This is a guest post by Robert Simpson. You can also write about 1099 income.
When it comes to getting the most out of your income, some have found that receiving a 1099 tax form instead of a W-2 is quite advantageous. At first it may not seem so because 1099 employees have to pay double payroll taxes, such as FICA/Medicare, but when the many advantages are weighed against this particular negative, it becomes clear that receiving a 1099 is the best option for those who can take advantage of it.
The main perk is that 1099 employees can take deductions that W-2 employees cannot, thereby lowering their taxable income while taking home the exact same amount of money. This can also increase tax refunds.
Work-related Deductions That Don't Cost a Thing
Picture two employees: Jennifer and Lashonda. Jennifer receives a W-2 and earns $40,000 a year, and Lashonda receives a 1099 while earning the same amount.
They both drive to work and have car payments and insurance costs of $500 per month, or $6,000 per year. In addition to this, they also buy work-related supplies throughout the year to the tune of a few hundred dollars.
This year, they both went on vacation, and while away, Jennifer made a business contact and brought a new customer to the company. Lashonda did the same. The travel costs for them were about $1,000.
Throughout the year, they both needed to drive roughly 2,000 miles that were not for commuting.
They do the same exact job and they have the same costs, but the difference is that if they are in the 25% tax bracket, Jennifer's tax burden at the end of the year will be about $10,000 while Lashonda's will be roughly $8,000. Lashonda, despite doing nothing different, will receive a larger tax refund by roughly $2,000.
How Is This Possible? Breaking Down a 1099's Advantages
When taken into account, Lashonda's expenses for her car, which she needs for work, and travel, which she can prove was for business, with the 2,000 miles she drove while not commuting, her taxable income is not the full $40,000 she was paid, but the $32,000 left over after her deductible expenses.
Jennifer cannot deduct her auto expenses even though she also needs the car for work. The reason for this is because there are certain deductions that an employee cannot take that a self-employed person (who receives a 1099) can.
The result is that self-employed people like Lashonda can deduct what should be an everyday expense and keep more of the money she earns, which is reflected in a larger tax refund.
A Larger Tax Refund
We're beginning to hear people say that a big tax refund is the result of "loaning the government money at zero percent interest," which is not entirely without truth. However, in this case, the big tax refund is the result of the bonus one can give him or herself by receiving a 1099 instead of a W-2.
The previous example shows two people who do the same job, earn the same wage, and even have the same exact expenses, but one of them can deduct her car and vacation travel (which was used legitimately for business) while the other may or may not have been able to deduct non-commuting miles. Over an entire career, this one difference could lead to hundreds of thousands of dollars, making receiving a 1099 an attractive option.
Robert Simpson focuses on taxation, finance, savings, business, and other related subjects. For information on 1099 forms as well as free 1040ez visit R&G Brenner.
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