Also, it’s worth noting that W-2 employees used to be able to have unreimbursed business expenses, but the Tax Cut and Job Act of 2017 eliminated those for federal purposes. This underscores the value of having somebody that you trust who can help you navigate the business component of your taxes.Īgreed. But if you really look at the deductions, and you treat it like business income with both income and expenses, then your effective tax rate can be lower on that income than if you were a W-2 employee. I think one takeaway worth noting is that if you just look at your taxes on a personal level, and you don't look at business income, and you just add 1099 income, to Greg's earlier point, you will pay slightly higher taxes. For example, if you rented a two-bedroom apartment and one of the bedrooms is an office, I would argue it’s going to be a higher percentage than 19%. A lot of our clients think about what’s most advantageous for them. You can look at square footage, you can look at the number of rooms. There are a lot of ways to go about it, it just depends on what you’re comfortable with. Do I just deduct 19% from my portion of the rent? I live with a roommate and pay half our rent, and my office takes up 19% of our total square footage. As long as you have proper documentation-receipts, credit card statements, etc.-you should be okay. One thing the IRS has stated-if your 1099 income is greater than $150,000, they believe there’s a higher propensity of you combining personal expenses with business expenses. And again, it really depends on how creative each person wants to be. I’ve seen expenses as low as 10% of income all the way up to 50-60% of income, with an average in the 15-20% range. Is there any sort of average ratio of 1099 income to deductions? Use the sleep test-if you think you’ll have trouble sleeping over a deduction, skip it. An example: some people are confident arguing that their gym memberships are deductible because that's where they do their networking, while other people are introverts and don’t talk to anybody at the gym, meaning they wouldn’t deduct their gym memberships. ![]() For example, is the software you’re listing as an expense only used for business, or do you use it for personal use, too? Same goes for your cell phone, computer, and so on.Īs for how aggressive to be, we encourage everybody to stay within their own comfort zone. You essentially need to be able to prove that the expenses you’re running against your 1099 income are necessary to your business. They will likely look at your expenses and ask you to substantiate them with receipts and credit card statements. If you're running a 1099 business and you’re showing losses for five years straight, you're likely going to get audited because the IRS will be suspicious. the percentage of your rent or mortgage expenses), but also to utilities and internet.Īre there factors that increase or decrease the risk of getting audited? How do you know how aggressive to be with business expenses? ![]() That would be your business use percent-and it extends not only to the space itself (i.e. Take that 200 square feet and divide that by your entire home square footage. Let’s say 200 square feet in your house is dedicated to your office space. How do you calculate a home office deduction?
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