Whether this is your first year in business for yourself or your fiftieth, tax burdens can sneak up on you. Unexpected income or confusion as to how much you might owe can lead to significant tax debt. Worse, you’re expected to pay off past tax debt while pre-paying your taxes next year. Failing to do either — or both — leads to a vicious cycle of growing tax debt for 1099 workers.
Instant Tax Solutions is here to help. We inform you of your options and help you analyze your exact obligations to the IRS. In some cases, we can help you reduce your burden or make it easier to pay off using strategies like:
- Offer in compromise
- Installment agreements
- Penalty abatement
- Currently not collectible
If you owe taxes or are worried about how much you might owe, there’s never a better time to get started. Reach out to professional tax experts who can help you analyze what you owe, look for opportunities to reduce the burden, and help you prepare to maximize your deductions for next year. Find a way out of tax debt, and prepare for next year to start keeping more of what you make and giving less to the IRS!
File Taxes as a 1099/Independent Contractor While Maximizing Your Deductions
Working as a self-employed 1099/independent contractor has tons of unique perks. You get to set your own hours; you’re in charge of how much you get paid, and you have the flexibility to structure your business however you want.
One thing that being self-employed does not do, though, is to make filing your taxes easier. You are responsible for disclosing all of your received income, separating it from your expenses, and potentially separating it from your own personal income.
Since self-employed individuals are required to pay the contributions to social security, Medicare, and other costs that normally come out of payroll taxes, you have a vested financial interest in reducing your taxable income as much as possible through business deductions. You also want to ensure that you are using the optimal accounting practices for your given business situation.
That’s where our tax experts come in. We can assist individuals who are contractors, who own their own business, who work “gig” jobs like Uber, and who generally have a higher tax burden than the average filer thanks to self-employment taxes.
The More You Can Deduct, the Less You Owe
One frustrating situation that independent contractors/self-employed individuals face is that they have a much stronger motivation to track deductions and invest in their business.
The average filer who receives a W2 may have limited deductions. But an individual who receives a 1099 technically owns their own business and is allowed to deduct any ordinary and necessary expenses.
Common 1099 deductions include:
- Home office deduction
- Vehicle mileage
- Office equipment
- Software and digital services
- Payment to subcontractors
- Financial fees
- Overhead from workplace rent, internet usage, cell phone usage, etc.
- Marketing costs
Many people are shy about deducting expenses, and others are unsure of what does and does not count as a deductible expense. Working with experienced tax accountants and attorneys can allow you to determine exactly which expenses should be deducted from your total taxable income. What’s more, we can help you make better decisions in the future so that you can count more of your income towards running and improving your business — and less towards paying off taxes.
Avoid Penalties With Prepayment
Individuals who receive a 1099 income statement are expected to estimate their tax burden and pay it on a quarterly basis. Most often, these payments are based upon your tax information from last year, but if that situation has changed, you will need to estimate future costs based on your exact income, expenses, and other deductions.
Failing to file prepayments can mean a big, unexpected tax burden come filing time. On top of that, you may face penalties and interest for your failure to pay as expected.
No matter how much you owe or how much paperwork you’ve avoided, it’s never too late or too early to start preparing for the next tax season. Consult with tax attorneys and accountants to develop a system for tracking income, automatically deducting expenses, and owing less come tax time!
Filing Assistance for Self-Employed, Contract Workers, and 1099 Earners of All Stripes
Regardless of how you earn your income, you have a financial incentive to make tax preparation a part of your regular work schedule. With assistance from experienced tax law and accounting experts, you can greatly simplify this work. You can also put more of your money towards investments that improve your business and less towards owing money to the IRS — sometimes after most of it has already been spent!
Instant Tax Solutions provides assistance and filing services for a number of 1099 workers, including the following.
Truck Drivers
Being an independent owner-operator or carrier business owner comes with lots of freedom. You get to set your own hours, decide how your business should run, and choose how much money you can make.
But the independent truck driver’s life also has its challenges, and your tax obligations might be your biggest one.
Gig Work
Gig workers often receive inconsistent pay, but they still owe on any income source that exceeds $400. If you work odd jobs as a contractor or get work as a freelancer through services like Fiverr, Upwork, and TaskRabbit, you can obtain assistance with preparing for and reducing your upcoming tax burden.
Rideshare Services: Uber & Lyft
Rideshare apps make it easy to earn extra money on the side or form a lucrative side hustle. One drawback is that they also make it easy to rack up unexpected tax debt. Learn the most common deductions for rideshare drivers and what you can do to lower your tax costs at year-end.
Food & Grocery Delivery: Instacart, GrubHub, DoorDash, UberEats, PostMates, Etc.
Nothing beats the convenience of food and home supplies delivered to your door, giving thousands the opportunity to make more money using just their car, their phone, and their own two hands. Instant Tax Solutions can assist you with finding deductions for your food & grocery delivery job, helping you optimize your income and avoid tax filing surprises.
Construction Workers, Contract Laborers
In the construction and contracting industry, sweat earns money. But facing unexpected tax questions can also make us sweat in a way that’s quite expensive. With Instant Tax Solutions, we can help you optimize your business accounting, invest more in improving your business, and avoid common pitfalls that lead to hefty tax bills that could otherwise be reduced or avoided.
Real Estate Agents & Brokers
Home buying has reached all-time highs, as have the opportunities for those involved in home sales. Like a crafty home buyer, you want to do your homework: preparing for your year-end tax burden by accounting for commissions, deducting every expense possible, and sending less of your hard-earned commissions and other income to the IRS come tax season.
Frequently Asked Questions
How can I reduce my taxes on my 1099 income?
Your tax burden is based on your total taxable net income, which equals gross income minus deducted expenses and any other allowable deductions. The best way to reduce your tax burden is to track all of your expenses while also making strategic capital investments using your income.
You can also deduct the expenses of home office costs based on its square footage compared to the total size of the home. Home office costs can be calculated by taking this percentage and applying it to all home expenses, such as heating, electricity, rent, etc.
Similarly, you can deduct all vehicle mileage associated with trips for business purposes.
A best practice is to track all daily expenses and consider which ones might apply partially or wholly to the costs of running or maintaining your business. You should also encourage yourself to use more of your income for business purposes since each one reduces your taxable income. For example, given a choice between a game console and a new home computer, consider that the game console will cost more than its retail price when accounting for the fact that the income you spent on it will now be fully taxed. (This holds true even if you can only partially deduct the expense of the computer-based on the percentage it is used for work.)
Will the IRS know if I don’t file 1040 for my 1099 income?
It is very likely that the IRS will notice that you have undeclared income, especially if you have filed in past years.
Further, most 1099 income is reported to the IRS as a business expense, and the very act of sending a 1099 form to independent contractors creates a paper trail. When you are paid by another person or business, they will want to declare those wages as a business expense and deduct it. So if one business is claiming they paid you and you fail to declare that payment, there will be an obvious gap in records.
However, the IRS does not require filing for income less than $400 from a single payment source or type of work.
Is there a penalty for not filing 1040 for my 1099 income?
Yes. You are required to report all self-employment (1099) income over $400 on your 1040 tax return, and not doing so can incur penalties.
The penalty for late filing is 5% of the unpaid tax balance for every month past the deadline, up to 25%. The penalty for late payment is 0.5% of the unpaid tax compounded by the length of time up to a total of 27.5%, making the maximum penalty total up to 47.5% of your unpaid balance. These penalties may be accompanied by additional fees.
On top of that, you may be charged with a crime or face recovery action on the part of the IRS, incurring other civil and criminal penalties on top of your unpaid balance penalty. In extreme cases, you could face jail time for tax evasion and other crimes.
What happens if you don’t file your 1040 related to 1099 income?
The IRS keeps its own records on income-earning individuals. This is especially true for everyone who has filed before or who has received a statement of wages from an employer or entity compensating them for work performed. Independent contractors are likely to receive a 1099 wage statement from each revenue source, creating a record of that income with the IRS.
If the IRS has records that you have (or are likely to have) an outstanding balance, they will send notice of late filing and late payment to the most recent address they have on file within a few months of the tax deadline. If the balance remains unpaid, it will continue to add up in addition to incurring penalties, interest, and other fees.
Avoiding taxes is a crime, and once the charges or balance get high enough, the IRS will pursue the unpaid balance through any means available, including seizing assets, garnishing wages, or engaging in criminal prosecutions with the risk of jail time.
What if I receive a W-2 and 1099?
You must report all annual income on your 1040 tax statement, regardless of the source. W-2 income is reported on line 7, “wages,” whereas 1099 income is reported on Schedule SE.
1099 income is counted towards your total taxable income for the year in order to determine your income tax rate and your amount owed.
Additionally, 1099 income incurs a separate tax-related to unpaid Social Security and Medicare contributions, totaling 15.3% of all taxable 1099 income.
What do I need to file a 1040 tax return on my 1099 income?
All you need to file for your 1099 income, technically, is the total amount of income earned.
However, you should also deduct any applicable expenses and credits in order to reduce your taxable income for the year. These expenses should be categorized and documented.
You should also have a 1099 form from every income source for your own record-keeping purposes and also to provide proof of income in the event of an audit.
What are the estimated payments?
Nearly every single 1099 worker will owe taxes at the end of the year rather than expect a refund. Any time you owe a balance to the IRS, they expect you to file quarterly and submit your estimated taxes for that tax year, to-be-filed by April of the next year.
You can estimate your payments by determining your taxable net income (gross income minus expenses and deductions) and applying all applicable taxes, including income tax and self-employment taxes.
You can also file estimated quarterly payments based on your tax burden from the year before, but you will likely face a penalty for any unpaid balance if your income increased this past year.
What expenses should I be keeping track of?
You can deduct any and all “ordinary and necessary” expenses. Common deductions include office supplies, office equipment, wages paid, the cost of goods and services, vehicle mileage, office costs (including home office deductions), licensing and certification costs, education and training costs, uniforms, software, applicable utilities, 50% of meals for client and business relationships, and more.
Generally, track ongoing expenses such as software licensing fees and business account bank fees, and also track incidental expenses like office supplies, meals, mileage, etc.
What is the difference between income tax and self-employment tax?
Income tax is paid on all net taxable income, whereas self-employment taxes are only paid on 1099 income.
Self-employment taxes represent your expected contributions to Social Security and Medicare. These are typically paid by an employer as part of their payroll tax burden.
Deductions to your 1099 income reduce both your income tax and self-employment tax burden but remember that your income taxes are calculated on your total income, including any non-1099 sources.
What are considered expenses/deductions?
Any “ordinary and necessary” expense related to operating your business can be considered an expense, although exceptions may apply.
Basically, any expense that you pay to run, maintain, or grow your business can apply. This definitely includes the cost of inventory items and wages paid to other contractors. It also includes any bills or services used by the business as well as any equipment.
Suppose a “capital expense” (i.e., business equipment) involves an item that has a shared personal use. In that case, the filer can only deduct the portion of the item used for business. For example, if someone buys a smartphone but uses it 50% for personal use, they can only deduct 50% of the phone’s cost and 50% of the cost of cell service and data usage.
Commonly missed deductions include interest paid on business loans, marketing, and advertising costs, the costs of maintaining or improving the property, website hosting fees, consumable items used for a business like batteries, computer and office equipment, insurance, retirement plans, rental costs for business equipment, and taxes applied directly to the business (not including income tax or self-employment taxes).
Keep More of What You Earn; Worry Less About What You Owe
The saying goes: a penny saved is a penny earned. When you set aside all the pennies you need for taxes, invest more of those pennies into deductible areas, and account for all of your pennies spent on expenses, that’s a lot fewer pennies leaving your bank account when the tax filing deadline looms.
As a business owner and independent contractor, you have the freedom to choose more about your business and how it runs. Don’t jeopardize that freedom by being unknowledgeable about available deductions for 1099 workers or being unprepared for the taxes you will someday owe. Work with experienced tax experts to run your business smarter — and keep more of what you earn by being prepared!
