Helpful Tax Tips for Self-Employed Contractors
There are a lot of perks to being a self-employed contractor! You get to choose the jobs you want to work on, make your own schedule, hire your own sub-contractors, and more. However, being self-employed comes with new challenges, as well. Here are a few tips that may be helpful if you’re a new contractor (or just want a refresher!).
If you’re paid $600 or more for your work for any individual client, you’ll receive a 1099-NEC from them. If you use online payment apps like PayPal, you may also receive a form 1099-K. The IRS gets a copy, too.
New tax legislation has reduced the reporting threshold associated with Form 1099-K for card payment processors, and other third-party payment networks like Venmo and Cash App from $20,000 to $600. So that means that in 2022, payments are required to be reported on Form 1099-K if more than $600 was processed during the year.
Don’t miss these tax-saving opportunities:
Hire your spouse and get a tax break on medical insurance:
Although self-employed individuals can deduct 100 percent of health insurance premiums paid for themselves, a spouse, and dependents, the deduction is only allowed as an adjustment to income on the 1040. This can reduce your income tax but does not reduce your SE tax since it does not reduce your SE income. However, if you hire your spouse and you provide family health insurance coverage to employees then you can be covered on your spouse’s policy. The cost of the insurance for employees is deductible on your Schedule C, and reduces your SE income and tax.
Set up a home office and maximize your write-offs:
If you regularly and exclusively use a portion of your home or apartment or use a separate structure not attached to your house as your principal place of business or as a place to meet with clients, you can claim deductions for using the space. Your office qualifies as a principal place of business if you use it as the sole place to perform administrative duties. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. The amount of the deduction depends on the percentage of the home or apartment that is used for business.
Open a retirement plan to shelter your business profit:
The most common self-employed retirement plan is a Simplified Employee Pension plan (SEP). You can put in up to 25 percent of your net earnings from self-employment, which is your net Schedule C profit minus the deduction for one-half of your self-employment tax. The maximum annual contribution for 2022 is $61,000. Compare that to the $6,000 cap on IRA contributions ($7,000 if you are 50 or old at year end) for 2022. A SEP can be established for 2022 as late as April 18, 2023, or if you filed an extension, October 15, 2022.
Hire your children:
Sole proprietors who hire their kids can deduct their wages on Schedule C, as long as the compensation is reasonable for the type of work performed. Wages paid to the children are exempt from Social Security tax if they are under 18 and are not subject to federal unemployment tax if they are under 21. Chances are that he or she won’t owe income tax on the wages. This lowers the family’s tax bill considerably by moving taxable income from the parent to non-taxable income of the child. Also, a parent can make a contribution to a retirement account for them based on their wages.
Deduct your mileage:
If you are self-employed and your home is your principal place of business, you can deduct the cost of driving from home to see a client or to go to another work location.
For the first half of 2022 the rate is 58.5 cents per mile and increases to 62.5 cents per mile for the last half of 2022.
Combine business with pleasure when traveling:
If you fly on a business trip to another U.S. city and spend a few extra days there as a vacation, you can deduct 100 percent of your airfare as long as the number of days spent on business is more than your vacation days. In other words, the main purpose of the trip must be for business. Your other out-of-pocket expenses, such as lodging, hotel tips and 50 percent of meals, can be deducted for the business days only. Expenses for the personal days generally are not deductible. There is an exception if you spend an extra day or two away to get a cheaper airfare for a Saturday night stay over. If your added cost of meals and lodging for that period don’t exceed what you saved in airfare, those costs (the hotel bill plus 50 percent of meals) can be deducted as business expenses.
*As always, these tax strategies should be discussed with a qualified tax preparer, tax accountant, or tax attorney before being implemented.*