Being a freelancer and leaving the traditional dynamic of employer-employee relationship behinds means that you shoulder a larger tax burden as you have to pay both the employee and employer contribution to Medicare and Social Security, which is often referred to as the self-employment tax. However, the number of expenses that you can deduct from your taxes also significantly increases as a freelancer.
#1 Health Insurance Costs
Although you are responsible for paying your health insurance costs, you are also able to take a direct deduction from your income for your health insurance premium. For example, if your premium was $3,500 for 2017 and your taxable income was $30,000, your taxable income can be lowered to $26,500. This can help reduce the amount of taxes that you owe on your income if your deduction drops you down to a lower tax bracket.
#2 Self-Employment Tax
Although you pay essentially double the Medicare and Social Security contribution as a freelancer verse when you are an employee, you are also able to deduct half of that amount directly from your income. So even though you are paying more, you are essentially able to deduct the extra amount that you are paying from your income.
#3 Retirement Plan
You can still contribute to your retirement as a self-employed individual. You can set-up a simplified employee pension plan and make contributions to your pension plan that reduce your income. You will have to pay taxes when you withdraw money from your retirement account, but you will be able to save on your tax bill right now. Don't forget to set-up and contribute the maximum amount towards your retirement; it can significantly help lower your taxable income levels.
#4 Business Supplies
Almost all companies require the use of supplies. These supplies are considered business expenses. You are able to deduct your business expenses from the money that you make to determine your income. Kind of how large companies deduct their expenses and losses to come up with their profits; you do this to come up with your net income.
In order to deduct your business supplies though, you need to make sure that you are keeping track of all of your business supplies. You should keep a spreadsheet of each business supply purchase you make, the date of the purchase, what you purchased and how that supply benefits your business. At the end of the year
#5 Professional Development
As you are responsible for your professional development, you can deduct your professional development from your taxes as well. For example, if you need to take a certification course to further your freelance business, that would be a tax-deductible professional development expense. Or if you belong to a professional development organization or union, those membership fees would be deductible as well.
As a freelancer, you may pay more taxes up front but there are lots of opportunities that you can take advantage of in order to lower your taxable income as well. Contact a local accounting firm for more information and assistance.Share