I love paying taxes — said no one, ever.
We're fully aware of our tax responsibilities as freelancers, no doubt. But it's far easier to focus on growing our solopreneur businesses or spiral into an existential crisis amid looming deadlines than think about what we'll owe Uncle Sam.
We get it. As freelancers, we do carry a hefty tax burden. We need to pay federal taxes every year, plus estimated federal taxes every quarter. If your net income from self-employment (income after expenses) adds up to $400, you're on the hook for filing a federal income tax return.
There's also self-employment tax. This has to do with Social Security and Medicare tax, which is also known as FICA tax. In 2022, the tax rate is 15.3%. When you work for someone else, they foot half of these taxes. But when you're a freelancer, you're responsible for all of it.
Here's the good news: While you do owe taxes, there are also a bunch of tax deductions that you can scoop up. In turn, it can help bump down your taxable income. Think of it as one of the perks you've earned (each and every perk should indeed be celebrated) as a freelancer.
Before we dig in, for a tax deduction to count, it needs to be ordinary and necessary. Let's break that down: ordinary means it's accepted in your line of work. Necessary means that it's helpful for your business.
An example: That giant inflatable golden swan floatie? If you've used it for a mega pool party with your pals, it most likely won't fly as a business deduction. But if you're using that swan floatie for a video for your business YouTube channel, then it might fly as a legitimate tax deduction.
If you use your cell phone and internet for both professional and business, you can deduct a percentage. For instance, 60% of internet time is spent on work-related tasks, while 10% of your phone usage is for work. That's how much you can deduct for taxes.
If you freelance and work out of your home, you might qualify for the home office deduction. For you to qualify, your home office needs to check off two points. First, it needs to be a space dedicated exclusively and solely for your business. For instance, this space can't double up as, say, a dining area and office space. It also needs to be your primary location where you do work.
Second, if your home workspace is the primary place where you do business, it might qualify for the home office deduction. If your home office makes up 10% of your place. In that case, you can deduct 10% of your rent or mortgage, along with any utilities.
If you use your car or truck for your business, like to drive to meet with clients, or to pick up supplies, then the costs of operating it can be deductible. This includes registration fees, licenses, repairs and maintenance, insurance, and mileage.
If you use your car for work, you can deduct mileage you put on it. For the 2021 tax year, the mileage rate is $0.56 per mile. For the 2022 tax year, the mileage rate is $0.58.5 per mile. When you figure in car expenses, there are two ways you can go about pinpointing your deduction. Depending on your situation, you can use the standard mileage rate, or the actual mileage rate.
Any software that you need to run your freelance business — think cloud accounting software, Zoom premium subscriptions, cloud storage, productivity platforms, design and photography software — can be written off as a tax deduction.
Office supplies and equipment. Pens, pencils, notebooks, laptops, keyboards — any equipment or supplies that you purchase for your business is tax deductible. Shipping costs and postage? Those are also tax deductible.
Taking a business trip? Expenses related to your business are deductible. Meals related to business — think coffee with a potential client, or lunch for a business purpose — are 50% deductible. However, the IRS has a rule that these meals can't be "lavish" or "extravagant."
This doesn't necessarily mean that just because you threw down $500 for a business dinner that it's over-the-top based on the cost alone. It just needs to be a reasonable expense based on the context.
So a monthly membership for a movie lovers group or the athletic club probably won't cut it as a business expense. But membership fees to professional groups and boards, trade associations, and civic and public service organizations do.
If you've hired a bookkeeper, accountant, or attorney for legal services that are needed to operate your business, those count as business deductions come tax time.
You may be able to deduct 100% of your dental and health insurance premiums. This includes premiums you purchase for your spouse and dependents under age 27. In some cases, premiums for long-term care insurance might also count.
Flyers, postcards, web domains, web hosting, and a subscription to Behance or a portfolio platform for creatives to showcase your work all can count as tax deductions.
A good rule of thumb is to set aside a portion of each paycheck toward your taxes. If you're diligent and keep records of all and any expenses that count as a deduction, then there's a chance that part of your tax responsibility will be lowered.
To help you save for taxes, check out Lance. It’s a business banking account for freelancers that automatically divvies up your income into a few pre-set Stacks (aka subaccounts) every time you get paid. So you can automatically stash away some funds for your taxes.
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