We all know that filing taxes can be a pretty stressful experience under – and that’s downplaying it. Now, while it’s by no means easy for those in normal circumstances, for freelance professionals, it’s even harder. The thing is, when it comes to freelancers, tax season can offer a different level of frustration, considering the fact that different rules apply to freelance taxes.
There is some good news though, and a couple of tips and tricks that are going to help you with managing your finances. Now, if you aren’t sure about any specific details, you should always opt for a consultation with a qualified tax professional for expert advice. So, keep that in mind, and with that disclaimer out of the way – we’ve got some tax tips for freelancers that can help you with managing your taxes well.
Let’s Talk About the Basics First
Well, first things first – in order for you to understand how you could tweak your taxes, it’s important for you to understand how you should assess them in the first place if you are a freelancer.
So, if you happen to earn at least $400 or more in a year as a freelancer, you are considered self-employed by the Internal Revenue Service. That further means that you are required to file taxes as a business owner. Now, there is a downside to all this, and that is the fact that in addition to the standard income taxes based on your tax bracket and filing status, you also need to pay a self-employment tax of 15.3%. This tax represents the Social Security and Medicare taxes you would normally pay, as well as the half typically covered by a traditional employer.
Know Your Deductions
As a freelancer, considering the fact that you already have to pay more taxes, deductions are something that you really shouldn’t overlook – and yet, they most often do end up overlooked. A high number of freelancers leave valuable tax deductions and benefits on the table just because they aren’t sure what they can and cannot deduct. Statistics even say that 35% of freelancers have a hard time understanding and paying taxes, while 73% don’t deduct any expenses at all!
All of that being said – it’s time for you to learn more about deductions. Not only will it make your tax paying easier, but, as experts on taxpaying from keepertax.com explain – by deducting everything that you can, you will actually end up potentially saving thousands of dollars. They also go on to explain how, so, let’s talk about that in more detail.
Home Office Deduction
If you happen to do your freelance work from home, this deduction can be a big money saver if you use a part of your home regularly and exclusively for business purposes. The good thing is that you don’t need to have an entire sector of your home dedicated to the business, so, even a desk count.
So, basically, if you work from home – IRS allows you to write off associated rent, utilities, real estate taxes, repairs, maintenance, as well as other related expenses from your taxes.
Since you aren’t provided with an employer-paid healthcare plan, the probability is high that you are covering all the premiums by yourself. Although the high cost definitely does seem steep, as a freelancer, you can actually deduct these – which will ultimately lower the amount of overall tax you owe.
So, how much can you deduct? You can actually deduct 100% of your health insurance premiums, including both dental and long-term care premiums. You should understand though, that this is a deduction on your personal taxes. Now, in order to qualify for the deduction, you must have no other health insurance coverage, as well as to have business income.
Self-Employment Taxes Deduction
We have already mentioned that you have to pay 15.3% of your income for social security and medicare taxes. The good thing though is that you actually get to deduct the 7.65% employer portion off of your income taxes.
Be Sure to Plan Your Retirement
As a freelancer, it might be a little harder to contribute, but you shouldn’t let that stop you, since retirement is something that really is worth the investment. In case you need a little extra incentive, remember that your contributions to a retirement plan are actually tax-deductible.
Take the 401(k) plan for instance – the IRS isn’t going to tax what you divert into a 401(k) if it’s funneled directly from your paycheck. For 2020, you can divert up to $19,500 per year into your 401(k) account, and in case you’re 50 or older, you can actually contribute even up to $26,000.
In the end, even though the whole process is intrinsically stressful, there definitely are some ways in which you can make it easier. That being said, don’t ignore all the responsibilities until the last moment, do your research, and keep yourself informed and organized – the whole ordeal will be a lot easier. Don’t worry, you got this!
Photo credits: Pexels