Working for yourself is cool. You can choose what kind of work you want to take, you determine your own salary and make your own schedule.
However, the downside of self-employment is a tax headache. And most of the time it’s a BIG headache.
Before freelancing income, you only had to worry about your W-2. Now you need to collect 1099 from each client you served during the year, which can be up to a dozen or more.
Where many people never have to pay taxes in their lives (it’s all deducted from their salary), you will have to do quarterly tax payments.
Certainly, you can take deductions related to running your business, but you need to be very careful when tracking your expenses, as self-employed people are more likely to checked (I once was).
No questions: Tthe axes for freelancers and self-employed professionals are more complex. What can you deduct? What is prohibited? And what are some rules of thumb when you work for yourself?
1. Hire an accountant
Trying to save money on an accountant is like going to a cheap auto mechanic: you get what you pay for. While top-notch CPA will cost more, they will also find lucrative deductions that you never thought of.
It’s not for knocking Homemade tax software e.g. Turbotaxor other tax preparation services; if your situation is pretty simple, go for it. But if you have to juggle multiple forms, a long list of expenses, and don’t want to miss anything, then I suggest getting tax advice from a CPA.
Read more: Should I Hire a Tax Inspector?
Case and point?
As I handed over my taxes to the experienced accountant, I left due to a five-digit number in the previous tax year into a four-digit bill. Go find out for real.
And here’s a little secret: Stephanie NgCPA and book author How to pass the CPA examSays that:
“freelancers who need to hire lawyers, accountants, or other consultants can deduct them as business expenses.”
In other words, you’ll be able to recoup your investment in a tax deduction when you file your tax return next year, so it’s basically a win-win.
2. Save and sort every receipt
Christopher JervisPresident and Managing Partner at Lone Wolf Financial Servicestax preparation firm says that:
“Good and detailed accounting of income and expenses is the best way to reduce tax liabilities.”
The idea here is simple: you need to develop an effective documentation system broken down by category of expenditure. And the most important thing: also don’t lose receipts after filing. My check would have been flawless if I hadn’t lost two key receipts that resulted in a $750 payout after fines and interest.
To avoid confusion when receiving, take advantage of technology.
There are many great budgeting apps these days, which will allow you to track your expenses and make sure everything is accounted for.
Read more: The best budgeting apps to control your finances
3. Consider your location
One of the benefits of freelancing is that you can live anywhere, so why not use your location to your advantage, right?
Matthew CampbellCFP and Chief Financial Officer at budgetaryis talking
“One thing many freelancers overlook is their location. The state you live in can have a huge impact on your overall tax liability.”
And he’s right.
For example, if you live in California or New Jersey, you may pay more than 10% on income tax alone. But if you live in a state like Texas, Florida, Nevada, or New Hampshire, you can save a lot of money in taxes because you don’t have to pay income taxes.
4. Replace your health insurance with a high deductible.
The Affordable Care Act has raised many questions among the self-employed. Here’s the key: Obamacare subsidies are not considered income and therefore not taxable.
Meanwhile, freelancers may be eligible for deduct premiums for medical and dental insurance for them spouses and dependents. But all bets are off if your spouse is insured under a subsidized health insurance plan at work.
Jervis of Lone Wolf Financial Services believes that if you’re thinking about deducting your health insurance as a business expense, it’s best to switch to a high-deductible health plan.
According to Jervis:
“A high deductible health plan is defined as a health plan with a deductible of $1,400 or more for individual coverage or $2,800 for a family.”
Because you pay more out of your own pocket (with a lower monthly fee), you can deduct more medical expenses. You can also apply for health savings account (HSA) with this type of plan.
But why are you doing this, right?
Well, in case you didn’t know, the individual contributions you make to the HSA during a given year are also tax-deductible, so it’s worth giving it a try.
Read more: How to choose a health savings account
5. Maximize Your Retirement Contributions
“A freelancer could potentially make a traditional individual retirement account a deduction that will lower their tax bill somewhat,” says Jervis.
Currently, individual taxpayers can contribute up to $6,000 (or $7,000 if you are 50 or older.). If you are married, you and your spouse can contribute up to $6,000 each, for a total of $12,000 (or $14,000 if you are both 50 or older.).
However, how much you save will depend on your income. For example, Jervis says flat tax payers making more than $66,000 and taxpayers making more than $105,000 probably won’t get as much savings as those who make less.
So yes, tax credit + retirement savings, what’s not to like?
6. Is your home office really a home office?
An office that is part of your home is eligible for a tax deduction if you can prove that this is your main place of work. When I was tested, I had to provide photographs, measurements, and descriptions to support my home office claims.
However, in order for you to take advantage of the home office deduction, IRS says that the designated territory you claim must be used exclusively for business.
So, remember, an office that doubles as a kids’ room won’t work.
Here are some of the things you can claim with this deduction:
- Money spent on repairing that part of the house.
- Part of your utility bills.
- Maintenance.
The best part? You don’t even have to be a homeowner to take advantage of the home office deduction, as you can also deduct part of your rent, which is a room or part of an apartment that you use for business. The same if you live in an RV or boat.
7. Don’t overlook these gems
IRS rules are strict and, well, weird. Believe it or not, they took deductions for theater costumes. TueSly overalls and white dress shirts don’t work. for deduction because you are supposed to wear them outside of workyou can deduct clothing expenses not suitable for regular clothes, such as those with a company logo.
Aside from your work clothes, here are other hidden gems you can deduct this tax season:
- Subscriptions. While your Netflix and Hulu subscriptions won’t qualify for this deduction, if you’re a graphic designer, for example, and have an Adobe Photoshop subscription to help you get your work done, you can deduct this. The same goes for any publications you subscribe to that are relevant to your career.
- Equipment. Are you a photographer and just bought a lens? If so, you can subtract that.
- Office tools. Pens, paper, paper clips, notepads can all help you lower your taxes.
- Training and certifications. Have you attended a boot camp or a short course this year to improve your career prospects? Then you can get a tax cut for that as well.
- Rent. Car and equipment rentals can also be deducted.
- Marketing and advertising. Any advertisement you place online or in newspapers and magazines to promote your services.
- Subcontract work. You can deduct wages paid to anyone who has provided you with a business-related service. For example, if you have a small business and paid a graphic designer to improve your website, this could be considered a tax credit.
- Network events. Conference tickets and professional mixers also count.
- Membership fee. You are an engineer and belong to American Society of Civil Engineers? If so, your annual fees are also deductible.
Hot tip: Kamyar Shahfounder and owner Global consulting groupadvises to carry a credit card when paying these expenses to increase your savings.
“Freelancers can not only deduct these purchases, but also earn rewards for credit card purchases made with a business credit card that also doubles as a rewards card. You can also deduct the interest you pay on any business credit card debt if you have to roll over balances from month to month.”
8. Business lunch? There is a deduction for this.
Many freelancers forget that they can deduct food, but when they find out about it, they start claiming every little trip to Starbucks.
To deduct food, you must go on an overnight business trip, meet or entertain a client – and you can only claim 50% of the cost of the meal.
However, thanks to the Taxpayer Confidence and Disaster Relief Act of 2020, The IRS temporarily allows you to deduct 100% of business-related food expenses.if they refer to the period from January 1, 2021 to December 31, 2022.
9. Track mileage and travel expenses
If you’re freelancing and have taken you far away from where you normally do business, any bus, plane, or Uber rides can cut your tax credits.
Also, if you use your vehicle to commute to various jobs or meet with clients outside of your normal work area, you can also deduct your mileage.
One way to calculate the amount you can deduct is to track the mileage of your business and multiply This by standard deduction, which is currently 58.5 cents per business mile.
Another way to do it is to calculate the percentage of time that you traveled for business and multiplying this number by total cost your whole car operating costs such as gasoline, oil changes, registration fees, car repairs and insurance.
10. Write off losses
Ng, CPA and book author How to pass the CPA exam, says that whether you’re a small business owner or a freelancer, you can write off any business losses that result from theft, a car accident, or any natural disaster.
“However, the total amount depends on their insurance calculation and AGI (gross income less statutory deductions)”.
Here is the formula for calculating this deduction:
Amount of loss – insurance claim – 10% of AGI = deduction
Summary
There are many ways to save money when filing taxes if you are a freelancer.
While you can always calculate taxes yourself using tax software, it is best to hire an accountant or other tax professional to help you with this task, as this will allow you to take full advantage of all your expenses.
And trust me, their fees will be cheap compared to what you could overpay the IRS.
Featured Image: iJeab/Shutterstock.com
