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What Are 1099 Deductions?

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  • Originally Written By: Carol Francois
  • Revised By: C. Mitchell
  • Edited By: Bronwyn Harris
  • Last Modified Date: 12 July 2014
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1099 deductions are personal income tax deductions available to certain U.S. individuals who work as independent contractors and receive 1099 forms from their employers. The phrase is something of a misnomer, as no deductions are actually filed on the form itself. All must be reported and claimed on a dedicated itemization form, usually one related specifically to business expenses. Most of the deductions are also allowed by certain other forms, so they are hardly unique to the independent contractor. Usually, any small business owner or self-employed person can file for the same deductions, whether they have a 1099 or not.

1099 Form and Deduction Process

The United States tax code requires employers to report employees’ salaries and total earnings to the Internal Revenue Service (IRS) at the end of each calendar year. In most cases, employers are also required to deduct a percentage of employee wages to satisfy state and federal income tax obligations — though freelancers and independent contractors are usually exempt from this. Freelance wages must still be reported, however, and businesses typically use IRS form 1099 to do so.

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Employers usually file one copy of the 1099 with the IRS, and send a duplicate to the employee. The employee is then responsible for paying income taxes based on the sums reported. The IRS allows 1099 recipients to claim a number of business-related deductions, but the form does not represent any sort of entitlement. Only certain expenses are eligible, and employees must usually be able to offer careful documentation of each.

Business Expenses

Most 1099 deductions fall into the “business expense” category, which includes membership dues in professional organizations, subscriptions to industry-related publications, and any equipment needed to complete the work. An independent transcriptionist who purchases a transcription machine may be able to deduct its purchase price, for instance, and an editor who has a paid subscription to an online style manual may be able to deduct the membership fees.

Home Office Costs

Independent contractors who work from home may also be able to claim a 1099 deduction for a home office, but the IRS’s specifications for this deduction are very exacting. The parameters are usually quite wide — utility bills, mortgage payments, and Internet expenses can all be included, as well as more traditional office expenses like printer paper and phone lines.

Most of the time, though, contractors must be able to prove that the claimed deductions are related exclusively to work in order for them to qualify. A phone that is used for work but also as the primary family line can only be deducted in proportion to the amount of time that it was used for business purposes. Contractors must also usually be able to prove that their workspace was used only for their job. A home office that doubles as a place to handle household paperwork will not usually qualify.

Necessary Transportation

Contractors who drive as a part of their work are sometimes able to deduct mileage, gasoline, or even car expenses. The same rules that apply to home offices pertain to transportation costs, however. If a car was used for both personal use and business use, deductions cannot usually be claimed, at least not in full.

Deciding Whether or Not to Claim

1099 deductions are never mandatory, and many taxpayers decide to claim nothing — even if they have eligible expenses. The IRS provides a choice between itemized and standard deductions. Every U.S. taxpayer is automatically eligible to claim the standard deduction. Most of the time, contractors will only file 1099 deductions if their expenses exceed those provided for under the standard option.

Importance of Correct Filing and Audit Risk

The IRS recognizes that there are a lot of ambiguities and possibilities for abuse when claiming business-related expenses, and for this reason, reviewers often pay more attention to returns that include 1099 deductions. A high percentage of these returns are audited, a rigorous examination that typically requires taxpayers to produce receipts and proof of all claimed expenses. Independent contractors who do not have meticulous records often avoid claiming deductions that they cannot absolutely prove.

Should an audit turn up a disparity or a filing error, the taxpayer is usually fined or assessed a penalty. 1099 recipients who are unsure of how to claim deductions, or who need more information about whether specific expenditures will qualify, are usually advised to talk with a professional tax preparer before submitting their final returns.

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Discuss this Article

anon942487
Post 9

What is an I-9n tax form?

anon65385
Post 8

I am inheriting about $20,000, mostly in annuities. Do I need to have taxes withheld from that before they send it to me?

anon64042
Post 7

i been receiving unemployment money and someone told me that i need a 1099 form instead of the usual 1040. is this true?

macshell5
Post 6

If I received pain and suffering money from a previous employer, how does that work at tax time? I have to fill out a 1099 form, but since it was pain and suffering money do I have to pay taxes on it?

anon43907
Post 5

I received a 1099 from a prior company I previously owned. Can I list the 1099 income as income on a 1120 tax form for a C corporation and then offset it prior years tax losses?

jeffreyc
Post 4

No, in fact, the actual tax rate for this income is the same as for employment income. The only difference is the availability of tax deductions. 1099 income has a much broader range of legitimate tax deductions available, which can greatly reduce the taxable income.

anon36285
Post 3

is a 1099 like 50cents to the dollar come tax time?

jeffreyc
Post 2

In order to complete the income tax filing, you will need a Schedule C and SE. These forms are used for reporting your 1099 income and expenses. When preparing to complete the Schedule C, make a list of all your 1099 income and update the form. Then make a list of all the expenses you incurred earning that income. Some of these expenses are deductible. Review the information booklet for a list of deductible expenses. Deductions reduce the amount of taxable income, and therefore the amount of tax that you will pay. Report the net income on the Scheduled SE. Net income is the difference between the taxable income and the deducible expenses.

Depreciation is the amount of value an asset loses over time and with usage. Think about what happens when you buy a new car. The car costs $10,000, but as soon as you drive it, the value drops to $8,000. The $2,000 difference is called depreciation.

vb10tlc
Post 1

I have a W-2 plus 2 1099 Misc. I don't know if I have been doing my taxes correctly.

One is for only $602.50 and the other is for $1650.00. What do I need to do to fill out the paper work? I get confused about the deductions and what about deprecations? So confusing and it is probably something easy. thanx

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