Working as a freelancer can be a dream for those who don’t like to punch a time clock. There’s no one to answer to and it’s a schedule where a person can set their own hours. Truly, being a freelancer has a lot of benefits, but it also entails a few responsibilities that you won’t be doing when you are a traditional employee.
The Internal Revenue Service (IRS) considers self-employment as:
- Business owners (sole proprietors)
- Independent contractors that work directly with a client
As a freelancer, you are your own boss, thus you are a business owner. If you think you will be exempted from the many deductions a plain employee is charged thus receiving a meager “net” pay, filing your tax as a freelancer is a little bit complicated. On the lighter side, you can add deductions based on your report to the IRS.
The glitz and glamor of being a business owner goes away when it comes to the yearly tax report. Regardless of whether the taxes are self-prepared or done by an accountant, it is still important to know the deductions a business qualifies for so that proper measures can be taken throughout the year.
Though your main goal of filing your taxes as a freelancer is to reduce your taxable income, and that you have more business expenses to count for compared to a regular employee, you are only allowed by the IRS to report deductions as necessary for your business operations. Anything lavish is a red flag.
To avoid paying a ton to Uncle Sam, most people use a Form 1040 and use a Schedule C. One of the biggest goals of the self-employed is to write off as much as possible. The form starts allowing deductions on Line 8. Here, a write off for advertising is allocated. This will include anything that is done to promote the business. It can be business cards, printed brochures, and even a sponsorship to local community events. Anything used to promote the business should be listed here.
Car and truck expenses are often a big write-off, and the filer has two basic options. On line 9 of the schedule C, the number of miles driven for business can be entered. The IRS will times those miles by 57.5 cents and in 2021 it’s .54 cents In addition, any money paid for parking fees and other toll fees can be added too. This amount goes on line 9. In section B of form 4562, the other option is to itemize expenses versus mileage. This would be the costs of gas, insurance, repairs, and other car-related costs. It is usually much more advantageous to the bottom line to claim the mileage over actual expenses.
As a self-employed business professional, it is often necessary to hire other freelancers to help out. It could be a college student who is helping to do some filing or computer work. Hiring contractors goes line 11 or employees line 26 of the Schedule C and is known as Contract Labor. Any labor that the freelancer paid for but didn’t treat as a regular employee would go on this line. Don’t include fees for accountants and lawyers on this line, those must go on Line 17. Repairs for business equipment would go on Line 21, so it too doesn’t go in this lot. It is reserved for just the people paid to do a job for the business. See the IRS guidelines for more information in Independent Contractors.
If a business has any sort of equipment, then depreciation is going to play a big role in reducing the amount owed. This could be computers, cameras, machinery, and anything else that the company bought to utilize. The IRS allows you to claim the item’s depreciation over five years. There is an exception that will allow a business to write off the total amount up front, or they can split it up over the next five years. Line 13 is pretty self-explanatory.
As a freelance business, it is important to have insurance. All sorts of insurance premiums from auto to malpractice can be written off on Line 15. If the company pays for workers’ compensation, storm, accident, and even office insurance, write it off here.
Any loans that were taken out for the business can be reported on Line 16. If there was any interest paid in the loans, it’s also recorded here. This can be for credit card debt or mortgage interest used if taking the home office deduction. Only a small percentage of mortgage interest will apply to this deduction for home offices.
On Line 17, any legal or professional services can be written off. If there was a lawyer that did some work for the company or an accountant; their fees would be included here. It can be hard sometimes to determine between contract labor and professional services. Typically, anything other than legal or accounting goes under contract labor.
One of the ways to get some money back is office supplies. Every pen, paper-clip, stamp, and other professional tools can be written off on Line 18. Keep all those recipes from the year, as it can really add up to a great deal. Ink for the printer and printer paper are big expenses. Be sure to tally all that up and include it here.
Professional Equipment/Business Property
If the company leases any gear, like cars or professional equipment, then they can write it off on Line 20a. If a property is being rented for the business, then it can go under 20b, which is for other business property.
This is not typically a huge category for the freelancer. Line 21 is for those who pay for equipment to be repaired, or something of that nature. If the computer broke down and an IT professional had to come and fix it, then it would be categorized here. If something needs to be repaired in the home office, it should also go here. This category is not a big deduction area for the self-employed of a small home-based business.
Supplies for Physical Products
If a freelance business produces things to sell, then they can write off the supplies on Line 22. This can be copy paper, leather, or whatever else is needed to make the goods sold. The cost of the inventory shouldn’t go here. Just what had to be purchased within the last calendar year should be included.
Real Estate Taxes/Licenses
Any real estate taxes or federal unemployment taxes can be reported on Line 23. A home office allows a person to put a percentage of the real estate taxes on here too, but a calculation has to be done from Line 30 to see how much to claim.
Those who travel for the business purposes can enter the costs on Line 24a. Remember to only include meals, gas, mileage, and other expenses that were for actual business and not pleasure parts of the trip. Only reasonable meals count. Anything extravagant will be frowned on from the IRS.
If the office is not in the home, then a person can deduct 100 percent of the utilities. A home office goes according to a calculation from Line 30. Phone, gas, Internet service, and electric bills are categorized as utilities. This goes on line 28.
The biggest and most complex deduction is often the home office. For this to count on the freelancer taxes, it must be the location where most of the business work is done. The space must be only for business and nothing else. The freelancer must meet clients there regularly, do work there, or use it as a place to store or showcase inventory. The home and office must be measured and the calculations entered online. It is important that you have pictures of the office space and a copy of receipts associated with any claim to ensure that you won’t be triggering red flags to the IRS with your outlandish claims.
The Essence of Professional Help
Assuming the preparation and filing of tax as a freelancer can be quite tedious. It is better to have an accountant look over things so that there is some level of protection in the event of an audit. Especially that the recent COVID-19 pandemic had been an unimaginable adversary.
Understandably, preparing your tax and filing them is one of the constant hurdles in life that seems not to go down in terms of how much you will be taxed. The calculation is only an icing on the cake, but dealing with the ever-changing tax rate yearly is the main challenge.
Obviously all you ever wanted is to lower your self-employment tax. One thing to do is meet all the explanation of your expenses above. Any business-related expenses can reduce your tax but will also reduce your net income. Sounds fair and easy. Yet, if you look at it closely, you need someone more knowledgeable to handle your tax preparation. There are professionals who specialize in 1099 contractors. Through their help, you can lower your tax bill.
Let’s say that your income status doesn’t change drastically every year, but surprises are always there. Like the recent pandemic, not only regular employees lost their jobs, businesses too, and freelancers are no exemptions. Some of them, even working remotely or in the comfort of their home office, lose clients who also shut down their businesses. And if you are one of them, this will have a negative impact on your finances.
For this year, if your net worth amounts to $142,800, it will slash off a 15.3% self-employment tax rate, a little higher than $137,700 in 2020. This rate sums up Social Security and Medicare with 12.4% and 2.9%, respectively. You have to shoulder all of it because you are both responsible for the employer and employee’s portions.
When your financial situation becomes a mess, then it is better to have someone handle your problem. And also being aware that tax laws are constantly changing, that someone, a professional or an accountant, will guide you through.