7 Money-Saving Tax Tips for Freelancers and Remote Workers
Article Published by: money.usnews.com
Paying taxes may not be your favorite part of having your own business or working as a freelancer. It can be a headache to keep up with what you owe and when it needs to be paid. However, the more you understand about taxes, the more you can save by legally cutting your tax bill.
Try these seven tips to take more control over your taxes.
1. Know which business expenses are deductible. The good news about running a freelance business – or even working as a remote employee – is that you’re allowed to deduct certain expenses from your taxable income, which reduces your tax liability.
Tax-deductible business expenses may include advertising, travel, auto mileage, office furniture, supplies, computers, software or insurance. Even if something is partly personal and partly business, you can still divide it appropriately and deduct the business portion.
Check out “Publication 535, Business Expenses” or consult with a qualified tax accountant to get familiar with all your potential tax deductions.
2. Claim the home office tax deduction. Claiming a home office deduction is probably easier than you think. It’s a way to make certain expenses, such as mortgage interest, rent, utilities and insurance, partially tax-deductible.
To qualify, you must use a part of your home regularly and exclusively for business, such as a spare bedroom, detached garage or any identifiable space. The Internal Revenue Service also requires that your home is the principal place of your business (but it need not be the only place you work or meet customers).
If you’re employed by a company but working from home, there’s an additional requirement: The business use of your home must be a convenience for your employer, not for you. An example would be if your company doesn’t have a local office or enough space for you to work.
For a full explanation of deductions related to working from home, including a relatively new simplified calculation method, refer to “Publication 587, Business Use of Your Home.”
3. Be diligent about categorizing business expenses. To get the most tax savings you must keep good records. If you’ve never been a stickler about keeping track of expenses, now’s the time to start.
Try out money management tools, such as Mint, Quicken and QuickBooks. They can help you categorize expenses and stay organized.
4. Have the right kinds of insurance for your work. Choosing the right types of insurance for your small business or home office is essential to protect yourself from unforeseen losses. At a minimum consider these types of policies:
Property insurance. This pays to repair or replace property, including computers, office equipment and inventory.
General liability insurance. This insurance pays for damages, legal fees and court costs if your business is found at fault in a lawsuit.
Commercial auto insurance. This type of insurance pays for damages and liability that may arise when you use a vehicle for your business or freelance work.
And don’t forget about a health plan for you and your dependents. The Affordable Care Act, also known as Obamacare, gives freelancers a marketplace to buy insurance coverage.
Depending on your income and family size, you may be eligible for a subsidy to reduce your premiums.
The cost of various types of insurance – including health, property, liability and commercial auto – are generally tax-deductible when you’re self-employed.
5. Use a health savings account. Enrolling in a health savings account, also called an HSA, can save you money on health care costs.
Find out if you qualify for an HSA regardless of whether you’re self-employed or work for an employer. These special accounts allow you to pay for qualified medical expenses on a pre-tax basis, which cuts your tax bill – but you must first be enrolled in a high-deductible health plan.
6. Contribute to a retirement account for the self-employed. Depending on your work and financial situation, you may qualify for different types of retirement accounts. The more you contribute, the more you save on taxes and the bigger your retirement nest egg will be.
Here are three types of retirement accounts you should be familiar with when you work for yourself or don’t have a retirement plan at work.
Individual Retirement Arrangement. An IRA offers “traditional” tax-deductible contributions that are never taxed until you take a distribution. Or you can choose a Roth version that taxes contributions, but allows tax-free withdrawals in retirement.
Solo 401(k). This is similar to a 401(k) plan offered by big companies and is available when you work for yourself, with no employees. It’s offered as a traditional or Roth account and comes with high annual contribution limits.
SEP-IRA. This is a good option for anyone who is self-employed with or without employees. Contributions can only come from an employer. Employees can never contribute their own money. So, as the business owner, you choose the amount of tax-deductible contributions to add to your account each year.
7. Use a tax professional. If you need help understanding how to reduce your taxes, consult with a qualified accountant. While it costs to work with a tax pro, they find ways to save that you may have overlooked, such as streamlining business processes and claiming often-overlooked tax deductions.
ABOUT MICHAEL SMERIGLIO:
Mike Smeriglio III is a financial specialist. A licensed CPA since 1985, Mike has been providing tax preparation services to individuals and businesses for more than 30 years through his firm located in Greenwich, CT.