It’s tax season, so if you were working last year, and as boring as it is, you need to file taxes. So let’s talk the most common deductions and how to simplify your tax preparation…
W2 VS 1099s
- You will receive a W-2 if you work a normal job that takes out taxes for you. If you only get a single W-2, your taxes should be pretty straight forward, you may even be able to file them for free on the IRS website. Most of the free file options walk you through any possible deductions you may get and will help you decide whether to use the standard or itemized deductions for your taxes.
- You will receive a 1099 if you work as an independent contractor, meaning they don’t take taxes out for you. It is your responsibility to file taxes and keep track of your income and amount you owe for taxes. It is also your responsibility to track any income that is not tracked for you, such as cash income or income for your small business. Which type of 1099 did you receive? There are 19 different 1099’s, but only 2 main 1099’s for independent contractors – 1099-K is for merchant card payments and 1099-MISC is for any other income (if you are working on a cash basis or for your own business, your income would be under a 1099-MISC also).
Once you get through entering your income, it moves you to the Worksheet C, where you get to put in deductions. So are you ready to cut out some of those taxes you owe? Let’s look at the BEST deductions to help keep your hard earned money in your pocket. Here are 15 of the most common and easiest deductions to claim for your small business, side hustle or direct sales company.
#1 Vehicle –
Anytime you are driving for your business, it can be deducted. There are 2 ways to get deductions for your vehicle.
Actual expenses method is where you have to add up auto insurance, gasoline, maintenance, tires, car washes, toll road fees, title and registration, interest on car loans and depreciation. Also, if your vehicle is used for personal use during time when you are not working, you can only deduct the actual expenses for when it is business usage. For example, my husband’s car is used for personal (off the clock) driving maybe 5 hours a week (out of a 60 hr work week), so we would only count the actual costs of his car as a 92% deduction. Here are the numbers:
Oil Changes/Maintenance: $165.00
Car Wash: $312.00
Total = $7883
Standard mileage rate = $0.53.5 per mile, this set deduction is made to include gas, insurance, maintenance and depreciation in this allowed amount. You only need to keep track of your business mileage. Using this method, we deducted $30,000 this year (yes, husband drove over 60,000 miles doing ride-share last year). Obviously, for this year, the standard method worked better, however, last year the actual expenses worked better, since we had major repairs, high interest rates and larger depreciation on more than 1 vehicle.
#2 Home Office –
If you work from home (direct sells, business from home or run an internet company), you can deduct a portion of the yearly home expenses. So, for instance, you have a 4 bed, 2 living room and 1 kitchen home (7 living spaces). You start a direct sell business in September and use 1 bedroom for an office and hold parties in the kitchen or living room (2 of the living spaces), you can deduct the home expenses at 29% of the yearly home expenses. BUT since you only used the space for 4 months, then you would bring that down to 10% of the yearly home expenses that can be deducted, but that still comes out to to over $1000, which is pretty awesome for only having a business for 4 months.
#3 Phone Payments –
Same thing as the other deductions, determine what was personal use and what was business use. We have 4 phones, 2 exclusively for business, 1 is 50/50 and 1 is strictly personal use, which means our bill is 63% business deductions, which comes out yearly to $1209 in deductions.
#4 Travel –
Any travel done specifically for your business can be deducted, as long as it is overnight and primarily for business. Included in this category is conferences, plane tickets, hotel costs, rented vehicles and meals where business conversations are happening.
#5 Supplies –
Anything purchased for the running or growth of your business can be deducted. Business cards, website, a hot-cold bag, a booster seat for ride-share, cookies for an open-house and samples are some examples we have deducted as supplies expenses, it adds up really quickly!
#6 Health Insurance –
As a small business owner or independent contractor, you can deduct health insurance and medical costs. The requirement is that you are self-employed and unable to receive insurance from a spouse or employer. You can only deduct up to the net value of your business for the year, that is if you report a negative loss on the business, you won’t be able to get this deduction, however if you report a positive income, then anything you actually spend on insurance and medical costs can be deducted.
#7 Advertisement –
Ads, PR, promotion materials, giveaway items, even Facebook ads can be deducted as a business expense. When I was doing direct sells, this was between $300-$600, and I wasn’t focused on advertising that much.
#8 Business Insurance –
Separate from health insurance, this is fire, malpractice, general liability, ect.
#9 Licenses/Startup Costs –
Some independent contractors require licensing, such as claim adjuster or insurance sales. Most direct sells companies require a start-up fee. These licenses and upkeep fees are deductible also.
#10-15 Other Deductions
These deductions are also allowed, and can be legitimate, but are harder to prove. My pro-tip on these deductions – can you prove it is a business expense? And what percentage is business vs personal usage? If you can’t prove it, don’t claim it!
- Products used for personal use – In some instances, especially for direct sells, you could claim products used for personal use as advertisement, think of it as you are a walking billboard when you are using your skincare, clothing products. However, eating 1/2 the pies in your bakery doesn’t count.
- Inventory – If you have purchased the items, but haven’t sold them, it may be able to be counted as a cost of goods sold.
- Expired items – If you have to throw away products that you purchased, this may be counted as a business loss.
- Meals/Entertainment – if it was a meal for BUSINESS, making a sale, recruiting or hiring someone, it can count.
- Commission/Fees – If commission or fees are removed prior to hitting your bank, this can be deducted. Make sure your income on the 1099 isn’t already reflecting these fees being removed.
- Depreciation – if you can’t sell it for the average value at the end of the year due to business use, it can be deducted. don’t count the computer as depreciating if you have had it for 40 years. However, vehicles that are driven excessively can’t be sold as much and KBB will give you a good idea how much value was lost due to the driving, that can be claimed.
And there you have it! Your taxes are now simplified and you know how to deduct your expenses correctly. In closing, here are just a few ways to help you stay honest with your taxes, and yes, I learned these the hard way after our first year of filing our own taxes:
- Make sure you can prove what you deduct. The easiest way to do this – take pictures of all receipts for anything business related.
- Don’t buy business items at the same time you buy personal stuff, that creates a nightmare as you try to organize for filing your taxes.
- Avoid over claiming. Don’t claim going to the movies as a business expense, unless you get paid to review movies.
- Always calculate your percentages. Again, there are 2 percentages to look at – how many months you used it for your business and the percentage of personal vs business uses.
- You can’t deduct standard mileage and car repairs. Enter them both and the tax software will figure out which will give you a better discount.
- Car payments are not allowed to be deducted.
- Keep a business account for supplies and income to go into. It makes tracking expenses and deductions much easier.
- Buy a separate phone if you do a lot of business by phone, by apps or the internet.
- Always track your mileage. Try using a mileage app that allows you to categorize by business or personal mileage.
- Don’t double dip. Your phone can’t be both utilities and supplies.
- It helps to make a spreadsheet of each deduction category and itemize the items and calculations for each category.
Have more questions? Leave a comment below, I’ll see if I can get the answer for you.
And, HEY… here are 15 more reasons to start your side hustle (besides tax write offs) And, for getting started, check out my top 40 great side hustle and gig work jobs that we have personally tried.
Disclaimer – please verify ALL information with IRS.gov for current and most accurate information. This blog is meant for personal review only and should not be used as an expert opinion.
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