If you are like most freelancers, you are probably in search of new ways to lower your annual tax bill. Many freelancers can pay less -- legally, of course -- with some simple advance planning. Here are four ways you can consider to save money and pay less tax for freelancers in 2016, brought to you by Shared Economy CPA.
Working from Home
Many freelancers work from home because it is more cost-effective and it provides individuals more productivity as they are in the comfort of their own home. Working from home can also generate a significant amount of business expenses that can help you reduce your taxes.
When determining whether or not to expense the office portion of your room, it is important to ask yourself if the space was used regularly and exclusively for business. If so, then it can be considered tax deductible. A few common expenses that you can consider expensing is the proportionate amount of your utilities bill, cable and Internet, and other costs associated with the monthly fees of your home.
Keep Track of All Business Expenses
In order to make sure that you take all possible deductions, you need to make sure that you save all receipts and expense account records. Start by downloading financial statement information from your bank, Freelancer, PayPal, Venmo and any other services that you use to conduct business.
As a freelancer, you also need to keep track of receipts related to self-employment expenses including the materials you purchase in order to perform work for clients, office expenses, travel and marketing. There are smartphone apps that will allow you to photograph and keep track of your receipts so that you never have to worry about losing the paper copies.
Plan Your Trips and Business Accordingly
As long as the primary purpose of your trip is business, it is okay to write off a business trip that includes some elements of pleasure. You can deduct your lodging and transportation costs. The deduction for business meals is generally limited to 50% of the cost. If you opt to drive to your destination rather than fly, the standard mileage rate for business for 2016 is 54 cents per mile for business miles driven.
The key to making sure that you can successfully claim a deduction for business travel is keeping careful records. Review the business travel rules outlined by the IRS so that you will have the information available to support your claims in case it is challenged by the IRS.
Understand Your Employment Status as 1099 Worker (for U.S. Individuals)
The IRS requires that self-employed individuals who are paid on a 1099 submit Form 1040 along with Schedule C when they submit their annual personal income taxes. Form 1040 is the form that most people file for their personal income taxes. Schedule C is the schedule that accounts for personal business income.
As a self-employed individual you must also pay self-employment tax, which includes Social Security and Medicare tax. Self-employment taxes are filed using estimated tax payments and you must report your Social Security and Medicare taxes using Schedule SE (Form 1040), Self-Employment Tax.
Generally, you are required to file an income tax return if your net earnings from self-employment are $400 or greater. As a freelancer, your status as a 1099 worker will allow you to deduct regular business expenses. These expenses can include cost of materials, office rent, office furniture, computers, payroll, and legal fees. Receipts related to running a business from your home including certain utilities, mortgage, rent and vehicle expenses may also qualify for deductions on your taxes.
If you have any further questions regarding your freelance taxes, please feel free to contact us.