Reply
cancel
Showing results for 
Search instead for 
Did you mean: 
Reply

The 8 Most Important U.S. Tax Benefits and Deductions for Freelancers

Highlighted
Community Manager
Lena E Community Manager Member Since: Apr 7, 2015
1 of 1

The 8 Most Important U.S. Tax Benefits and Deductions for Freelancers

Written by David Rodeck

 

Life as a freelancer comes with a number of advantages compared to life as an employee. You have the ability to set your own hours, grow your income, and build a business according to your own terms. The downside is that you also face expenses and challenges that many employees don’t have to worry about.

To help you manage these expenses, the U.S. tax code offers a number of deductions for self-employed workers. Here are some of the most important tax benefits and deductions that all freelancers should know about.

 

  1. The home office deduction
    If you work from home, you’ll be able to deduct part of your rent or mortgage payment under the home office deduction. To qualify for this deduction, you need to designate part of your house or apartment as your “home office” and primarily use it for your business.

    To calculate the deduction, measure the approximate square footage of your home office and divide it by the square footage of your entire house or apartment. This is the percentage of your monthly rent or mortgage payment that you can deduct. For example, if your house is 300 square feet and your office takes up 150 square feet, you can deduct half of your monthly rent or mortgage payment. There’s a maximum of 300 square feet for this deduction.


    You can also deduct expenses like utilities, internet, and phone bills for your home office. For example, if one third of your home is used for your home office, you can deduct one third of your utility bills. If you split your phone and internet time equally between work and personal use, you can deduct half of these bills.

  1. Deduction for office supplies
    You can deduct the cost of all the office supplies you buy for your business like paper, pens, staplers, printer cartridges, etc. Be sure to keep track of how much you spend and store your receipts in a safe place because every purchase makes a difference for your end-of-the-year tax return.


    Larger items, like a computer, are also deductible when purchased for your business. When you buy a computer, you have the choice between spreading the deduction over several years, a process known as depreciation, or you can deduct the entire purchase all at once. Most people find it easiest to take the deduction all at once. However, if you think your income and tax bill will be higher in the future, it could be worth spreading the deduction over several years.

  1. Deduction for travel expenses
    If you ever need to travel for your business, your expenses could be deductible. In general, you can deduct travel expenses like flights, hotel rooms, car rentals, etc. To deduct these expenses, you need to be traveling somewhere for business like going to see a client or attending an industry conference. However, if you want to combine some vacation time with your business trip, you can and part of your expenses will still be deductible as long as the trip is primarily related to business. To determine if a trip is primarily related to business or pleasure, the relative amount of time spent on business versus vacation is an important factor. If at least half the time was spent working, then you can likely deduct a portion of the expenses from your taxes.


  1. Deduction for advertising expenses and membership dues
    Expenses related to advertising your business and hopefully bringing in more business are tax deductible. This includes both print and web advertising. If you’ve set up a website for your freelancing business, all the costs of launching and hosting the website are deductible. In addition, if you pay any membership dues for organizations that help with your business or provide continuing education, the dues and fees are also deductible. For example, Upwork membership and service fees are all tax deductible.

  1. Deduction for insurance premiums
    Self-employed workers like freelancers can deduct their health insurance premiums. Costs to cover yourself and your family can be claimed as a deduction against your income. Premiums paid for qualified long-term care insurance are also partially deductible. Other health care expenses like deductibles and copayments may be deductible but only if they exceed 10% of your adjusted gross income for the year (though persons age 65 and older may deduct medical expenses that exceed 7.5% of adjusted gross income through December 31, 2016).

    You can also deduct the insurance premiums for liability coverage to protect yourself against a lawsuit as well as part of your homeowner’s insurance premiums to cover your home office. If you pay for workers’ compensation insurance and/or state unemployment taxes, these expenses are deductible as well. However, you can’t deduct the premiums for disability insurance, or for life insurance where you are the direct or indirect beneficiary of the life insurance policy.

  1. Larger retirement plan contribution limit
    As a self-employed freelancer, you won’t have access to a work-sponsored company retirement plan like a 401k, unless you go through the expense of setting one up for yourself, which doesn’t make sense for most freelancers. This potentially would make it harder for self-employed workers to save for retirement because work plans often have a higher contribution limit than an Individual Retirement Account (IRA). The maximum amount you can contribute to an IRA is only $5,500 per year if you’re younger than 50 or $6,500 if you’re 50 or older.

    Fortunately, as a freelancer, you can set up a SEP IRA, which is a retirement plan for self-employed workers and other small business owners. With this plan, you can contribute up to a maximum of $53,000 a year, depending on your income. Every dollar you put in your SEP IRA is deductible from your income so you can save for retirement while lowering your tax bill.

  1. Lower self-employment taxes through an LLC
    If your freelancing business is fairly established, it may be worth launching an LLC. While setting up an LLC takes some time and costs money, it does come with considerable benefits. First, an LLC has better liability protection. When you do business as an individual freelancer, you’re working as a sole proprietorship. If you’re ever sued for your work, you could be held personally liable and lose your personal savings. An LLC has limited liability, which means it can protect your personal assets from a legal claim based on your freelance work.


    Second, an LLC can help lower the amount you owe in self-employment taxes, which are taxes specifically used to pay for Social Security and Medicare. These taxes are split between an employee and an employer, with each paying half. As a freelancer, you are your own employer so you end up paying roughly double the amount. By setting up an LLC, you’re setting up a company in which you’re the only owner and employee. This business structure lets you divide your income between salary and profit. While you need to pay self-employment taxes on your salary, you don’t pay self-employment taxes on your profits.

    This is a simple overview of a somewhat complicated tax planning strategy. Before considering this move, you should speak to an accountant or an attorney who specializes in business planning. When used properly, this strategy can potentially save an established freelancer thousands of dollars on their self-employment taxes.
  1. Deduction for tax preparation fees
    When filing taxes as a self-employed freelancer, it’s probably worth having a trained tax professional prepare your return. This will help you avoid costly mistakes and could pay for itself as your accountant can help make sure you don’t overlook any valuable tax benefits. Even better, tax preparation fees are tax deductible so you’ll get one more way to save while ensuring your return is handled properly.


    By taking advantage of these top deductions for freelancers, you’re more likely to have more money left over for yourself and your business.

    Although this list applies only to the U.S., many other countries also have tax breaks and other incentives available for small businesses. It’s a good idea for every freelancer to speak to their personal advisors about what’s available to them, as this article presents general information only and does not constitute tax or legal advice.

THIS ARTICLE DOES NOT ADDRESS ALL TAX ISSUES FOR FREELANCERS, AND IT CANNOT AND SHOULD NOT BE RELIED UPON AS LEGAL ADVICE. READERS ARE STRONGLY ENCOURAGED TO SEEK TAX ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

Untitled
TOP KUDOED MEMBERS