Full or part-time freelancing provides job flexibility and additional income, but dealing with taxes can be a hassle. When you don’t have taxes taken out of your paycheck automatically, you have to figure out your tax bill and pay it yourself.
Underestimating your tax obligations throughout the year can result in a hefty bill in April. However, there are a number of tax breaks open to independent contractors that might help lessen the blow.
What Tax Breaks Are Available to Freelancers?
Freelancers and independent contractors can lower their taxable income by deducting certain business-related costs. To take advantage of the deductions, you need not operate a full-fledged firm.
This means that those who work in the gig economy on the side, such as drivers for ridesharing applications, may be able to deduct the costs associated with their vehicles, such as gas, maintenance, and phone service.
Top Tax Breaks for Independent Contractors
According to IRS guidelines, in order to be tax deductible, a business expense must be “necessary and ordinary,” or a reasonable and customary outlay for a company of that type.
Here is a list of the most common tax write-offs for independent contractors.
(a) Costs Associated with Advertising, Marketing, and Use of the Internet
As long as they are necessary for the operation of your business, the money you spend on marketing, website development, and maintenance may be deducted from your taxable income.
(b) Items for the Office and Workshop
Laptops, printers, books, and other office supplies may all have a deductible cost. Depreciation allows you to write off the cost of a major asset, such a computer, over several years.
(c) The Price of a Car
Depreciation, lease payments, gasoline, tires, insurance, and registration costs may all be deductible for freelancers who use a car for work.
But there’s a catch: if you drive your automobile for both work and play, you may only deduct the portion of your gas and maintenance costs that directly benefit your company, according to the Internal Revenue Service.
For vehicle-related deductions, you can either use the normal mileage rate (currently 65.5 cents per mile traveled for business in 2023) or provide proof of actual expenditures incurred. If both options are viable, the one with the greater tax benefit should be chosen.
(d) Insurance for Companies and People
You may be able to write off the cost of premiums for company insurance policies including liability and medical malpractice protection. Your health insurance premiums for yourself, your spouse, and your dependents may be tax deductible if you’re self-employed and satisfy certain requirements.
(e) Organizational Memberships
Membership fees to social organizations, such as country clubs or gyms, are not tax deductible, even if you use them to network and bring in new clients. However, dues paid to the regional business chamber, industry groups, or other similar organizations could be tax deductible.
(f) Education Expenses
Courses and other education costs related to your business may be written off, and if you travel for classes or to attend a conference, the travel costs may be deductible as well. But you must be able to prove that the education helps you maintain or improve your skills or is required by law to help you stay in your profession or job.
(g) Costs of Lawyers and Other Experts
Let’s say you decide to seek the counsel of an attorney in order to construct your independent contractor agreement or submit a trademark. It is possible to write off the fees and the cost of accounting and bookkeeping services.
(h) Money Spent on a Home Office
The home office deduction is available to those who have a specific room in their residence that is used exclusively for business purposes. Those who have picked a house with a spare bedroom or two will find this to their advantage.
(i) Savings for Retirement
Saving for retirement with a tax advantage from a regular IRA, SEP IRA, or SIMPLE IRA is possible. However, the precise amount that might be deducted will depend on factors including your income and whether or not you or your spouse participates in a workplace retirement plan.
Let us know if you need any help.
Contact Surya Padhi at Sure Financials for any questions and clarification. Surya Padhi is an expert who keeps current on tax law changes as well as a member of the National Association of Tax Professionals National Association of Tax Professionals (NATP) and National Association of Enrolled Agents (naea.org). Visit Welcome | Sure Financials & Tax Services, LLC (surefintaxsvs.com) for more information and contact us by calling +1 908.300.9193.
