Commonly Missed Tax Deductible Expenses For Your Home Office
If you work from a home office, there are plenty of expenses you can deduct from your tax bill to save money. Don’t miss some of the most common.
AND.CO is now Fiverr Workspace
Congress has just passed the most sweeping reform to the tax code in more than 30 years. As a freelancer, managing your own taxes and understanding the implications for your business can be challenging, especially when the rules change.
This FAQ is designed to help you navigate the changes, but it should not be considered professional counsel. We suggest that all freelancers educate themselves using publicly available information and also enlist the guidance of a qualified accountant for more in-depth and situation specific questions.
Related: 6 Common Self-Employment Tax Mistakes to Avoid
The most important policy change for freelancers to focus on is the new pass-through deduction. Many small businesses operate as “pass-through entities” in the form of sole-proprietorships, LLCs or S-Corps. In these cases, the business owners or freelancers pay individual tax on earnings but there is no double taxation in the form of corporate taxes.
Since the new tax policy lowers the corporate tax rate from 35% to 21%, a new pass-through provision was introduced to give an economic boost to small businesses (which do not pay corporate taxes), too. So, how does it work?
Under the new policy, freelancers operating as pass-through entities can deduct 20% of their revenue from their taxable income. The provision is taken “below the line,” which means that while it lowers your taxable income it will not impact your adjusted gross income (AGI).
Here’s a very simplified look at the calculation:
If your taxable income is below the $157,500 threshold ($315,000 for joint-filers), you can deduct 20% of the pass-through income generated by your business. The catch: This deduction may not be greater than 20% of your taxable income.
Example: If your taxable income is $60,000, you may deduct 20% from that, which resets your taxable income to $48,000. Looking at federal taxes only for the sake of simplicity, at a 22% tax rate, you would pay $10,560 in federal taxes versus $13,200.
Related: Tax and Legal Watch Outs for Digital Nomads
If your earnings put you above the $157,500 threshold, things get a little more complicated. This ceiling was designed to discourage high-income business owners from creatively gaming the system to reduce their personal tax obligations.
If you earn between $157,500 and $207,500, you are only eligible for a fraction of the deduction. In those cases, the deduction will be limited to whichever is greater: 50% of the W-2 wages paid by the business or 25% of W-2 wages + 2.5% of “qualified property.” Put another way, you will only receive a fraction of the pass-through deduction.
If you’re a single taxpayer earning income above $207,500, you are not eligible for the deduction at all.
Professional services freelancers (consultants, lawyers, accountants, etc.) are not allowed to claim the deduction if they make more than $157,500 as a single taxpayer or $315,000 if filing jointly.
The pass-through deduction was designed to create parity between small business owners (many of which operate as LLCs) and large businesses (C-corps), the latter of which benefits from the reduced corporate tax rate (from 35% to 21%). As such, in theory, most freelancers will not need to incorporate, as the net tax obligation will be the same no matter if you’re a single member LLC, partnership or an S-Corp. (You can read a more lengthy breakdown of that here.)
If you have an Fiverr Workspace from Fiverr account (and you’re based in the U.S.), you have access to our special discount on Visor’s Tax services. Visor will assign you your own tax professional to give you advice throughout the year and do your taxes for you.
Our automated technology and intuitive tools take care of the small stuff so you can
focus on what matters