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In the USA,

  • Sally is a normal employee making $100,000 a year

At the end of the year, she files her taxes with taxact.com and pays the $20 fee. Sally simply claims the standard deduction of $12,700. So the $20 deduction is "wasted".

  • Her sister Jane is a 1099 contractor, and grosses $100,000 the same year

At the end of the year, she files her taxes with taxact.com and pays the $20 fee. Now, the $20 is her (only!) expense that year. It is her (I believe "Schedule C") deduction, giving her $99,980 income for the year. Jane then deducts the usual $12,700 standard deduction from $99,980.

Undeniably it seems, 1099 contractors can deduct small amounts (up to the $12,700 "limit" as it were), whereas employees can not deduct small amounts (up to the $12,700 "limit" as it were).

Is this example totally correct?

Or is there "another" way Sally can deduct such small expenses?

{Of course, obviously, there are many other differences in what you do and don't pay in employee V. 1099 situations. This question is only about the "magical" gain of the $20 expense, in the example!}

  • The $20 fee for filing taxes is a personal expense and not an employee expense, and not something that can be deducted as a business expense on Schedule C. The fee is deductible (or used to be deductible; don't know how the new Tax Act treats this) as a Miscellaneous Expense on Schedule A but only to the extent that the total Miscellaneous Expenses category exceeds 2% of AGI, and there is, of course, the standard deduction limitation. – Dilip Sarwate Mar 31 '18 at 15:52
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This micro example points to a much larger discrepancy. With the new tax law much fewer Sallys will be able to itemize leaving potential tax deductions as wasted. Her tax returns are simplified but she might have paid less taxes under old tax policies. To be fair to the current administration, things have been moving in this direction for many years now. People used to be able to deduct credit card interest and charitable giving could be deducted without itemizing. However, things are trying to be made more simple.

The Janes of the world can also probably deduct mileage, a home office expense, internet access at home, portions of things like home repair, phone bill, vacations, meals, the list goes on. The Sallys of the world have these same expenses however, were never able to deduct many of these expenses.

The Janes do have some downsides: they pay both sides of social security, they don't get vacation, they have increased tax and other regulatory complexity. A big one is they don't qualify for group insurance policies. Health insurance is the big one, but also disability and life play a role.

For some people being a 1099 can be very lucrative, others it is pure hell and leads to financial disaster. Often times the best situation is when a married couple has one on a w-2 job with good benefits and the other on a 1099. The 1099 person needs to be relatively healthy so they can qualify for life and disability insurance policies at a reasonable price.

Keep in mind well paying 1099 positions are not very common since the Microsoft lawsuit.

  • A fantastic answer as usual. In short, "yes", on the face of it, the example shows "how it works". That's tough that some are nickle-and-dimed by the new policies. Fascinating times we live in! – Fattie Mar 30 '18 at 15:07
  • Thanks @Fattie. I am not sure why your question, which was great, or my answer got down voted, but no accounting for some people being cranky pants. – Pete B. Apr 2 '18 at 10:57

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