote their business
- Contributions to a tax-advantage investment account and/or an IRA
- Self-employment tax – deduct a percentage of these taxes paid for Medicare and Social Security (the amount varies based on your situation, so consult your tax professional)
In addition, some ICs can also take deductions for items directly tied to their business. For example, working from home and conducting business using a computer, they can expense a new computer and any specialized software they use. If they are a therapist who does evaluations, they can expense the materials they use in the evaluations. Other expenses might include a percentage of their cell phone bill, internet service, virus protection, and even donations they make to charitable organizations.
It’s always a good idea to have a tax accountant to do the IC’s tax return. As long as all their receipts and expenses are recorded, having a tax account do the tax return makes tax time less stressful and more enjoyable. And always be sure to file on time.
Visit the Investopedia website for more information about tax savings for self-employed and see what can be deducted in 2021. The tax law changes every year, so it is to the advantage of the contractor to find and use a tax accountant who keeps up on the law and its changes.