Being self-employed has a lot of perks- you get to choose and make your own decisions, you choose your working hours, and you get to follow your passion. So, if you’re thinking about becoming a self-employed worker in the US, it is advantageous to have an overview of trends, and statistics about self-employment. According to the most recent US Bureau of Labor Statistics (BLS) reports, there are over 9 million self-employed workers in the US.
With the rise in self-employment, many taxpayers are unsure what they can deduct or not deduct when they file their tax returns. As a self-employed individual, it’s necessary for you to understand the differences between the types of expenses that qualify for tax deductions.
We’ve included some of the common tax deductions that you as a self-employed worker can apply for. You and your business of choice will be able to steer towards what works best for you.
The IRS offers the ability to write off the cost of business purchases from your tax bill.
The following list represents expenses incurred by freelancers that can be used as tax deductions:
Rent is any amount you pay for a property you do not own. You can deduct rent as an expense only if the property is meant for business. If you receive equity in or title to the property, the rent will not be deductible.
If you operate a business from home, then you may apply for a home office deduction. The home office deduction is available for homeowners as well as home renters.
There are two prerequisites for using a home office deduction:
You can deduct the business percentage of your utility payments, including heat, lights, power, telephone service, water, and sewerage. However, if you pay for a utility or a service that does not aid your business, you won’t be able to use that for a tax deduction
This can prove helpful if you spend many hours at home using the utilities throughout the day.
Wages paid towards contract labor are subject to tax deductions.
If you take a business loan to fund a project, you can write off your business loan interest payments as a business expense. The IRS generally demands certain conditions to qualify your business loan:
For interest to be deductible, your lender must be legitimate. You cannot borrow money from friends, or family members that you may or may not fully repay and claim a tax deduction.
In addition, the interest you pay on a credit card is considered a personal expense. However, if the expenses are for business needs, you can qualify the interest paid out as a business expense.
Any equipment or supplies you need to perform your job qualifies as a deductible expense. This includes any and all office supplies and materials.
If you keep incidental materials (pen/ink/stationary items) and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if the following requirements are met:
You can also deduct the cost of books, professional instruments, and equipment if you normally use them within a year.
Distinguishing between your personal and business expenses will save you money on tax payments and help track your expenses more efficiently. As a self-employed individual, it will help you decrease your taxable income as well as your self-employment tax.
By itemizing, you may deduct the interest you pay on your home mortgage. Homeowners are allowed to deduct 25% of their mortgage interest.
You may apply for a tax deduction for medical and dental insurance and qualified long-term care insurance for yourself, your spouse, and your dependents.
For self-employed individuals, the health insurance plan must be claimed under your business or in the name of the individual. The tax deduction is restricted to your net profit on Schedule C. If all or part of the health insurance amount is not applicable under this particular section, the balance may be deducted from Schedule A under medical expenses.
If you received a tax credit for the amount you paid for health insurance, you need to subtract the credit from the amount you paid for health insurance. This amount is what will be allowed for your health insurance deduction. Qualified long-term care insurance premiums may be included in this health insurance tax deduction up to the following amounts for 2020:
If your modified adjusted gross income (MAGI) is less than $85,000 ($170,000 if filing a joint return), you may be allowed a special deduction for paying interest on a student loan.
The IRS has an Interactive Tax Assistantwhereyou can learn if you are eligible to deduct your student loan interest.
Donations made to an organization (charitable or otherwise) may be deductible as a business expense if the payments aren’t charitable contributions or gifts and are directly related to your business. If the payments are charitable contributions or gifts, you can’t deduct them as business expenses. However, if you itemize your taxes, you can deduct any contributions you make to a qualified nonprofit organization.
You can also deduct the cost of your education related to your trade or business. You must be able to prove the education maintains or improves skills required in your trade necessary for your business, or that it is required by law for keeping your license to practice status or job.
To calculate your estimated tax, you need to consider a few things: your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.
While the best person to answer your tax deduction questions would be your accountant or CPA, FlyFin too can provide you with some help to manage your expenses. FlyFin’s Quarterly Tax Calculator will provide you with the most accurate quarterly tax calculations based on your income and deductions.
FlyFin will track all of your expenses and categorize them as deductible, non-deductible, or possible deductions. Before calculating your expenses, Flyfin will ask you a few questions regarding your profession to understand your expenses.
On average, 75% of freelancers overpay on their taxes since they don’t consider deductions while estimating quarterly taxes. They do not take into account personal itemized deductions such as home-office, mortgage, and charitable contributions, etc. This often leads to unnecessary confusion and loss of tax savings.
Flyfin’s Quarterly Tax Calculator is powered by A.I. that works around the clock and scans through all your expenses to provide you with the most accurate deductions all the while ensuring that you don’t have to pay a penny more than what you actually owe.
To know more about maximizing your tax deductions, click here.
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.