Self-employed people and freelancers are leaving money on the table by not maximizing allowable tax deductions. Let’s fix that.
Self-Employed Tax Saving Tip #1: Work Retirement Options
Self-employed people must pony up Medicare, Social Security and income taxes. However, they have more retirement savings options at their disposal, including:
- Simplified Employee Pensions;
- Employee Incentive Match Plan Savings programs; and
- Individual 401(K).
Freelancers and self-employed parties can reduce their taxable income by saving money using one of these plans and in doing so gain tax-deferred interest. These are above-the-line deductions, so they don’t affect the self-employment tax (currently 12.3%).
Freelancer Tax Saving Tip #2: Auto Expenses
Use a vehicle for your job? If yes, you can deduct associated expenses. The standard IRS mileage deduction rate is 54.5 cents. Plus, you can lob off any tolls, car payments, insurance, garage rent, license fees or maintenance costs associated with business travel.
Don’t push your luck with auto deductions, though. You can only deduct percentages associated with work. For example: If you’re a freelance writer with a home office, don’t count drives to the market or lunches with friends. You could, however, deduct auto expenses related to trips associated with pieces you’re writing.
Self-Employed Tax Saving Tip #3: Home Office
Yes! You can deduct home office expenses, including rent and associated utilities. However, your home office cannot be a bedroom with a desk; it must be a dedicated area.
For example, let’s say you rent a 1,000 square-foot apartment for $1,000 a month and use a 300-square-foot room as a dedicated office and nothing else. You can potentially write off $300 a month of your rent, plus the percentage of monthly utilities needed for that 300 square feet.
Save all receipts! With an accountant’s help, you may be able to subtract insurance costs, repairs and even depreciation costs from your taxable bottom line.
Offices up to 300 square feet can also use the simplified home-office deduction scale, which uses flat rates.
Freelancer Tax Saving Tip #4: Medical Expenses
Self-employed workers can deduct medical and dental expenses, including health insurance costs and long-term care insurance premiums.
There are some caveats, however, with medical deductions. Also, if said expenses don’t amount to 10% of your adjusted gross income, you may not be able to use this tactic. Work with a tax accountant with self-employment experience to figure it out.
Self-Employed Tax Savings Tip #5: 20% Pass-Through
One of the best parts of the 2017 Tax Cuts and Jobs Act was the 20% pass-through provision. It allows sole proprietorships and other categories of companies to deduct 20 percent off yearly earnings automatically. The new rate could significantly help self-employed individuals who formally establish a corporation, which isn’t expensive to do.
Freelancer Tax Saving Tip #6: Child Employment
We’re not suggesting that you turn your home into a Dickensian nightmare, but there are ways to put your kid to work, legally, which could help shelter up to $12,000 a year, per child, from Uncle Sam — on top of the standard dependent deduction.
Self-Employment Tax Tips: Position Yourself Optimally
Do you need help setting up the perfect tax positioning for your situation? Our team has helped countless individuals save money on taxes and prepare for their futures. Working with tax professionals is worth its weight in gold…literally.
Get in touch today to start exploring options.