The Top 10 Tax Deductions Freelancers Need To Know Before Filing Their Freelance Taxes
Understanding the nuances of the small business tax code has never been a walk in the park (especially when the tax laws are constantly changing), but when it comes to freelance taxes…? Let’s just say that those are a whole different ballgame.
According to a 2015 study done by Xero, 73% of freelancers don’t deduct any expenses when filing their taxes. Considering how many people now rely on freelancing gigs as a primary source of income, that number is frankly shocking and prompts the question: Are you maximizing your tax deductions as a freelancer?
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If you are a freelancer, there are 10 very important tax deductions you need to know about. Gaining a basic understanding of how freelance taxes work and what you can and can’t deduct can save you a good chunk of change and spare you from trouble with the IRS down the line.
Read on for several money-saving tips and to learn about the top 10 tax deductions available for freelancers.
Table of Contents
The Basics Of Freelance Taxes
Freelancing is a form of self-employment in which a person offers their service for a fee (rather than relying on a traditional employment arrangement). A person is required by law to pay taxes to the US government if they receive a freelance income of $400 (or a church employee income of over $108.28) in a given year.
When you’re paid by a traditional employer, standard taxes on Medicaid and Social Security are automatically taken out of each paycheck. This isn’t the case for freelancers and independent contractors, who are instead required to pay self-employment taxes. The self-employment tax rate is 15.3% (12.4% for Social Security and 2.9% for Medicare). In addition to self-employment taxes, freelancers are also required to pay income tax.
If you are a freelancer, you will have to save a certain percentage of your income in order to pay your taxes. Most financial professionals advise freelancers to save around 25% (or even 30%) of their total income to cover these taxes. Freelancers may be required to pay taxes every quarter rather than annually (cue estimated quarterly taxes), depending on the size of their earnings.
Estimated Quarterly Taxes
Most tax-payers are used to the April 15th deadline when filing taxes for the previous year. However, freelancers are often required to pay estimated quarterly taxes. Instead of paying taxes once a year, some self-employed individuals will pay these estimated taxes four times a year.
|Quarterly Tax Period||Estimated Quarterly Taxes Due|
January 1 - March 31
April 1 - May 31
June 1 - August 31
September 1 - December 31
Note: These due dates are specifically for 2020 and will vary slightly each year.
So, how do you know if you need to pay estimated quarterly taxes? According to the IRS, individuals who expect to pay at least $1,000 in taxes for the year should file estimated quarterly taxes instead of waiting until April to file. The 1040-ES form can help you approximate your total income for the year as well as your estimated tax payments.
As always, we recommend consulting with an accountant or tax professional for tax advice — especially when it comes to freelance taxes. They will be able to assist you in officially determining whether you need to pay estimated quarterly taxes, and if so, how much.
Tracking Freelance Finances
When you’re self-employed, it’s incredibly important to keep your finances organized. That’s where accounting software comes in.
Most freelancers would probably rather be finding new clients, creating new marketing strategies, improving their brand and social media presence — basically doing anything but accounting. But earning freelancer income is only half the battle. Managing that income and keeping track of your business earnings and expenses — that’s what sets you up for long-term success.
Luckily, there are multiple accounting programs that are designed specifically for freelancers, like QuickBooks Self-Employed. QuickBooks Self-Employed helps freelancers keep track of their income and expenses, manage deductions, and calculate estimated quarterly taxes. It even includes a Turbo Tax plan so you can easily file your taxes. Read our full QuickBooks Self-Employed review to learn more.
Whichever accounting software you choose, it’s important to record your income so you can set aside the proper amount for taxes, track your expenses so you can maximize deductions, and keep your finances organized in case you ever face an audit.
Tip: Hire A Tax Professional
The biggest tip I have for freelancers is to hire an accountant or tax professional. When you’re self-employed and trying to save as much money as you can, it seems counterintuitive to hire an accountant, but trust me — the expense will more than pay for itself.
As a previous independent contractor, I’m speaking from experience here. When I started out as a 1099 contractor I knew a little bit about self-employment deductions. I saved 25% of each check, kept a careful record of my business-related mileage, and saved all of my business expense receipts. But without the help of an accountant, I still would have missed out on over $3,000 worth of deductions I didn’t know about.
Accountants and tax professionals can help you navigate the murky waters of freelance taxes and find you all sorts of savings. They know exactly what you can write off, which deductions you qualify for, and which deductions could put you on the radar for an audit. This expertise is priceless.
But, don’t let your accountant do all the work. Knowing which deductions you are eligible for and keeping careful records of your receipts and expenses throughout the year can help ensure you save as much on your freelance taxes as possible. (And, since accountants are often paid by the hour, the less work they have to do, the more money you’ll save.)
Top 10 Tax Deductions For Freelancers
Whether you about to file your taxes and are searching for last-minute savings or you are trying to track your deductible expenses throughout the year to get ahead of the tax game, here are the top ten tax deductions freelancers and independent contractors should know about:
1. Self-Employment Tax Deduction
Remember when we said that freelancers are required to pay a 15.3% self-employment tax? Since freelancers are self-employed, they serve as both the employee and the employer, resulting in the 15.3% tax rate. In a traditional job, half of that tax would be covered by the employer.
This deduction allows you to deduct the employer-equivalent portion of your self-employment tax (approx. 50% – 57%). This deduction only affects your income tax. Contact an accountant or tax professional to see if you’re eligible for the self-employment tax deduction.
2. Health Insurance Premiums
Since freelancers have to provide their own health insurance, self-employed individuals can often deduct their health insurance premiums. The deduction cannot exceed your annual earned income.
3. Home Office Deduction
If you have a designated space in your home that is used exclusively for your business, you may be eligible for the home office deduction. You can use the simplified method and claim $5 per square foot, or you can use the complex method and write off direct expenses related to your office, including furniture, maintenance, equipment, and a portion of your utilities. Contact your accountant to see if you are eligible and to determine the best way to claim your home office deduction.
4. Office Supplies
Do you use printer ink or buy stamps to run your business? There’s a deduction for that!
Freelancers (and small businesses) can deduct office supplies so long as they are “ordinary and necessary” (which is the IRS’s rule of thumb for all deductions). Be sure to save all of your receipts so you can file your taxes properly at the end of the year.
As a freelancer, you can deduct travel expenses so long as the travel is strictly business-related. Again, be sure to save your receipts, airline tickets confirmations, etc.
If you’re self-employed, you can deduct business-related mileage. The 2019 mileage rate is 58 cents per mile, which adds up surprisingly quickly.
Carefully log your start and end mileage, your starting point, your destination, and the purpose of the trip in a notebook (or using a tax software program like QuickBooks Self-Employed). You can also choose to deduct vehicle expenses instead of mileage. Talk to your accountant about which option is best for you.
7. Hardware & Software
If you require specific hardware and software to run your business, these purchases can count as deductions. Talk to your accountant about the best way to deduct these expenses as some bigger purchases may need to be depreciated.
Certain educational or certification expenses can also be deducted so long as they are directly related to your current line of work, not a new career. Keep track of your tuition and other education expenses throughout the year to claim this deduction.
9. Retirement Contributions
Since self-employed individuals are responsible for their own retirement accounts, retirement contributions can also be deductible. Keep track of any contributions you make to your SEP or IRA plans throughout the year to take advantage of this deduction.
10. Advertising & Marketing
Advertising and marketing expenses used to expand your business and bring in new customers can also be deducted.
New Tax Laws May Equal Savings
The new Tax Cuts and Jobs Act was one of the biggest changes to tax law in decades. While the IRS is still rolling out the full implications of these changes, one of the most important changes for freelancers is the new 20% qualified business income deduction, otherwise known as the pass-through credit.
Certain types of businesses — like sole proprietors, S corporations, and partnerships — are eligible for an up to 20% deduction on taxable income. There is an income limit for this deduction, so be sure to talk to an accountant or tax professional to see if you qualify.
In addition to the new Tax Cuts and Jobs Act, the IRS and Treasury have announced a 90-day payment delay in light of the coronavirus. Individuals can delay payments on up to $1 million, which includes freelancers as freelancers fall under pass-through credit and file their business taxes through their individual tax returns. Visit the IRS for more information about this tax payment deadline.
Freelance Tax FAQs
Still have questions on self-employment taxes? See if we clear things up with the answers below, or leave us a comment with your specific question.
Now that you know about the top ten freelance tax deductions, it’s time to start saving! (Saving receipts, that is.) Make sure to carefully preserve all expense receipts and keep detailed financial records of anything you plan on deducting. This assists your accountant to maximize your deductions and helps prevent a tax audit.
You can now rest easy knowing exactly what’s expected of you as a freelancer when it comes to filing taxes. You can also be confident about the best ways to save money on your freelance taxes so you can continue to do what you love — and get paid for it.
As always, we recommend consulting an accountant or tax professional for the best tax advice.