How to Save on Taxes as a Freelancer

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Being a freelancer comes with the benefit of having complete control over your work schedule and income. But an additional benefit most freelancers overlook is tax savings. Wondering what we’re talking about? Read on as this article by Dan Rhoads explores the various ways you as a freelancer can reduce your tax burden.

How Much Do You Owe?

Depending on where you live and your income bracket, you’ll need to pay the appropriate taxes at state and federal levels. In addition, a freelancer is required to pay 15.3% in self-employment tax as reported by the IRS. This amount serves as contributions towards Social Security and Medicare. For full-time employees, employers pay up to half of this contribution. But, as you are your own boss, the complete liability falls on your shoulders.

How Can You Reduce Your Tax Liability?

Here are four ways you can pay lower taxes:

● Form a Limited Liability Company

By selling your services as an LLC, you’ll become eligible to use business expenses as tax write-offs. Additionally, after forming an LLC, apply for an S Corp Designation. With this designation, you’ll overcome the burden of double taxation and pay taxes only once when filing personal tax returns.

● Use Home Office Tax Breaks

Using a space in your home regularly and solely for business activities makes you eligible for tax deductions which can be calculated in two ways:

Actual Expenses Method: Under this method, direct expenses for the office such as painting, repairs, etc. can be deducted 100%. Additionally, indirect expenses such as mortgage payments, insurance premiums can be deducted based on the percentage of the home used for business.
Simplified Method: For each square foot of your home used towards business, you can deduct $5 up to a maximum of $1500 as reported by Nolo.

● Deduct Cost of Office Equipment

The cost incurred by you to purchase equipment essential for your business can also be used as a write-off. This can include buying printers, cabinets, desks, chairs, a laptop, lighting, etc.

● Deduct Cost of Traveling

If traveling is a regular part of your business, you can deduct 56 cents per mile driven in your car. Additionally, expenses incurred on vehicle repairs and maintenance can also be used as deductions.

Come tax season, remember to take advantage of these benefits to keep more dollars in your pocket.

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Dan Rhoads believes in offering customized investment solutions to build and protect your prosperity for a bright future. Call (484) 460-3922.

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Image Source: Pexels

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References

"7 Advantages of Being a Freelancer in 2022." Upwork. Published March 15, 2021. https://www.upwork.com/resources/advantages-of-being-a-freelancer

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"Federal Income Tax Brackets for Tax Years 2021 and 2022." Smart Asset. Published January 3, 2022. https://smartasset.com/taxes/current-federal-income-tax-brackets

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"Self-Employment Tax (Social Security and Medicare Taxes)." IRS. Version updated on January 19, 2022. https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes

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"2022 Wage Cap Jumps to $147,000 for Social Security Payroll Taxes." The Society for Human Resources Management. Published October 13, 2021. https://www.shrm.org/resourcesandtools/hr-topics/compensation/pages/2022-wage-cap-rises-for-social-security-payroll-taxes.aspx

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"4 Reasons Why Every Freelancer Should Form an LLC." News Anyway. Published March 30, 2021. https://www.newsanyway.com/2021/03/30/4-reasons-why-every-freelancer-should-form-an-llc/

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"Form Your S Corp Today." Zen Business. Accessed February 23, 2022. https://www.zenbusiness.com/s-corporation/

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"What Are Office Expenses for Tax Deduction?" Houston Chronicle: Hearts Publishing. Accessed February 23, 2022. https://smallbusiness.chron.com/office-expenses-tax-deduction-57305.html

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"Travel Expenses For Freelancers: What Are They And How To Calculate Them." FreelancerMap. Published November 23, 2022. https://www.freelancermap.com/blog/travel-expenses-for-freelancers/#transport

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"What vehicle tax deductions can I write off for tax year 2021?" Finder. Updated December 13, 2021. https://www.finder.com/motor-vehicle-tax-deductions

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