Receiving a 1099 from a company is very different than receiving a W-2. We all know how employers withhold FICA, Medicare, Federal and State (if applicable) withholding income taxes. Your net paycheck is called “take home pay” because all the taxes should have been taken out by your employer and remitted to the respective government entities on your behalf. However, when you receive a 1099, it is for the full amount you received from the company and you are responsible for your own taxes.
It is likely you need to file an IRS Schedule C to report how much money you made or lost in your business – but don’t panic! The amount of your 1099 is your gross income and you use the Schedule C to list and deduct expenses and mileage associated with your business during the year, reducing the amount of your income to be taxed. You must report your 1099 income. Properly filing your Schedule C allows you to maximize your deductions, offset that income, and put money back in your pocket.
The following are some of the typical deductions self-employed individuals might claim. The description is meant to outline each category’s general application. It is recommended that you consult your tax professional for further clarification of the rules and how each applies to your circumstances.
Determining the start date of your business is important because of the timing of some expenses you may wish to claim. Technically, any expenses related to your business paid before you officially begin operating your business are considered 'startup expenses' and are treated differently. Even though the net effect of these “expenses” will be treated the same as if they happened after your official start date in most cases, having them separated out and having an official “start date” is a good idea and will arm your tax preparer with the correct information.
For tax purposes, a specific vehicle should be established as your “business use” vehicle. At the very least, record the odometer reading as of the start date of your business and at the beginning of each year. Then keep a business mileage log to track your mileage each time you use your vehicle for business. Each log entry should have three things: date; miles driven; and, business purpose.
Business use of Home (or Home Office):
If you own a home-based business, you may already be using part of your home as your office or workspace. Most of the deductions related to the business use of your home are calculated from documents that are sent to you after the end of the tax year, such as year-end mortgage interest statements, which usually include total payments for insurance, as well as real estate taxes. However, planning to take a deduction for the business use of your home requires some forethought.
To take this deduction, the Business-Use portion of your home cannot be for casual and occasional business use. You must use that area of your home REGULARLY and EXCLUSIVELY for business. If you have an office at home, or even a place to store business products, the square footage of that area -- in relation to the total square footage of your home -- is the percentage used for all the home office deductions. Making sure the use of the area is managed properly is the key to being able to take this deduction.
If you have a cell phone that you use in your business you can deduct a portion of those expenses. Technically, you write off the portion of business use calculated as the portion of minutes used for business calls vs. minutes used for personal calls.
Meals and Entertainment:
This is a special category of expenses that only qualify for 50% of the amount spent. You also should keep in mind that these expenses only qualify if you are entertaining someone for business purposes. If you treat a prospect, a client or customer, or an employee to lunch, you should write on the receipt the name of the person you treated and a brief description of the business discussion or business purpose. If you take someone to a basketball game just before or after an event where business took place, make sure your records document the person or people involved and the business purpose.
Meals for you alone while traveling for business are deductible but have the same 50% limit.
If you are traveling overnight for business and there are more travel days than personal days, you can deduct the cost of transportation as well as other costs associated with your travel. A business day is defined as one in which you conducted over four hours of business. If you have more business days than personal days, the travel costs to get you there and back are considered business days. (Domestic travel only. Consult your tax professional for the rules that apply to foreign travel.)
Whatever system you use, make your life easier at tax-time by documenting your business deductions as you go instead of scrambling after the year is over. Deductr helps you maximize your deductions and eliminate tax-time stress by easily tracking your business expenses and providing a single-click report for your Schedule C at tax-time. For more information about Deductr’s expense, mileage, and time tracking system visit deductr.com.