Ready to save some money?
If you’re self employed, a freelancer, or an independent contractor, then you know how complicated tax time can be.
While there are a lot of details to track and plenty of paperwork along the way, the good news is there are also tons of tax benefits to being your own boss!
Set up a home office and maximize your write-offs
If you regularly and exclusively use a portion of your home or apartment or use a separate structure not attached to your house as your principal place of business or as a place to meet with clients, you can claim deductions for using the space.
Your office qualifies as a principal place of business if you use it as the sole place to perform administrative duties. Expenses that may be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. The amount of the deduction depends on the percentage of the home or apartment that is used for business. The write-off is claimed on Form 8829, and is deducted on Schedule C. Thus, it reduces your SE income and tax.
Open a retirement plan to shelter your business profit
The most common self-employed retirement plan is a Simplified Employee Pension plan (SEP). You can put in up to 25 percent of your net earnings from self-employment, which is your net Schedule C profit minus the deduction for one-half of your self-employment tax. The maximum annual contribution for 2016 is $53,000.
Compare that to the $5,500 cap on IRA contributions ($6,500 if you are 50 or old at year end) for 2016. A SEP can be established for 2016 as late as April 15, 2017, or if you filed an extension, October 15, 2017.
Deduct your mileage
Employees are not allowed to deduct the cost of driving to and from home to work. But if you are self-employed and your home is your principal place of business, you can deduct the cost of driving from home to see a client or to go to another work location.
You can claim 54 cents per mile for 2016, plus the cost of parking and any tolls you paid. Be sure to keep a record of your business driving or the IRS can deny your deduction on audit.
– via turbotax.intuit.com
Need an employee? Stay in the family!
Did you know that employing your spouse or children can have a huge benefit for your business? Not just in company culture, but when it comes to tax time as well!
Remember these tax tips from the experts when you sit down next to crunch the numbers.
If you’re self-employed as an independent contractor, do remember that you can write-off any business travel expense, so long as it’s for an overnight trip away from your tax home. (Tax home being the place you run your business.) If your entire trip is business-related, you can deduct the whole thing. But if it’s a mix of business and personal, you need to keep track of the business side and be sure to deduct only that amount. Stopping by your parents’ place to take the folks to Applebee’s after a business trip isn’t going to make the cut, in other words.
You can also deduct meals, both during business-related travel or for business-related entertainment. Which sounds amazing, right? But keep in mind you can generally only deduct up to 50 percent of the cost of your meals, and the IRS is totally on to you: They make a point of excluding “lavish or extravagant” meals. You can also use the standard meal allowance if you weren’t keeping track of the actual cost. Each state sets a per diem amount that is a useful shortcut for deducting business meals [source: U.S. General Services Administration].
Remember to Pay Estimated Taxes
So far, it’s been all rainbows and roses when it comes to tax tips. Remember to get that sweet home office deduction! Buy some cool software! But now we get into the darker side of filing as an independent contractor: estimated taxes.
Obviously, when you’re self-employed, no employer is withholding taxes from your paycheck. So that means you and you alone are responsible for taking a chunk out of every check you get and squirrelling it away for Uncle Sam. There’s no flat rate that every freelancer should set aside, considering that state taxes vary so much — so you might want to check with an accountant in your state to be on the right track. (Don’t forget you’re paying your own self-employment tax too, to cover Medicare and Social Security.)
And if you’re profitable — meaning that you’re making more than $400 a year — you’re also going to have to provide those tax payments quarterly. The IRS wants your money all year long, not just at the end: They’ve set aside four due dates during the year for you to make quarterly payments (although you can pay more often throughout the year if that’s easier for you).
Employ the Kiddies
OK, you’ve waited this long, so now it’s time we gave you self-employed independent contractors the best, and perhaps most absurd, tax tip of all: Hire your babies. Need some help transcribing meetings? Surely little Susie will do it for $5 an hour. Need to paint the office? Timmy’s cheap. Heck, maybe you can convince Sally to file your taxes for you!
It’s not just that your kids are easily manipulated and always around. It’s that you can deduct their wages on your Schedule C (business profit and loss) form. If they’re under 18, they’re exempt from Social Security tax, and if they’re under 21, they don’t have to pay Federal Unemployment Tax either. They probably won’t have to pay taxes at all if they’re not scamming you out of too much money — and that money you’re paying them isn’t counting toward your taxable income either. Just remember that you do have to pay reasonable wages. But hey, no need to be a scrooge: You can even contribute to IRAs for them.
– via HowStuffWorks
What are the best tax tips you’ve heard for independent contractors or freelance creatives?