How Do Freelancers Pay Less Taxes?

If you are working as your own boss, you get some incredible advantages with the freelance lifestyle. You can set your working hours, work from the comfort of your home and have the ability to choose your clients. All in all, the freelancer lifestyle truly lives up to its name.

But, with this freedom comes new responsibilities. Typically, when you work for an employer, there are certain things that they take care of for you.

If you're self-employed, all the responsibilities are up to you. This means you’re in charge of handling your taxes, including Medicare taxes and setting up a healthcare plan.

There’s no denying that we are all looking for ways to save money, especially when it comes to taxes. Here are some ways to save money and reduce the amount you pay in taxes as a self-employed person or freelancer.

Open a health savings account

Setting up a health savings account is first on the list. The reality is that everyone needs a healthcare plan, regardless of their employment status. Without one, you could face high medical bills. But, of course, that’s the last thing you need to worry about when you’re sick!

Establishing a Health Savings Account (HSA) is a great way to offset the cost of healthcare by setting aside money for your healthcare costs. To qualify for enrollment in an HSA, you will need to enroll in a high-deductible healthcare plan (HDHP).

Establishing an HSA will help you pay less in taxes because you can deduct your annual HSA contributions from your income that is taxed. Any income that your HSA earns is tax-free.

Plus, if you need to withdraw any money from your HSA to cover medical costs, it will be tax-free, which means less money leaving your pocket!

Home Office Deductions

Another self-employment tax deduction comes from your home office. If you use a home office exclusively for your business, this may be eligible as a deduction. But this means you need to conduct all your business from this home office. So those regular business meetings at Starbucks may impact your eligibility for the deduction.

To get those tax savings, you need to calculate the total area of your home and then calculate the square footage of your office space to find the percentage of your home that you use for your home office.

So let’s say your office takes up 5% of the overall home area of your home. As a result, you can deduct 5% from your utility payments or even your rent or mortgage, which means more tax savings.

Setting up a solo 401(k)

Are you looking to reduce taxes and save for your retirement? One way to do this is to open a solo 401(k). As the name suggests, this 401(k) is for business owners with no employees.

Do you own a business with your spouse? In this case, you still qualify for a 401(k)

But why open a solo 401(k) in the first place? First, you can contribute as the employer and the employee. That means double the contributions! Also, you can make pre-tax contributions or Roth (after-tax) contributions. Roth contributions can help with retirement distributions or withdrawals, which are usually tax-free.

Plus, the IRS did self-employed people a favor and cut down on the solo 401(k) paperwork, which saves you on time, too!

Reducing self-employment tax

HSA accounts, home office deductions and solo 401(ks) are great ways to lower your federal income tax. But, this doesn’t reduce your net income, so you will still have to pay the self-employment tax on this amount.  

One possibility to reduce the self-employed tax is to lower your net earnings. Although it sounds impossible, there is a way. Section 179 allows you to deduct the cost of certain fixed assets like vehicles, computer software or machinery used for your business.

Forking over the money to buy certain items for your business, like a vehicle, could impact the amount of taxes you owe. But if the vehicle or equipment qualifies for the Section 179, the tax amount could be dispersed over a period of time. This gives you time to save!


How FlyFin can help?

Filing taxes can seem overwhelming. Getting a full understanding of the qualifications for deductions takes time and effort. But with FlyFin, tax filing is effortless. With the help of A.I., FlyFin finds every possible deduction to save you time and money. You can also use FlyFin’s 1099 tax calculator to help with filing self-employment income tax. When you understand and use these strategies, you can make better tax-filing decisions and pay less in taxes.

FlyFin CPA Team

FlyFin CPA Team

With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.