Chief Tax Information Officer
Published on: February 14, 2020
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This sector of the US economy is experiencing enormous growth, and with more people than ever becoming entrepreneurs, joining the gig economy, starting a small business, or otherwise working as self-employed professionals, it could pay to know how self-employment can impact your tax situation.
One of the most important deductions is the new Qualified Business Income (QBI): Self-employed workers and small business owners might be eligible for a deduction of 20% of eligible income before taxes. The QBI deduction is available to taxpayers whose taxable income falls below $160,725 for individuals, or $321,400 for joint returns, and to certain taxpayers with higher business income. QBI is income from a trade or business in the US, such as rideshare driving, consulting, e-commerce, or reselling income. The deduction does not include wages earned as an employee and business-generated capital gains, interest, and dividend income.
In addition to the QBI deduction, here are seven of the most important and common deductions available to gig-economy workers, freelancers, contractors, the self-employed, small business owners, and entrepreneurs. Depending on their profession and whether they qualify for these deductions, these taxpayers may be able to deduct:
If you’ve made $600 or more from any one gig, you should receive Form 1099-MISC, and if you’ve been paid through a third party, you can expect to get Form 1099-K if you’ve been paid at least $20,000, or have at least 200 transactions. Even if you receive neither of these forms, you are still responsible for reporting – and paying taxes on – this income.
If you’re self-employed in America’s rapidly expanding gig economy, getting to know the tax deductions you might qualify for can help you stay ready and keep track of your job-related spending throughout the year. Don’t be surprised at tax time; stay informed and stay on top of your taxes.
If a business paid you $600 or more for work you completed as a non-employee, you should receive Form 1099-NEC. If you’ve been paid at least $20,000 through a third party, or have at least 200 transactions, you can expect to get Form 1099-K. Even if you receive neither of these forms, you’re still responsible for reporting—and paying taxes on—your income.
Filing your taxes as a self-employed worker can be quite different from managing your taxes as a full-time worker at a single company. Whether you’re a gig economy worker, freelancer, contractor, small business owner, or entrepreneur, you may be able to save money in the form of self-employment tax deductions.
Self-employed workers and small business owners might be eligible for a deduction of 20% of eligible income before taxes. The QBI deduction is one of the most common tax write-offs for self-employed workers. For tax year 2020, this type of deduction was available to taxpayers whose taxable income fell below $163,300 for individuals or $326,600 for joint returns, as well as certain taxpayers with higher business income.
QBI is income from a trade or business in the U.S., such as rideshare driving, consulting, e-commerce, or reselling income. The QBI deduction does not include wages earned as an employee and business-generated capital gains, interest, and dividend income.
According to the Internal Revenue Service (IRS), deductible business expenses for taxes must be both necessary and ordinary. That means the expense must be:
Deductible business expenses may include the cost of goods sold, capital expenses, and other expenses. Keep the following potential business expenses for taxes in mind and save your receipts and records throughout the year in order to maximize your self-employment deductions.
Most businesses have two types of supplies. There are the office supplies such as pens, pencils, note pads, calendars, etc. and the work supplies that are specific to a job. A painter would have supplies such as paintbrushes, cleaner, tape, etc.
Keep track of your expenses for each job and for your office supplies. This will help you lower your income taxes and Self-Employment (SE) taxes when it comes time to do your tax return.
If you use your vehicle for your self-employed work, you may be able to deduct maintenance and repairs for vehicle upkeep and expenses—this may include expenses such as oil, registration fees, insurance, parking fees, tolls, and depreciation (if you own the car or truck), or leasing costs.
These deductible business expenses for taxes may include fees paid to a cab company for using its cars, or rental fees for a truck driver's trailer. Be sure to keep a log of all job-related vehicle expenses, including miles driven for business and your total mileage for the year.
If you travel for work, you may be able to deduct travel expenses. This can include transportation and lodging, along with incidental expenses such as laundry, phones, maid service, and other expenses.
For self-employed workers who require special work clothing, you may be able to deduct your clothing’s cost and maintenance. To qualify as a self-employed tax write-off, the clothing must be required for work and not suitable for everyday use. For example, qualifying clothing may include safety shoes for a building contractor.
Do you need to obtain licensing in order to perform your work? What about insurance? If you’re self-employed, you may be able to deduct state and local government licensing and regulatory fees, as well as liability insurance premiums.
If you belong to professional organizations, you may be able to deduct your association fees for those organizations. Subscription fees for trade publications may also qualify as self-employment deductions.
In order to be able to deduct home office costs, your space must be dedicated to work. For example, if you set up your laptop and work at the kitchen table where your family also eats dinner, that’s not deductible. A room that’s designated solely for your work may be eligible for a self-employment tax deduction, though.
Within your home office, you may be able to deduct expenses such as the business percentage of electricity, mortgage interest, equipment, real estate taxes and home maintenance. You’ll need to know how big the space is and how that compares to your whole home in order to calculate an accurate deduction.
Expenses associated with continuing education may be eligible for tax deductions. If you run a business, continuing education deductions may count for both yourself and any work-related education that you cover for your employees.
In addition to the common self-employment deductions listed above, you may also be able to deduct the following business expenses, if applicable:
When you file your taxes as someone who’s self-employed, you’ll need the following paperwork in order to obtain the full value from your potential tax deductions. Keep these records throughout the year to reduce your stress come tax time.
If you’re not sure which documents do and do not apply to you, ask a tax professional for help. Jackson Hewitt’s Tax Pros can help you determine which deductions make sense for your specific work situation.
If you’re self-employed in America’s rapidly expanding gig economy, knowing the tax deductions you might qualify for can help you prepare for tax season and encourage you to keep track of your job-related spending throughout the year. Stay informed and stay on top of your taxes by getting in touch with Jackson Hewitt. Our Tax Pros are happy to answer any questions you may have on self-employment tax deductions.
About the Author
Mark Steber is Senior Vice President and Chief Tax Information Officer for Jackson Hewitt. With over 30 years of experience, he oversees tax service delivery, quality assurance and tax law adherence. Mark is Jackson Hewitt’s national spokesperson and liaison to the Internal Revenue Service and other government authorities. He is a Certified Public Accountant (CPA), holds registrations in Alabama and Georgia, and is an expert on consumer income taxes including electronic tax and tax data protection.