Self-employed individuals often have a much higher tax burden than employees, making it difficult for them to get ahead. Fortunately, there are plenty of deductions freelancers can take advantage of, but you still need to do your due diligence to stay tax compliant.
How 1099 contractors can reduce their tax bill?
If you’re a freelancer who receives 1099 forms from their clients, you’re considered a “1099 contractor.”
While that means you have to pay 15.3% in taxes, you can reduce your bill by:
1. Getting a rough idea of what you’ll owe on your tax
Independent contractors have to save 25% to 30% of their income for tax purposes, but they may have to keep even more if they make over $50,000 a year. Since most contractors don’t have a consistent wage, you need to estimate how much you’ll make by the end of the year.
To understand your total tax burden, use a free tool like KeeperTax’s 1099 tax calculator. That way, you won’t have to guess how much you need to put away or fiddle with complicated math. Plus, you won’t have to worry about missing your tax payments, which could be expensive.
2. Figure out immediately if you need to pay quarterly taxes
If you owe or expect to owe $1,000 or more in required quarterly pay estimates, then you have to pay quarterly taxes. The IRS won’t warn you when you’re expected to switch from yearly to quarterly until you’re audited or have to pay a late fee, so it’s best to stay ahead.
Your quarterly estimates account for 1/4 of your last year’s total tax burden. For example, if you owed $12,000 last year, you would have to pay $3,000 before one of the estimated tax deadlines. You’ll avoid penalty fees if you’re short on your taxes but not on the estimates.
3. Start tracking vehicle, office, and travel business expenses
Some deductions are harder to track after the fact or are a pain to prove. For example, you need to track your business-based vehicle expenses based on standard mileage rates, or you risk getting this information wrong. If you’re audited, you could be charged with tax fraud.
Remember to track your home office or remote expenses, like rent, utilities, phone, and internet, business meals and travel deductions, and tax-deductible vehicle usage ahead of time. Remember that you can only deduct certain costs, like rent or internet, up to a specific amount.
4. Deduct your premiums and pay into your retirement
If you purchased a loan or incurred interest on your credit cards, you could deduct them. If you bought a home, liability, or other insurance to protect your startup, you could deduct these premiums, too. You may even be able to deduct your health insurance premiums.
Speaking of health, you can protect your health and well-being well into retirement by paying into your IRA or 401(k) plan. Independent contractors don’t have to pay taxes on the money they deposit into their accounts. This could slash your tax burden by 5% to 15%.
5. Become an s corporation to pay fewer taxes overtime
Certain businesses may qualify for a business income deduction, which lets you deduct as much as 20% of qualified business income. However, you must form a pass-through entity, either a sole proprietorship, LLC, partnership, or S-Corp. You’re likely a sole proprietor.
But if you form an S-Corp, you can be taxed as a corporate entity on income that stays in your startup. For example, if you take out $100,000 as income but keep the rest of your income locked into your business, you’ll only pay self-employment tax on the income you withdrew.
