1099 tax benefits are overrated
Many people are under the illusion that once you have a business you can magically deduct everything on your taxes and pay zero money to the government.
This is obviously false and in fact, the tax benefits are mostly underwhelming.
Here's the deal:
- You can only deduct legitimate business expenses
- As a solo 1099, you generally don't have many business expenses.
- Because you don't have many expenses, the tax deduction is minimal. If you have a marginal tax rate of 24% and you deduct $2,000 worth of expenses, you will save 24% X $2000 = $480.
- Plus, you're not actually "saving" anything overall. You just spent $2,000 to save $480 in taxes.
- There are only a few likely candidates for "free" tax savings: mileage and office space. You probably already drive to work and probably have something you can call a home office. But, the tax savings are probably minimal
- The major tax benefit you probably should take advantage of is getting an individual Solo 401k. The benefit, as compared to your job, is you can put away more than the employee limit. In 2023 it's up to $66,000.
The net effect of tax benefits as a solo 1099 is mostly peanuts. The big financial win from going 1099 is simply increasing your income by $20,000 - $80,000/year. When you do that, a few thousand bucks in tax savings seems negligible.
Want the full playbook? Check out Going 1099.