The advantages of being a self-employed or independent contractor are numerous. You have the freedom and flexibility to do your job, and it's also a great way to start your own business. On the other hand, costs can increase quickly, so it's good to know what can be filed on a tax return as a freelancer. Let's dive in!
What taxes do freelancers pay?
Independent contractors (including contractors and self-employed) must pay:
Income tax: This type of tax is calculated based on the income generated by a person or a company.
Self-employment taxes: This consists of Social Security and Medicare taxes.
Unlike full-time employees, whose income from Medicare, Social Security, and taxes are automatically deducted from salary, you must deduct it from your earned income. You can claim tax deductions for various items that are considered business operating expenses.
Keep in mind that these taxes are not tax-deductible:
Federal income tax, including self-employment tax
Taxes on personal property
Sales tax for buyers of products or services.
Business tax deductions for a freelancer: a detailed analysis
Home office expenses
Independent contractors and many freelancers generally work from their home offices. As this is a business place, you can cancel part of the mortgage interest, rent, property tax or property tax, security system, home insurance, etc., as long as you have a dedicated space for commercial purposes.
How do I calculate home office deduction?
You can pick between two methods of calculating tax deductions for your home office. We suggest you analyze your costs across both and see which scenario has a lower tax collection result.
Standard Method: You can calculate the deduction for your home office by determining the percentage of square footage it takes out from the total square footage of your home. This information must be completed on IRS Form 8820.
Simplified Method: If your home office space is less than 300 square meters, you can use the IRS Simplified Calculation. Instead of listing all of your expenses, you can claim a standard deduction of $5 per square foot of home office space. The maximum deduction is $1,500 per year.
Office expenses
Notwithstanding the office space location, there are certain items for which it is possible to request a tax return.
Office supplies: You can completely deduct office supplies, such as pens, paper, postage, and other stationery that you use daily.
Repairs and maintenance: Accidental repairs and maintenance of offices and equipment used at work are tax-deductible.
Utilities: Electricity, water, and internet bills may also be tax-deductible. Keep in mind that these can only be deducted if you are not working in a home office.
Advertising costs
You can get a tax deduction for all your advertising expenses, online and offline. Some of the activities include posting ads on Facebook, Google ads, trade show promotions, and printing business cards, brochures, or other promotional materials. If you use a public relations agency or independent professional services, you can also deduct your commissions.
Fees and commissions
All commissions paid to non-employees for marketing and sales purposes are tax-deductible. This includes sales representatives' services or commissions charged by marketing channels and platforms such as Amazon or eBay.
Please note that if you pay more than $600 in a fiscal year, you will need to complete a 1099-NEC (formerly 1099-MISC) form.
Employment contract
If you hire independent contractors, like a designer to create a brochure or a web developer to create a website, you can claim a tax return for your commissions.
Again, if you pay more than $600 per tax year, complete Form 1099-NEC.
Legal Professional, accounting, and tax services
If you hire people for professional services, such as tax advisers (in tax preparation for Schedule C), lawyers, or accountants, these expenses will be considered deductible expenses.
Mobile phone bill
You probably use your phone a lot as an independent contractor. If you have a dedicated mobile phone for business purposes, you can submit a tax deduction. If you use a mobile phone for personal and business purposes, you can deduct a portion of your monthly bill using the actual expense method.
Depreciation of equipment
Freelancers purchase the specific equipment needed to do the job. Over time, the value of this equipment depreciates.
For instance, if you bought a laptop or printer three years ago, it is now worth less than what you bought it for. According to the IRS, if you've been using the equipment for more than a year, the reduction may be written off on your tax return.
Travel cost
You can deduct your travel expenses as long as the trip is for business only. This includes accommodation, meals, airline tickets, or other transportation costs that arise during the business trip. Make sure to keep track of all receipts, as they will be used to reference the company's tax returns.
Car expenses
If you bought a car or other vehicle with a business name, it is fully tax-deductible. However, if you are using a car for personal and business purposes, you will need to apply the actual expense method. Therefore, you can deduct a portion of your car expenses, mileage, taxes, and parking fees used only for business purposes.
The IRS has a standard mileage rate of $0.57 per mile. Always save all receipts and add them when submitting the 1099 MISC form. Please note that the purchase of a car is not tax-deductible. Rules and fares change frequently, so stay tuned.
Business insurance
Corporate insurance premiums are also tax-deductible. This includes general liability insurance, theft, fire, and compensation, if applicable.
Health insurance
As a freelancer, your health insurance may be deductible unless
You are eligible to participate in another employer's plan (your wife, for example) and choose not to participate.
If you are self-employed but have another job
Please note that it is not possible to deduct all premiums from your health insurance. You are only eligible for an amount less than the income generated by business operations.
Employee pension plan costs
If you have employee or employer plans, such as 401 (k) or SIMPLE-IRA, you can claim a tax deduction for these costs. Please note that your SEP or IRA retirement account is not tax-deductible.
Commercial licenses
You can deduct all business licenses, certifications, and regulatory fees directly related to your business operations. If you need to operate taxes or licenses for small businesses, they are also subject to a tax waiver.
Business creation costs
If you start a new business this fiscal year, you can deduct up to $5,000 of all costs. Typical upfront costs can be market research, advertising, starting a business, or hiring a consultant.
Passive interest
We have already discussed mortgage interest for deductible office expenses and other interest rates, such as credit cards, equipment loans, lines of credit, etc. they are also tax-deductible.
Tax deduction for education costs
Any independent entrepreneur understands the benefits of continuous development, as it usually results in an increased workload. The good news is that all webinars, trade books, and trade magazine subscriptions can be tax-deductible.
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Don Bell Law