Most people assume earning 1099 income means a bigger tax bill. Mark and Ro from The Owner's Asset want to change that thinking entirely. In this video, they break down exactly how the IRS views 1099 income, why it actually creates more tax planning power than a W2 ever could, and which deductions business owners and independent contractors are leaving on the table every single year.

Watch the full video to learn more.

Video Transcript

Mark Switaj (00:01.014)

If you're earning 1099 income, the IRS doesn't see you like W-2 employees. It sees you like a business. And that difference can be tens of thousands of dollars in taxes every single year.

Rohit Punyani (00:13.712)

Yeah, it's a good point, Mark. That's because businesses are taxed on net economic profit. We'll clean up some jargon later, not paychecks. Paychecks means something very different than profit does to the IRS. We'll break down how the IRS views 1099 income and why we love it at the owner's asset. How business owners use 1099 income to regain control of their tax strategies.

Mark Switaj (00:37.517)

I'm Mark Switage, two-time founder and CEO of The Owner's Asset.

Rohit Punyani (00:41.941)

I'm Rohit Purniani. Everybody calls me Ro. I'm a former chief investment officer and the co-founder of The Owner's Asset. We help business owners, business owners and independent contractors, 1099s and independent owners design tax efficient wealth strategies. If this content helps you, subscribe, like, thumbs up wherever you're interacting with us.

Mark Switaj (01:01.997)

So, Ro, in this video, what are we going to cover? We're going to walk through really what 1099 income means. lot of folks may not even recognize that they have 1099 income. Some of the myths, maybe some of the fear-mongering that come along with being a 1099 earner.

Rohit Punyani (01:17.197)

Yeah, specifically how the IRS treats it differently is important. Why that difference creates planning leverage. Optionality matters, right? We want to create different multiple points of egress whenever we're looking at strategies and what structures matter most. Okay, so let's start with the foundation, the base case here. When you earn 1099 income, the IRS treats you as self-employed. This means that you're not an employee. You are looked at as a business. You may not be formally incorporated because you're getting 1099 income, but you are looked at as a business.

This distinction matters. matters a great deal to the IRS because it cares about who controls what's happening and who has the economic risk. Okay. What does that mean in the W2 world? Employees trade control, right? They give up control for stability. When you have 10 99 income or you have a small business, you're accepting volatility. You're accepting optionality. And that opens up a whole slew of very interesting tax opportunities and deductions. Okay.

W-2 employees are taxed first. It's actually even pulled out. The withdrawal, the withholding is pulled out oftentimes by your payroll processor and you don't even know it. And withholding happens automatically and deductions are limited because it's at the top and it's taken from you. 1099 operates differently. The IRS allows business owners to deduct what are called ordinary and necessary expenses. This is critically important as we walk through some of the different strategies that we go down.

It wants to tax you at net economic profit after the stuff it takes for you to generate that 1099 income. That phrase, ordinary and necessary, means expenses that are customary in your line of work, directly connected to how you produce that income. Okay. These aren't loopholes, right? Employers get these deductions for whatever it takes to help you get to work. The computers they buy you, the same types of things can be available to you when you're, when you're a 1099.

It's how the tax code avoids overstating income. Okay. So what's the key punchline? 1099 income is not a penalty. It's an opportunity.

Mark Switaj (03:23.628)

I love that, At The Owner's Asset, we love 1099 income. We love it. For one reason, control. And I know, Ro, you're going to get into some of that. A lot of W2 employees, the employer, as you mentioned, handles the withholdings, the benefits. It almost feels like it's out of sight, out of mind. Well, good news with what we're talking about with 1099 income. It's within your control.

And so that's what we want to talk about like how does it move? How do you move from like this mindset and W2 world of reactive to what comes to me versus like this proactive nature you are owning the structure that goes alongside with 1099 the optionality that comes along with it. You know as a repeat founder I think about this all the time. How can I use my structures to build my wealth buildings? How can I use my structures to build my wealth? How can I generate the income from these tools that are at my disposal? and this

This really aligns with our philosophy. why we came together on the owner's asset, why it's called the owner's asset. Because you are an owner, you are in control. It's not about just creating equity, it's about owning the outcomes of the things that are your assets. That can be through your business, through tax code structures, and really diving into how you might control 1099 income to your benefit.

Rohit Punyani (04:39.521)

Yeah, that makes a lot of sense. So I think the logical place to start is with the elephant in the room, right? The elephant in the room is self-employment tax. A lot of people are concerned, well, I suddenly have to pay the employer half of the self-employment tax. So yes, 1090, but there's a yes with a big caveat there. Yes, 1099 earners pay both the employee and the employer portion of both social security and Medicare, about 15.3 % of your self-employment income. But here's what's missed.

Don't stop the analysis there, right? What's missed is that employees never see the half that the employer plays. When you're self-employed, half of that is deductible as an adjustment to income. So you're not paying it on both sides. You can deduct half of it back out because it's, again, the IRS considers you the employer. It just happens to be a 10-9-9. It's an employee organization of just one. More importantly, and this is really important, so maybe slow down a little bit here, is

The tax applies to net income, not gross revenue. So there's a real opportunity there when you start adding in some other, other deductions. When you're self-employed, the real planning can happen. Every legitimate business deduction reduces both income tax and self-employment tax. That's why I said it comes out of net income, not gross revenue. So if you're making more, but you have some more deductions, that self-employment tax goes off of that new bottom line, not the top line. So that's critically important.

Mark Switaj (06:03.755)

All right, now it's time for a little commercial break and engagement request. So are you earning 1099 income right now? What's your biggest tax challenge when it comes to thinking about that 1099 income?

Rohit Punyani (06:06.925)

Thank

Rohit Punyani (06:14.987)

Yeah. Love that question because drop it in the comments, ping us. We read them all. We'll do future videos on it. We've had a couple of clients and friends of our, of the owner's assets. Hey, can you guys cut a video on this? Cause this is what we do. We help small business owners with their wealth building strategies.

Mark Switaj (06:31.178)

All right, cool. Let's do some low-hanging fruit row. We're gonna these fairly quickly. One of the most underused deductions for 10 to 9 earners, the home office deduction. So if you were like me and you often work from your home as your principal place of business, as the phrase goes, you may know, you may not know, that you can deduct a portion of that rent or mortgage interest, the mortgage interest, utilities, insurance, repairs, depreciation, you know, as part of your deduction profile, I'll call it.

There are simple methods, your CPA can get into this, it's based on square footage, the IRS scrutinizes it, scrutinizes this deduction because it's often abused, we will note that as well, but when done correctly, it can be actually meaningful for our 1099 earners. And so we highly encourage folks to talk with their CPA about this.

Rohit Punyani (07:19.597)

Yeah, so 1099 opens up the home office deduction, and then it opens up where this is where it begins to really separate itself. The power of 1099 income. As a self-employed individual, could do a SEP, a self-employed retirement plan. You can do a solo 401k. You could put almost $70,000, $69,000 into that.

So already you're finding that, you you're limited to that 23,500 with your employer. Well, once you have 1099 income, and if it's enough, you can actually put 25 % or 69,000, whichever is, you know, the lesser of those two into your own private retirement account. Now, okay, that may not be a big enough jump for you to think about it. Where it gets really interesting is the next level up for higher earners is the cash balance plan and the 412 system.

the old school US, that laudable old school pension system is still in place. It's called different things and has moved around in different sections of the tax code. But yeah, you can layer on a cash balance plan and depending on age and income and the design of your 1099, if it's just you or your other employees in your small business, those deductions can be massive, mid six figures. So you can really pay yourself before you pay Uncle Sam. And let's be clear on one final point here, Mark. Deductibility comes from the qualified plan structure.

Maybe not what's inside of it. And what's interesting about cash balance plans is you can actually open up your asset allocation to include some very powerful tax-free assets like life insurance, assets that can really change the dimensionality of your retirement, something with no sequence of returns, whether it's in annuity as well. So there's ways to not only get bigger deductions, but curate the path that you want your retirement to go down.

Mark Switaj (08:56.586)

I feel like, everything that I am talking about now, we're gonna do some, like, fire other deductions. I feel like you had the opportunity to talk about the meat. I'll talk about some of the potatoes, I guess. So let's just do some rapid fire on other deductions. Health insurance premiums. Talk about those.

Rohit Punyani (09:14.925)

Sure, relatively straightforward here. If you're self-employed and, not or, and, so if you're self-employed and you're not eligible through a spouse, you can deduct 100 % of the premiums above the line.

Mark Switaj (09:26.665)

Business mileage.

Rohit Punyani (09:32.686)

Business mileage this year is 67 cents. So when you're going to and from meetings, if you're picking up office supplies, you know, anything again that necessary to conduct your 1099 business or your small business, you can deduct 67 cents per mile to operate and degenerate that revenue. Okay, another one is qualified business deduction. This is section 199A, and it was renewed in recent tax legislation. In some cases, you can deduct up to 20 % of your qualified income.

Simply because we talked about, you've taken on that risk, you've gone out there and done your thing, the IRS is rewarding that with it. Now, this phase is out based on income and business type, but the overwhelming majority of small business owners and independent owners can take advantage of 1-99-A, something to explore with your CPA.

Mark Switaj (10:18.825)

I didn't know that about 1.998. Professional development, that's one that I actually know quite a bit about. So anything that's relative to education, you can deduct that, so long as it is improving your skills, as the phrase goes.

Rohit Punyani (10:33.069)

Love that. And most life insurance is not tax deductible. We know the important role life insurance plays, right? Protection, retirement and all that. However, a couple of ways to make it deductible, like we talked about cash balance plans, some other strategies. In most cases, it's not deductible except in your qualified plan, like I just mentioned, and certain buy-sell structures. So if you're looking to, you your business has gotten to a point where you're like, wow, protection matters, but I still want to keep mitigating my tax risk. Yeah, there's ways to do that as well.

Mark Switaj (10:59.593)

Bottom line, as we all know, documentation is everything. If you can't substantiate it, the deduction doesn't exist. So if you didn't save those receipts, digital works, you didn't do it.

Rohit Punyani (11:12.589)

If you're earning 1099 income and you want to design a smarter tax and wealth strategy, we'd absolutely love to get involved. We'd love to help.

Mark Switaj (11:22.77)

Click the link below, top on the phone, we'll do a video chat, we're big video folks, as you can already tell, we'll review your situation and map out your plan.

Rohit Punyani (11:33.228)

Yeah, and if this video helped, we'd appreciate a thumbs up, subscribe, share it, let folks know that there are teams out there that specialize in helping independent 1099s, solopreneurs and small businesses manage their tax and build wealth. All right, thank you.

Mark Switaj (11:47.336)

Thanks, everyone.