6 Tax-Saving Strategies Every Freelancer Should Know

Freelancing offers the freedom to choose clients, set schedules, and work independently. However, this comes with the responsibility of managing one’s finances, including tax obligations. Without an employer to withhold taxes from your paycheck, it’s up to you to stay compliant with tax laws and take advantage of any opportunities to reduce your tax liability. 

Thankfully, there are several ways to make it happen, especially if you’re a freelancer. 

Understanding Self-Employment Tax

As a freelancer, you are considered self-employed and must pay self-employment tax. This particular tax comprises both the employer and employee portions of Social Security and Medicare taxes, totaling 15.3% of your net earnings. 

To minimize this tax burden, freelancers can deduct the employer portion (7.65%) of the self-employment tax when calculating their adjusted gross income (AGI). This dedication can effectively reduce taxable income and result in substantial tax savings.

Tax-Saving Strategies for Freelancers to Consider

Method #1: Deduct Business Expenses

One of the most effective ways to reduce taxable income is by deducting business expenses. You can claim deductions for various expenses related to your line of work, including:

• Office supplies and equipment
• Marketing and advertising costs
• Travel expenses related to business
• Internet and phone bills (proportionate to business use)
• Membership fees for professional organizations
• Subscriptions to industry-related publications

Save receipts and maintain a log of all expenses. Accounting software can also help streamline this process and ensure you capture all possible deductions.

Method #2: Utilize the Qualified Business Income Deduction (QBI)

Introduced under the Tax Cuts and Jobs Act of 2017, the QBI allows eligible freelancers to deduct up to 20% of their qualified business income. This deduction is available to sole proprietors, partnerships, S corporations, and some trusts and estates. However, there are specific limitations and thresholds based on income and the type of business.

Your total taxable income must be below specific thresholds to qualify: $182,100 for single filers and $364,200 for married couples filing jointly. The deduction may be subject to phase-outs and additional limitations if your income exceeds these limits. Hiring a tax preparer can help you determine eligibility and maximize this deduction.

Method #3: Home Office Deduction

Freelancers working from home can take advantage of the home office deduction. To qualify, the space must be used regularly and exclusively for business purposes. It doesn’t have to be a separate room, but it should be a clearly defined area.

There are two ways to calculate this deduction:

• Simplified Method: You can deduct $5 per square foot of your home used for business, up to a maximum of 300 square feet.
• Regular Method: Calculate actual expenses, such as rent, utilities, and home maintenance, and deduct the proportion corresponding to your home office space.

Method #4: Health Insurance Deductions

Did you know you can deduct health insurance premiums for yourself, your spouse, and your dependents? Just make sure you are not eligible for employer-subsidized health insurance through another job or your spouse’s employer. You can also open a Health Savings Account (HSA) with a high-deductible health plan. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. 

For 2024, the contribution limits are $3,850 for individuals and $7,750 for families, with an additional $1,000 catch-up contribution for those aged 55 and older.

Method #5: Contribute to Retirement Accounts

Contributing to retirement accounts not only secures your financial future but also offers significant tax benefits. Some of the retirement plan options to consider include:

• SEP-IRA (Simplified Employee Pension Individual Retirement Arrangement): Allows contributions of up to 25% of net earnings, up to a maximum of $66,000. Contributions are tax-deductible.
• SIMPLE IRA (Savings Incentive Match Plan for Employees): Permits contributions up to $15,500, with an additional $3,500 catch-up contribution for those over 50.
• Solo 401(k): Suitable for self-employed individuals with no employees, allowing contributions up to $66,000, including both employee and employer contributions.
• Traditional IRA: Contributions are tax-deductible if you meet certain income requirements. The contribution limit is $6,500, or $7,500 if you are 50 or older.

Method #6: Keep Accurate Records

Proper record-keeping ensures that deductions and credits claimed on your tax return can be substantiated and simplifies the tax preparation process. Monitor the following records:

• Income Records: Track all sources of income, including invoices, bank statements, and 1099 forms used for the freelancing business.
• Expense Receipts: Keep receipts for all business-related expenses, such as equipment, supplies, travel, and meals.
• Mileage Logs: If you use your vehicle for business purposes, maintain a detailed mileage log, including dates, distances, and purposes of trips.
• Tax Forms and Returns: Retain copies of filed tax returns and any related forms or correspondence from the IRS. 

The Role of Tax Preparers in Freelancer Tax Planning

While freelancers can manage their taxes independently, hiring a tax professional can provide numerous benefits. These may include the following:

Accurate and Efficient Tax Filing

Tax preparers can ensure that all necessary forms are completed correctly and submitted by the deadlines. Accuracy and efficiency are particularly important for freelancers with complex tax situations, such as multiple income streams or extensive deductions.

Strategic Tax Planning

A tax preparer can assist with strategic tax planning throughout the year, not just during tax season. This includes advising on estimated tax payments, retirement contributions, and major financial decisions that could impact your tax situation.

Representation in Case of Audits

Having a tax preparer can be invaluable in the event of an IRS audit. They can represent freelancers, provide the necessary documentation, and handle communications with the IRS, ensuring the audit process is as smooth as possible.

Main Takeaway

Freelancers have unique tax obligations and opportunities for savings. By understanding your tax obligations and implementing these tax-saving strategies, you can significantly reduce your tax liability. Enlisting the help of a tax preparer can ensure freelancers not only comply with tax laws but also make the most of available tax-saving opportunities. 

At NCH, we understand the unique challenges freelancers face and work closely with each client to optimize their tax situation. With our help, you can focus on running your business without the added stress of tax compliance.

Call us at 1-800-508-1729 or visit our website to work with a tax professional today!

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.