How to Keep Track of Freelancer Tax Deductions and Financials
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A freelancer should understand their freelancer tax deductions and financials before filing their taxes. Many expenses that are deductible can include the cost of a quality monitor, 4K camcorder, and a digital SLR camera. There are limits on how much you can deduct, though, so it is wise to talk with a tax professional to determine which items qualify as business expenses. There are many benefits to freelancing as well, from the flexibility of working from home to the freedom to travel as you please.
For freelancers, car expenses can be a good tax deduction. Keep detailed records to compare actual expenses to the standard mileage rate. Another area to consider is health insurance premiums. While you can usually deduct these expenses on your state tax return, switching to a different method can be tricky. To keep your expenses in check, deposit a portion of your income each month into a savings account. And as long as you keep detailed records of your expenses, you can reduce your taxes considerably.
Deductions for Freelancers Who Drive
Whether you make daily deliveries or need to travel in order to meet with clients, freelancers are able to deduct their business-related mileage. The IRS will reimburse you per mile driven, but only if it’s related to the work you do.
In order to keep track of these freelancer tax deductions, you’ll need to keep a running log of how many miles you drive. You can do this by writing down your start and end mileage every time you drive your vehicle to complete freelance-related work.
Another easy way to log your mileage is through an app. There are several available that use your smartphone to track and log the number of miles driven per trip, as well as a running tally.
The Freelancer Self-Employed Deduction
One of the most important freelance tax deductions is your self-employment tax. Most freelancers are self-employed, so they need to pay a tax of 15.3%.
In an employer-employee job, your employer would typically pay half of the 15.3% rate. The good news is that there is something called the self-employed deduction. When you’re looking at freelancer financial planning, make sure you include this in your calculations.
During tax time, you’ll be able to deduct approximately 50-75% of this tax. It’s important to make sure that you’re eligible for the deduction, so contact a tax professional just to be sure.
Freelancer Tax Deductions: Home Office
Many freelancers take advantage of the home office deduction every year. If you dedicate a part of your home to your work, you should be able to use this as a deduction on your return.
Keep in mind that this area of the home must be used for work-related activities only. For example, you can’t deduct your bedroom if you use it to do your work on your laptop.
The IRS uses a set formula to determine a percentage of the deduction, or you can enter the information manually. Aside from the part of your home used as an office, you’re also able to deduct other expenses like utilities, Internet costs, and more.
The simplified method that the IRS uses offers $5 per square foot. However, you can also opt for the calculated method which will allow you to include itemized expenses.
Health Insurance, Travel, and Supplies
Tracking expenses as a freelancer can be tough, so it’s important that you save all of your receipts and keep them in a single location. One of many other freelancer tax deductions includes any health insurance premiums that you pay. Make sure you’re keeping track of these costs and include them on your return.
You can also deduct the cost of things required to do business, like furniture, computers, and office supplies. Put all of your receipts in a folder where you can refer back to them at the end of the year.
Office equipment like computers can be deducted, but the amount will decrease each year unless you buy something new. If you happen to travel for your work, keep all receipts for things like airplane tickets, hotels, and rental cars.
One way to track all of these costs is through a separate credit card that’s just for business. You can find one on this website, or talk to your local bank or credit union to apply for a business card.
Marketing and More
If you pay a company to market or advertise your business, these costs are also allowed to be deducted on your return. Whether it’s paying a graphic designer or signing up for paid ads on social media, be sure to keep track of every dime you spend on marketing to customers and clients.
You’re also allowed to deduct the cost of memberships to professional organizations. For example, if you pay a fee to be part of your local chamber of commerce, this cost may be a deduction on your taxes at the end of the year.
Another item you can deduct is any transaction fees you might have to pay to do business. If you sell items online through a website, every time you pay a fee, it should count toward your freelancer tax deductions.
There may be times that you need to utilize a contractor to help you get work done. If you’re paying someone else to help you complete a job, part of this cost may also be included as a deduction on your return.
Other items to keep in mind include your web hosting and website building costs. Any tools you use to complete your work or special clothing you need to wear could also be part of your tax deduction plan.
Make Freelancing Work for You
Keep these freelancer tax deductions in mind when you’re expense tracking. The more you spend on your work, the more you’ll be allowed to deduct on your annual tax return. When in doubt, speak to an accountant or tax professional for help and advice.
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