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Tax Issues for 1099 Workers

Written by Diane Kennedy, CPA on June 4, 2022

The headline for this story “Tax Issues for 1099 Workers” is how a lot of people are viewing their sudden change in tax status. Instead of their employer withholding taxes from their paychecks, suddenly the workers are responsible for calculating their own taxes and paying them. It’s easy to feel overwhelmed and think it is a major problem.

The reality is that it could be a huge tax savings opportunity. As an employee, someone else figures out the taxes but it comes at a price.

You lose deductions as an employee.

If you, or someone you know, is dealing with a change from being an employee to a 1099 worker, this article is for you! Learn how to turn that issue into a money saving opportunity.

More and more people are transitioning to working from home, or even a series of homes by becoming digital nomads. A conversation I recently had with a long-time employee who was transforming his financial life is a great example of this.

He’d lost his job during the pandemic and took advantage of the down time to take some classes online and picked up some new skills. He was able to reinvent himself as an online data analyst. (If you’re interested in doing something similar, check the very inexpensive Google certification programs. They even help you find work after you complete the online courses.)

He picked up jobs right away, but as a 1099 worker, not as an employee. He was a gig worker, a freelancer, an independent contractor, no matter what term you used, he now had his own business.

That was the first big conversation we had. He had a business. He wasn’t an employee any longer. The Form 1099-NECs he received weren’t substitutes for the Form W-2 he used to receive as an employee.

The Form 1099 doesn’t determine how much income you report to the IRS.

Your records determine the amount you report.

In this email, we’re going to through some of the first year in business topics that I discuss with my Wednesday Coaching students. I can also do private one-on-one consultations. The Wednesday Coaching classes are much more affordable and often you can pick up more in these sessions because you learn from the questions and situations of others.

How Do You Report Form 1099s?

The Form 1099-NECs that this fledgling business owner received quite likely did not accurately reflect how much income he received. Some businesses won’t give him a 1099 at all. Others will have timing differences. The business shows the worker has paid but the money doesn’t actually hit the worker’s bank account until the next year, for example.

As a cash basis taxpayer, you only need to report the income that you actually deposited into your bank account. If you didn’t receive a payment yet, it’s not income yet.

Set up a separate bank account for your business. Even if you don’t do anything else such as a form a business entity or get a business license, make sure you have a separate bank account for your business.

Unless you form a business structure, your business will be reported on Schedule C of Form 1040. It’s called a Sole Proprietorship.

The income you received from your clients is the gross income. Now subtract the deductions.

What’s Deductible?

The answer to “What’s Deductible?” is “It depends.” That’s because just about anything can be deductible in the right circumstances.

A business deduction is “ordinary and necessary to the production of income.”

In the case of the new business owner, he had classes that he took before he started. Those education expenses aren’t deductible. But once he’s started his business, any additional expenses for education that helps him in his trade are deductible.

He can also deduct the expenses for his computer, home office, ISP, software, cell phone, cell phone plan, business meals, business auto use, office supplies and probably dozens of other items.

On the other hand, if the new business owner was a “driver for hire” such as with Lyft or Uber, then her expenses related being a driver would be deductible. That may include Sirius for music in the car, the business use of her car, water and snacks she furnishes to guests and then the tools she needs to be in business including a cell phone, cell phone plan, computer, software and even a home office.

Just about anything can be deductible, it just depends on the type of business.

Good Recordkeeping

 When it’s tax time, you’ll need to show how much income you made and the type and amount of deductions you had against that income. The net income (gross income minus deductions) will be subject to federal and state income tax. Plus, there could be self-employment tax of 15.3% if you file as a Schedule C, Sole Proprietorship.

Make sure you keep records that prove where the money went (and to prove it was a legitimate business expense) and that you paid for the expense.

These are just the basics, of course. Once you have the foundation of your new business set, it’s time to roll up your sleeves and get some money making, wealth building and tax saving strategies in place.

That’s where we can help you with Wednesday Coaching.

Make sure you stay registered at Tax Updates for the latest in tax strategies delivered FREE to you via email.

Here are some other stories that can help freelancers and other 1099 workers pay less tax.

Tax Tips for Freelancers

Which is Better: Being a 1099 Worker or an Employee?

The more you know, the more you save.

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