3 Ways Freelancers Can Pay Less Income Tax
“We pay every dime we owe in taxes and not a penny more.”
Those were my marching orders when I was a Senior Tax Accountant in a large multi-national corporation. We were often reminded that tax avoidance was good business, but tax evasion could send us to prison.
I’ve employed the same philosophy as a business owner and freelancer. I make sure I file an accurate tax return, but I absolutely take advantage of legitimate tax planning strategies to reduce my taxes.
One caution — because everyone’s tax situation is unique, it’s important to consult a tax advisor who is knowledgeable about your business and personal finances so you get the maximum benefit from these strategies and stay within the law. I’m a CPA, but I’m not your CPA!
Also, these strategies apply to United States taxpayers. If you’re elsewhere in the world, check with your country’s laws to see if you have similar tax planning opportunities.
Now, let’s take a look at three ways you can reduce your tax liability as a freelance copywriter.
Strategy #1 — Business Expenses
The other day I read a social media post that claimed a business expense was deductible so “it’s free since the government pays for it.”
This could not be more wrong!
Yes, you can offset income with business expenses, but the government isn’t paying the expense for you. If they did, it would be a tax credit, not a tax deduction.
It’s good business to keep your expenses low so your profit is higher. And it’s good business to know how to maximize the business expense deductions you get.
Here are two ways savvy business owners can claim larger business expense deductions.
Home Office Expenses
If you have an area in your home dedicated exclusively for work, you can take a home office deduction for the space.
First, you’ll need to determine the square footage of your home office space. For example, if you’ve dedicated a bedroom in your home for your office, you’ll measure the size of the room and calculate the square footage — let’s assume it’s 100 square feet.
Now, divide the square footage of the room by the total square footage of the house. So, if you use 100 square feet out of a total of 2,000, your office would use 5% of the house.
You now have two options — you can keep track of the actual expenses of maintaining the home (mortgage or rent, electricity, water, etcetera) and claim 5% of the total costs as a home office deduction. Or, you can use the safe harbor deduction of $5 per square foot — $500 in our example.
Per Diem Travel Expenses
When you travel on business, you can deduct your airfare, hotel, and other travel-related expenses.
You can also deduct the expense of your meals in one of two ways.
The first way is to keep all of the receipts and deduct the actual amount you spent.
An alternative method is to deduct a per diem meals and incidentals expense each day for the trip. With this option, there’s no need to keep receipts — you simply deduct a flat amount for each day.
The flat amount is set by the IRS, and changes every year on October 1. For example, if you attend Bootcamp in May, you can use the per diem rate of $61 a day for each full day you’re there and $45.75 on first and last day of travel.
You can choose to use actual expenses or per diem rates every time you travel on business, although you can’t mix the two on any one trip.
Strategy #2 — Section 179 Expenses
Did you buy a new computer, software, or other qualifying equipment this year?
Normally, the IRS requires you to capitalize your purchases and depreciate the asset over a set time period — often five years or more.
Instead, you may qualify to immediately deduct the full amount you paid under IRS code Section 179. Your CPA or tax software can help you determine if you’re eligible.
For example, if you purchased a $1,500 laptop this year, the difference is a deduction of $1,500 instead of only $300.
That means your taxable income is $1,200 less, which could save you $100 or more in taxes, depending on your tax bracket.
Strategy #3 — Section 199A Income Exclusion
This is a brand-new tax law that can save you thousands of dollars in tax if you report your business income on your personal tax return.
Basically, Section 199A says if you have a qualified trade or business you can exclude 20% of your non-specified service trade or business (SSTB) income from your taxable income.
Unfortunately, copywriting income is considered SSTB income but there’s a special rule for very small businesses.
If your personal taxable income is $157,500 or less as a single taxpayer or $315,000 or less as a married couple, you can take the full 20% deduction, even if the income from your business is classified as SSTB income.
Not only do you save thousands of dollars, it also means you might be able to make the leap to full-time freelancer even sooner.
The Section 199A deduction is a complicated calculation, and takes into account all types of income you have, so be sure to check in with your tax advisor for help.
I know when you’re just starting out, hiring a CPA seems like an unnecessary expense, but getting good advice from the very beginning can save you hundreds or even thousands of dollars.
Today’s tax laws are complicated. A CPA can help you avoid any tax problems and make sure you don’t miss any tax-saving opportunities.
Be sure to take advantage of the special deductions for business owners and you’ll have some extra cash to enjoy!
Do you have any questions about how to get started with your business? Share with us in the comments below so we can guide you to additional resources.
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