Frequently Ignored Tax Deductions for Freelancers
If you work for yourself, you’re used to handling everything. Although dealing with clients can be difficult at times, you manage your business entirely on your own and never need anyone else. You miss out on tax deductions as a result, which is a significant issue. In essence, you pay more than you should because you don’t understand how the rules operate. However, things don’t have to be that way! We provide tax filing advice that you can utilize the next time tax season rolls around. Spend some time learning more about tax deductions to make sure you’re not overpaying.
Naturally, if you have to work on your return during tax season, doing everything by yourself can become an issue. Additionally, not all independent contractors are adept at efficient bookkeeping, which makes getting ready for tax season more challenging. For freelancers to reduce their tax burden, meticulous bookkeeping is crucial.
How Do Tax Deductions Affect Independent Contractors?
Every independent contractor also runs a little company. Since you don’t have an employer, you are an independent contractor and are responsible for all of their duties.
Your independent work is a business even if you don’t have any other workers for you. You’re running a little business, but it doesn’t exist beyond you and your name.
Therefore, independent contractors can deduct qualified business expenses from their taxable income for tax purposes. Your taxable income is directly decreased by tax deductions. They stand for ongoing costs associated with running your business. These are necessary company expenses, so the money used to cover them should be deducted from your taxes.
Commonly Ignored Deductions for Independent Contractors
Several tax deductions can be used, and it’s simple to overlook some of them and unintentionally underpay taxes. Make sure you give yourself enough time to claim all the deductions you are entitled to.
The Deduction for Self-Employment Taxes
Everyone is required to contribute from their income to Social Security and Medicare. In the case of an employer, the business will cover half the cost while you cover the other. For the self-employed person, you are responsible for making those complete payments.
The term for this is self-employment tax. The self-employment tax rate is 15.3%, which includes 2.9% for Medicare and 12.4% for Social Security. If the income exceeds the cutoff, a 0.9% Medicare tax rate is imposed.
The following are included in the self-employment tax threshold figures:
- A couple filing jointly: $250 000
- Married but filing separately: $125,000
- Singles: $200 000
- Head of household: ($200,000 with the eligible individual)
- $200,000 for a widow(er) with a dependent kid.
The good news is that that tax payment’s half—the portion typically funded by the employer—is a deductible business expense for tax purposes.
Tax Deductions for Health Insurance
Many people have access to health insurance through their work. But let’s say you work for yourself and are not eligible for health insurance through your workplace or that of your spouse. In that instance, you can consider your health insurance to be a healthcare program sponsored by your employer. Any premiums you pay may be deductible because they will be reimbursed by your company, not you.
Home Office Tax Credit
The environment in which you conduct business is crucial. The expenses related to a regular and established workplace may be written off against taxes. This usually entails using the home office deduction for independent contractors.
You might be able to write off some of the expenses related to house maintenance if you work from home. To qualify, you must have a specific place in your house that you use exclusively and regularly for business. Based on its size about the rest of your home, you may be able to write off certain charges for that office, including rent, a mortgage, utilities, and other relevant costs. For instance, you can only deduct 10% of your annual power bill, not the full expenditure, if your home office only occupies roughly 10% of your overall living space.
In the case of an IRS audit, you must be able to defend your itemized deduction. Making a diagram and taking precise measurements of your assigned work area can help you get ready for this. Only people who own their own homes are eligible for deductions like mortgage payments and home depreciation.
Office Supply Tax Deductions
You can deduct any tools or supplies you purchase for your business. How frequently do you restock your home office with supplies like pens, ink, and printer paper? Keep note of every one of these office items so you may write them off on your tax return.
Deduction for Retirement Contributions
Your retirement payments are a crucial deduction for tax season. You have the same option to contribute money to a retirement account and deduct it from your taxable income as your employer does to withhold a portion of your income before taxes for savings.
The amount of retirement contributions you can deduct is, however, subject to a yearly cap. So be sure to maximize your retirement savings before the end of each fiscal year.
Professional Dues or Subscription Fees
Do you engage in any form of professional continuing education? How can you gain new talents and keep up with industry developments? Any money you spend on professional development and company growth qualifies as a business expense.
This covers your membership dues for any professional organizations you may belong to as well as your subscriptions to any pertinent publications. For instance, a newspaper cannot be written off as a business expense since it is too general and too unspecific. However, if you work as a freelance chef, a magazine for the food industry like Nation’s Restaurant News can be written off as a business expense.
If you’re a freelance graphic designer, you can deduct periodicals for the industry, software subscriptions like Adobe Creative Cloud, and website hosting.
A valid and significant business activity, networking with others in your industry should be deducted as a business expense.
Advertising and Marketing for Tax Deduction
Do you invest any money in marketing your name or seeking out new customers? Even if you don’t have a formal marketing budget, you should still keep track of every dollar you spend on networking and self-promotion. These costs most likely also count as allowable company expenses.
Professional and Legal Services
If you employ more freelancers or companies, it is also a tax-deductible business expense! You can write off the cost of hiring an accountant or an attorney whenever you need their assistance with your finances. Purchasing professional and legal services is a standard expense of doing business.
You Can Maximize Your Tax Deductions With the Help of an Accountant
The tax code is complex and constantly evolving. Keeping up with the most recent changes and finding all the potential tax deductions for each expense would require a full-time job. Thankfully, you have qualified accountants to do it for you!
A clear benefit of hiring a professional to assist you with your bookkeeping and tax returns is higher tax savings and increased productivity. It will be a world of difference if you have an expert on your side.