Tax professionals took some time from their busy tax season schedules to weigh in on some issues freelancers face when filing their self-employment taxes.
As a freelancer you most likely know by now that the deadline for filing 2021 income taxes is April 18, 2022, so you won’t have an extension like last year due to the COVID pandemic That means that you must plan your time well and get your documents in order so you can file your return on time without missing on opportunity to maximize your deductions.
If you earn income from freelancing, you are likely eligible for a few key deductions that can lower your tax burden. While they make take a little extra time to document and keep track of, deductions can save you serious money on your tax bill.
Here are a few that freelancers shouldn’t sleep on:
Self-Employment Tax Deduction
As a freelancer, you need to pay self-employment tax, on top of your income tax.
The self-employment tax covers your share of Social Security and Medicare contributions, which would normally be split with your full-time employer. The tax rate for self-employment is 15.3% of net earnings which is made of the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings.
While the self-employment tax adds to what you might owe, the good news is that you can claim a portion of the tax using the self-employment tax deduction. The deduction is equal to 50 percent of your self-employment tax and is applied towards your adjusted gross income.
How to Claim: Calculate your self-employment tax and deduction amount using Schedule SE. Copy the deduction amount from Line 6 onto Schedule 1 (Form 1040 or 1040-SR) Line 14.
Do you have a home office? If so, you definitely should take advantage of the Home Office Deduction.
You are likely eligible as long as your home office is where you do most of your work and you use the space regularly and exclusively for freelancing. In other words, if you work at your kitchen table that doesn’t really count because you also eat there. But if you have a room dedicated to your freelancing job, then you should be covered.
There are two ways to calculate the home office deduction. The regular method uses a complex formula to calculate the actual expenses of your home office space, or you can use the simplified method which gives you a standard deduction of $5 per square foot. The max amount of space you can write off for either deduction is 300 square feet.
How to claim: If you use the simplified method, enter the amount on Schedule A (Form 1040 or 1040 SR). If using the regular method, use Form 8829 to calculate the deduction amount and enter it on Line 30 of the Schedule C form.
Health Insurance Premiums
This is a big one.
If you are paying for your own health insurance premiums, and those of your dependents—you can deduct the cost. To qualify you must not have any other health insurance, including being covered by your spouse’s plan. You also must have some business income, and the amount you deduct cannot exceed that. If you had a business loss, you can’t take the deduction. Also note this is a deduction towards your personal income tax, not your self-employment tax. The amount for your deduction in 2022 will be limited to expenses that exceed 7.5% of your AGI (Adjusted Gross Income), meaning that the amount of medical expense equal to the first 7.5% of your income isn’t deductible (e.g. if you earn $100,000 the first $7,500 of your health insurance or other medical bills will not be deductible).
How to claim: Enter the total amount of eligible health insurance premiums on Schedule 1 (Form 1040 or 1040-SR) Line 16.
When you promote your business you can be entitled to some good tax deductions as a self-employed taxpayer. By definition you can deduct all expenses for keeping ‘your name before the public if it relates to business you reasonably expect to gain in the future.’ The type of advertising matters of course, with lobbying expenses, political parties and candidates and any publications related to them being good examples of expenses you can’t deduct However, you should check with your accountant whether you are able to deduct the expenses on your Fiverr Promoted Gigs.
How to claim: To be eligible for deducting advertising, you need to go to Schedule C in your return and report your advertising expenses.
There are even more write-offs that you might be able to take advantage of if you are a freelancer. Just remember it has to be related to your business in order to be deductible. This list isn’t exhaustive, so be sure to check with an accountant or tax preparer to find even more ways to reduce your taxes.
- Commissions and fees paid
- Web site development and domain fees
- Software and services like Fiverr Workspace
- Educational expenses related to your career as a freelancer
- Business-related travel
How to claim: All of these expenses can be claimed on Part II of the Schedule C form. If there isn’t a line item for it specifically, you can list “Other Expenses” in Part IV.
Maximize Your Deductions
Documenting deductions does take time, so make sure you find out what you’re entitled to asap so you’re prepared to use it in your 2021 return no later than April 18th 2022 Use this opportunity to take a hard look at your freelancing business to find any eligible deductions you can. Your future self will thank you.