5 Beginner Mistakes to Avoid When Filing 1099 Write Offs. Among all types of tax forms, the 1099 write offs can help both independent contractors and self-employed. By writing the form, you can claim deductions for the current annual tax payment.
Working on your own business involves many expenses and you can get tax reductions by taking advantage of that form. Any person who earns income as a sole proprietor, independent contractor, self-employed, and sole owner of an LLC, will receive it from IRS.
That profession makes you work for yourself. When it comes to tax time, many filing requirements apply to it. These include SE tax or self-employment tax. The problem is you should take care of the calculation alone.
That also means you need to take track your income and expenses, which may cause unintended errors in your taxes. These errors make you pay more than you should on those taxes.
Avoiding Mistakes Related to 1099 Write Offs
Those who never file 1099 write offs can easily make mistakes. Many of them are troublesome, so you must know what they are.
One of the most important things to know is the presence of various types of 1099s. Each of them has different requirements. For instance, the 1099-R is given to those who deal with pensions, retirements, IRAs, and others.
There is also the 1099-S that applies to sales from real estates transactions. Failure to understand the type may lead to serious errors and consequences, so you should learn them well before taking any action.
Another type of 1099 write offs misunderstanding relates to the incorrect address. In some cases, the form doesn’t arrive to you. Many reasons are behind it, including wrong address and being lost.
Don’t ignore it, as you will get an audit. Instead, you should self-report the income on your taxes.
Failure to write off all business costs
This mistake is common. Your business indeed has many expenses and you can save lots of money by writing them off using the 1099 form. For example, you can depreciate business equipment regarding its lifespan.
Writing of all business expenses is the best idea to save more money when it comes to paying taxes as a self-employed. On the other hand, you may end up overpaying taxes each year.
Failure to keep accurate and adequate records
One main task that you should do as a self-employed is to keep accurate records on income and expenses. Even the IRS requires you to do so, as proof that you paid those expenses.
It indeed takes some time and effort, but it is helpful and worthy in the long run. Lack of organization is the most common mistake done by self-employed related to 1099 write offs. This mistake leads to penalty fees and extra tax payments.
All taxpayers should avoid this mistake. No one indeed likes to pay taxes! However, the IRS and government would penalize those who don’t file taxes diligently. The non-payment penalty is around 5% each month.
If those payments are late more than 60 days, there is an additional $100 penalty. Thus, it is recommended to pay taxes on time and calculate deductions correctly.
Write off personal expenses
All self-employed who want to file a 1099 tax form should avoid writing off personal expenses. There is no deduction applied in personal expenses. However, it is difficult to differentiate between business and personal expenses sometimes.
Here is an example. If you use a cellphone for both business and personal use, you cannot write it off completely. Instead, you must prove that more than 50% of the phone call was used for business purposes.
These apply to vehicles and computers either. Don’t be careless by writing off the expenses of those items without considering the portion of usage. It is possible to write off partial-personal costs, but it takes much effort and time (especially to keep accurate records of them).
Here’s How You Can Avoid an Audit
Any mistakes above can lead to an audit by the IRS. The bad news is you can still get an audit even if you try to avoid those 1099 write offs mistakes. So, what can you do?
Be more attentive to common audited expenses
Here is the secret. The IRS tends to audit some cost and income areas more than others. They do this because people often make mistakes or abuse the system. By paying more attention to those areas, you can avoid being audited.
Car expenses are an example. If you want to avoid issues, make sure the vehicle and mileage you deduct are for business activities only. It must be recorded properly using a tool called a mileage tracker.
The next common risky area is the home office expenses. The IRS reviews home office expenses on 1099 write offs closely, so you need to specify the portion of your home as a home office. This must be used exclusively for work.
Well, meal expenses also belong to the consideration. You should ensure the cost of the meals is related to business activities. For example, it is to eat with a client or travel abroad.
The reported income should match tax documents
A self-employed receive a different form at the end of the year, compared to an employee. Instead of receiving a W-2 form, you will get a 1099-MISC form. These two share the same purpose, which is summarizing the income you have earned.
Your Social Security Number is tied to the form. An audit may occur once the system detects any inconsistencies. This is why you should ensure your income should match the form you receive.
A hobby is not a business
Those who run a self-employed business need to make profits from it. If you fail to sustain it for 5 consecutive years, the IRS may claim that you do not run a business. Instead, it is categorized as a hobby.
Once they declare your activity as a hobby, they would cancel any expenses you have written off previously. This also leads to more penalties and expensive taxes.
Running an independent contractor business or being self-employed can be tricky when it comes to writing off expenses for the tax year. Mistakes are common, but you should not fall into those.
With a better understanding of 1099 write offs, you can avoid terrible mistakes and get audited by the IRS. The information above should help you with the next tax payment. Don’t you think so?