One of the main differences between a W-2 employee and a 1099 worker is that a 1099 worker benefits from a larger deduction from their taxable income. When working as a self-employed individual, you can deduct many qualifying business expenses, significantly lowering your taxable income.
Let's say you are a freelance digital marketing executive and your annual taxable income is close to $55,000. Under normal circumstances, you'll pay around $9,000 in taxes. But as a 1099 worker, you can lower your taxable income, thanks to business expense deductions.
In the above example, let's find the taxable income after considering the following deductions:
- Work from home deduction: $3,000
- Business meal with possible clients: $3,500
- Work-related travel: $2,500
- Office essentials (like table, chair, lamp): $3,200
- Subscription to work-related training: $5,500
These deductibles add up to a total of $17,700. The taxable income now stands in a lower tax bracket of $995 and $40,525. You'll now be taxed at 12% instead of 22%. The final tax to be paid is now $4,723 less than $9,000.
The only problem is that to find these deductions, you'll have to classify all the expenses manually, which is a time-consuming process. To speed things up, you can use FlyFin, which uses A.I. to find all your business expenses in minutes.