Top 7 Tax Breaks for Freelancers in 2022
As a result, the gig economy has exploded in recent years, with over 60 million gig workers and freelancers anticipated to exist by 2021, according to estimates.
No one, on the other hand, is really talking about the tax repercussions of making a career as a self-employed contractor.
In 2020, Americans will owe more than $114 billion in back taxes, penalties, and interest, according to the IRS. It goes without saying that a significant percentage of this comes from 1099 revenue. Why? Because 1099 employees are largely responsible for their own tax returns, quarterly payments, tracking deductions, and other administrative tasks such as these.
What Exactly Is a Tax Deduction and How Does It Work?
The concept of a tax deduction is simple: it is a reduction in the amount of income that is subject to taxation.
So allow me to provide you with a simple illustration. Consider the following scenario: you are a baker who creates pies and sells them for $15 apiece.
In the event that you do not deduct anything for the costs of manufacturing those pies, operating a bakery, and so on, you may be required to pay taxes on the entire amount of money generated by your pies sales.
A simple definition of deductions is the capacity to track expenses incurred in the course of carrying out the activities of your firm.
As a result, when you look at that pie maker, you’re thinking about things like your flour costs, your personal costs, whether or not you pay yourself a wage, and so forth.
While it may sound complicated and like something you don’t want to deal with, disregarding this will almost surely result in you paying more money in taxes than you need to without you realizing it.
Now, I’m going to presume that the vast majority of us aren’t making pies right now. In actuality, many of us are undoubtedly engaged in some form of online business or freelance work as a side hustle.
1. Tax benefits for those who work for themselves.
You may be eligible to deduct a percentage of your taxes if you are self-employed and have yourself listed as an employee of your own business, for example.
Please allow me to elaborate.
As a result, all self-employed individuals are required to pay a standard tax rate of 15.3 percent.
The majority of individuals, on the other hand, are fully unaware of this because you are responsible for half of this tax and your employer is responsible for the other half.
You might be surprised to learn that, when you work for yourself as an employer, you are responsible for paying the other half of those taxes. Therefore, the employer’s share of the taxes paid can be deducted from your income. If you are self-employed, as a result, you can deduct half of the 15.3 percent tax rate associated with having an employee on the books, even if that employee is only yourself.
2. Deductions for utilities and other equipment
As a result, utilities that you pay for on a monthly basis, such as your phone bill or even your light bill, may be deductible depending on how much of your income is allocated to the company.
The manner by which each individual calculates this will be unique. There is no way, obviously, to set a meter in your office and determine exactly how much of a percentage is being utilized for your company’s benefit.
The majority of people, on the other hand, will just calculate a percentage. So, for example, I’m going to suppose that I use my phone for business purposes approximately half of the time.
As a result, I personally deduct half of my telephone bill. Another point to mention is the equipment, which includes items such as the laptop I’m currently staring at and this extremely expensive microphone, among other things.
Nonetheless, when it comes to more expensive equipment, things become a little more complicated because there are two different ways to deduct these expenses.
As a result, the first approach is depreciation, which entails taking the item’s worth and distributing the deduction over a number of years.
As a result, you should have an idea of how long this piece of equipment will survive in general. Furthermore, if it is a large expensive item, you should split the cost of that item by its usable life and subtract that amount from your income each year.
Personally, I prefer to take a one-time deduction in the year that the item was purchased rather than a recurring deduction. In the case of equipment that could cost tens of thousands or even hundreds of thousands of dollars, you should seriously consider depreciating it over the course of the equipment’s useful life.
3. A deduction for working from home.
Consequently, if you entirely use a portion of your property for business purposes, you can deduct a percentage of whatever cost is associated with your home, regardless of whether you rent or own your home.
As an example, I write my articles in my home office, which is dedicated solely to the production of videos and the writing of articles. I measured the space in terms of square footage rather than in terms of my home’s overall square footage as a result.
Then I converted that to a percentage, which represents the amount of my utility bill as well as the fraction of my mortgage that I claim as a home office deduction.
Suppose you have a 2000-square-foot home and an office that is 200 square feet in size for the sake of simplification. Because you’re working from home, you’d be able to deduct 10 percent of your rent or mortgage from your business revenue, which would be a significant tax savings.
4. The depreciation of automobiles.
A automobile and the usage of that car for commercial purposes in any way could suggest that you are an Etsy seller who physically transports your items to the post office.
So there’s some good news. You do, in fact, have another write-off on your tax return. There are two different ways to account for this automobile deduction on your tax return.
The first is known as the standard deduction.
A standard rate per mile for business-related driving has been developed by the Internal Revenue Service due to the large number of persons who are deducting mileage from their business or freelancing revenue.
The cost per mile traveled for business purposes comes to 56 cents per mile travelled. So, assuming you had a notebook like this, what would you like to accomplish in an ideal setting with your notebook? You’ll want to have that in your car so you can jot down the times you’re driving to and from work as you go.
Once you’ve completed your log book for the year, you can multiply the number of miles you’ve traveled for work by 56 cents per mile, which can result in an additional deduction for you at the end of it. The other method of tracking this deduction is a little more complicated, and it involves tracking down each of your vehicle’s actual expenses one by one, taking note of things like oil changes, repairs, car washes, and so forth.
Although it is possible to use your vehicle for commercial purposes, you should ensure that this is the case before doing so.
As an example, say you own a landscaping company and you commute to and from work using landscaping vehicles. In that instance, you’d most likely look at each expense independently rather than using the standard 56 cents per mile as a basis of comparison.
However, I believe that the 56 cent per mile fee will be the most cost-effective alternative for 99 percent of freelancers who just use their vehicle to pick up supplies or go to the post office.
5. The costs of training and education
The term “school” does not necessarily refer to attending to college, but rather to everything you must participate in in order to remain relevant in your field of employment. In order to keep up with the times, I purchased a membership to the Wall Street Journal.
I designate it as training or educational expense, which allows me to deduct the entire cost of my subscription from my tax return. Additionally, if you pay dues to any industry associations, or if you purchase books to brush up on skills for your profession, or even if you enroll in online classes or courses, all of these expenses may be deducted in certain circumstances.
The most important thing to remember is that everything must be related to your company. So, if I were that pie maker all over again, I would be completely content with purchasing an online pie-making course or a book of pie recipe ideas instead.
However, if I went out and purchased books on how to establish a carwash business while also working as a pie maker, that wouldn’t necessarily work because it is unconnected to the real business itself. It is necessary that all of these deductions be related to your actual business or the services you provide to earn your living as an independent contractor or consultant.
6. The cost of advertising.
If you spend money on advertisements related to your business, or even on items like stickers on the side of your vehicle, you can deduct such expenses from your income. As a result, make sure to keep track of any advertising expenses incurred by your organization.
7. Miscellaneous business expenses
As a result, for me, these varied business expenses include things like airfare for business travel, motels for business vacations, and other similar charges. Not everyone, however, is forced to travel for business purposes. As a result, it will be defined by your particular area of business.