If you earned any This year freelance income – whether you added a side gig to supplement your salary, did some freelance work after losing your job or decided to start your own business – is very special for you Concession. But many freelancers miss out on tax-saving opportunities because they do not feel they are eligible for these benefits. And the rules can be tricky because employees can no longer cut unpaid business expenses, but self-employed people still can.
“Most people lose deductions because they don’t just keep records,” says Mackie McNeill, a certified public accountant and financial planner in Bellevue, Kentucky, and a consumer financial education advocate for the American Institute of CPAS. “It is easy to scan and save your deductible receipts.”
You will usually need to file Schedule c To report freelance or self-employed income, but you can also cut many of your expenses. If you have any independent income this year, do not miss the following tax benefits.
Additional tax-saving savings opportunities
A SEP is the easiest: It is offered mostly by brokerage firms, banks and other financial institutions that provide IRAs. Freelancers can contribute about 20% of their net income from self-employment to a maximum of $ 57,000 by 2020. Your contribution is tax-deductible, and the money is tax-deferred to the account until it is withdrawn.
But you may be able to save more in Solo 401 (k). You can contribute up to 100% of your self-employed income, up to a $ 19,500 maximum in 2020 (or $ 26,000 for those 50 or older). If you earn more than this, you can also contribute about 20% of your net income to self-employment, as long as your total contribution is in the range of $ 57,000 (or more than $ 63,500 or more than 50).
Solo 401 (k) also gives you the opportunity to create tax-free savings with SEP. Your single 401 (k) contributions can either be tax-deductible, which reduces your taxable income, but will be taxable if withdrawn, or you can make a Roth Solo 401 (k) contribution, which No longer reducing your taxable income, but tax-free upon withdrawal. (SEP Roths do not offer contributions.)
If you’ve lost your job or are starting your own business and your income-tax rate is lower than normal this year, you’d probably be better off making a Roth contribution to a single 401 (k) and creating a tax-free income. Future “Also, tax rates are low now, so why cut back today when you can earn a lot of income in your lifetime?” Says McNeill.
In 2020, you can only make Roth Contribution Single 401 (k) up to $ 19,500 (or $ 26,000 up to 50 or more). Instead any additional single 401 (k) contributions are tax-deductible.
If you have a side gig in addition to a full-time job, what you contribute to your employer’s 401 (k) reduces the limit to $ 19,500 (or $ 26,000) if you are in a single 401 (k). Can contribute But it may not affect your contribution based on 20% of your total net income from your self-employment to the extent of $ 57,000.
Not all administrators offer a Roth version of a single 401 (k). In addition, some administrators have allowed you to take loans from a single 401 (k) and consolidate the 401 (k) balances of previous employers into your single 401 (k) plan, which James Brewer, a certified financial planner And says CEO of Envision Wealth Planning in Chicago. . He works with a third-party administrator who offers additional benefits such as a single 401 (k) loan.
Home office tax break
If you use a place in your home “regularly and exclusively” for business, you may be able to take it Home office deduction – Even if your freelance job is a side gig. It is not necessary to have a separate room, but for this it is necessary to have a desk or a corner of the room, where you do nothing else.
An alternative is to deduct your actual expenses for the portion of your house based on the percentage of your home’s total square footage for that part of your house. If your home office is 1/10Th For your home, for example, you can deduct 10% of your rent or mortgage interest, homeowners ‘or renters’ insurance, electricity, water and gas bills as home-office expenses. You can also deduct a portion of your property taxes and depreciation on the home. And you can deduct 100% of some expenses that are specifically for your home office, such as the cost of repairs to that room.
Or you can use the simplified option to calculate your deduction, which is very easy. Instead of deducting a portion of all your expenses (and keeping all those records), you can deduct up to $ 5 per square foot of your home office, up to 300 square feet, for a maximum deduction of $ 1,500.
If you are only self-employed and have been working from home for a few months, you may be able to cut a partial-year home office. “If you worked at home for three months, you could take 25% of $ 1,500, or $ 375,” McNeil says. “Remember, exclusive use tests must be met first.” During that time, you need to use that part of your home exclusively for business.
You may be able to cut additional insurance costs specifically for your business. “One Frequently-missed deductions When people work from home there is additional insurance – such as a rider for additional liability or property risk, “says McNeil.” This is deductible in addition to the simplified method. “
Deduct your computer and other business equipment
You can cut the cost of the equipment you buy for your business, which may include a computer, printer, desk, chair, filing cabinet, software programs you use, printer cartridges and office supplies. Huh. “Also, other items such as the ring light you bought to look better on a zoom call,” says Michelle Morris, a certified financial planner and nominated agent associated with BRIO Financial Planning in Quincy, Massachusetts.
“If you buy a computer for the purpose of freelancing, it is deductible,” says Morris. “If you buy a computer and use it partly for freelancing and partly for personal use, you can pre-determine the cost.”
Deduct other business expenses
You can deduct 57.5 cents per mile for business-related driving in 2020, says McNeill, such as driving to meet customers, attending meetings, and even picking up office supplies. You can also reduce the parking fee and toll. Commuting costs, however, are not deductible.
You need to have one Log of your profit Morris uses the Everlance app in your tax records, which makes it easy to keep track of business vs. non-business profits and creates a spreadsheet that you can export to your tax preparer.
You can also cut advertising costs, mailing, business phone, website design and management, business travel and other expenses. See IRS Self-Employed Person Tax Center for more information.
Didact classes, subscriptions and professionals
The costs of professional development and other classes that you charge to improve your business acumen can be tax-deductible – which many people are now doing to improve their job prospects if they are on their freelance Growing a business or looking for full-time work.
You can cut professional association dues, networking meetings (even the cost of conferences at Zoom), membership of publications you read for your business, books, and other resources.
And the cost of hiring an accountant, lawyer or other professional to help your business is also tax-deductible. “If you have a coach to help you in your business, that’s a deductible expense,” McNeil says.