1099 Self-Employment Rules & Deductions

by Michael Keenan
You can deduct more of your business expenses when you're self-employed.

When you work as an employee, you can only deduct your unreimbursed business expenses if you itemize and only to the extent they exceed 2 percent of your adjusted gross income -- which usually means no deduction. However, when you receive a Form 1099-MISC because you're working as an independent contractor, the rules are different.

Deductible Expenses

When you're self-employed, you get to write off all of your "ordinary and necessary" expenses. Ordinary expenses include any costs that are commonly accepted in your line of work. A necessary expense is one that's helpful and appropriate, but not necessarily indispensable. For example, suppose you have your own construction company. You can write off the costs of the building supplies, wages you pay your employees, advertising costs and subscriptions to construction industry magazines.

Prorating Expenses

Uncle Sam doesn't let you claim personal expenses as a business deduction. But, if you have costs that are part personal and part business, you're still allowed to deduct the business portion. For example, say you buy a $1,000 computer that you use 80 percent for business and 20 percent for personal use. You can write off $800 -- 80 percent of the cost -- on your taxes.

Tax Reporting

Instead of your write-offs being an itemized deduction on Schedule A, you claim business expenses related to your 1099-MISC income on Schedule C. You're probably thinking, "Oh no, not another tax form," but it's actually good news. Schedule C figures your net income from self-employment, which is then copied directly onto your Form 1040 tax return. That way, you can claim all your business costs even if you don't itemize your deductions.

Income Tax Savings

To figure how much your business deductions save you on your income taxes, you need to know your marginal tax rate. That's the percentage you pay on your last dollar of income. For example, if you fall in the 28 percent tax bracket, you're paying 28 cents of your last dollar to the Internal Revenue Service. Then, multiply your marginal rate by your business deductions. For example, if you have $5,000 in deductions on Schedule C, multiply $5,000 by 0.28 to find the deduction saves you $1,400.

Self-Employment Tax Reduction

Besides lowering your income taxes, getting to write off your expenses on Schedule C as a business expense saves you on self-employment taxes as well. Self-employment taxes hit your net income, not your entire earnings. As of 2013, the self-employment rate is 12.4 percent for Social Security taxes and 2.9 percent for Medicare taxes. For example, if you have $50,000 of self-employment income but $5,000 in deductions, the fact that you write off the $5,000 saves you an additional $765.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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