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How Tax Deductions and Credits are the Perfect Storm of Tax Savings?
How Tax Deductions and Credits are the Perfect Storm of Tax Savings?
No one can escape taxes. They’re a fact of life for anyone who has an income. But only some of us qualify for tax credits to save on our taxes. If you’re a freelancer or you’re self-employed, you can also qualify for business deductions, the holy grail of tax savings, and lower the tax you owe significantly.
Some W-2 employees who work for a company and some people who work for themselves can qualify for tax credits, which directly lower your tax bill. However, anyone who pays self-employed taxes is qualified to deduct the cost of business expenses from their taxable income. Freelancers who qualify for both business deductions and tax credits can seriously reduce the amount of tax they’re on the hook to pay.
Key takeaways:
- The best way for freelancers to save on their taxes is by taking business deductions.
- There are hundreds of categories of business deductions available to freelancers.
- Knowing which tax credits you qualify for can drastically reduce your tax bill.
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What’s the difference between a tax deduction and a tax credit?
If you’re new to working for yourself, you might be wondering what is a tax write-off and what is a tax credit. Both can help you save significantly on the tax you owe, but the difference between them is fundamental and important to know, so that you can use as many of them that you qualify for.
FlyFin uses A.I. to make sure you find every possible deduction, and a team of CPAs who specialize in freelancer taxes to make sure you know all tax credits available to you and all the ways you can save on your taxes.
What is a tax write-off?
Just about anything someone who works for themselves needs to purchase in order to do their work or keep their small business running can be considered a tax write-off, also known as a deductible business expense.
The Internal Revenue Service has a huge list of all the things that qualify as a deductible business expense, but here's the general rule: if something is necessary and ordinary (the IRS’ words) for your line of work or your type of business, it’s probably deductible.
Are you a freelance handyman? Your tools are a deductible business expense. Own a consulting business where you’re the sole proprietor? You can write off the cost of advertising your services. A tax deduction calculator is a useful tool that can help you find business expenses that can be written off.
How do tax deductions work?
That camera you purchased for your wedding photography business is absolutely a tax deduction, also known as a tax break or write-off. But what does it mean to deduct something from your taxes? When you’ve done the calculations, and you know how much you’ve made throughout the year, you know how much income you have to pay taxes on. If you think you'll owe more than $1,000 in taxes, you'll need to make estimated tax payments every quarter.
That tax bill, however, can be lowered by subtracting the cost of business expenses. Say you made $100,000, and you owe $20K in tax on that income. The cost of your camera, your car expenses for getting to gigs and back and even online classes on the latest photography techniques can all be subtracted from that $20K of income tax you owe. So you'll have less income that will be taxed and will effectively owe less tax.
What is a tax credit?
These are essentially discounts the federal government provides, if you’re in a situation where paying income tax might hurt you more financially than the average American. For people who are working hard but not making as much, for example, there are tax credits that allow them to pay less income tax. Credits help people who are in school or who have kids pay less in taxes by knocking a certain dollar amount off their tax bill. More later on the specific tax credits that are available.
How do tax credits in 2022 work?
If you're doing your taxes for 2022, the fundamental difference between a tax deduction and a tax credit is that a deduction lowers your taxable income, and a credit lowers your final tax bill. So if you made $70,000 after a year of working as a freelance copywriter, you can subtract your business deductions and bring that taxable income down to, say, $55,000.
If you owe $15K of tax on that $55,000 of income, and you qualify for the Child Tax Credit or the Earned Income Credit, you would be able to reduce that $15K bill by the amount of the credit.
What are the most popular deductions?
Home office deduction
One of the most popular tax breaks is the long list of expenses that can be written off if you work from home or run a small business from where you live. Even if you use your part of your home to store inventory, some of these expenses can be deductible.
Everything from a portion of your utilities and home internet service to the stationary you use can be deducted as part of the home office deduction.
Vehicle expense deduction
If you use your car for work and you qualify for the vehicle deduction, there are numerous tax deductions you can take. Your oil changes, gas, parking fees and maintenance can all be a tax break. And, there are more industry-specific deductions, you can take, too. For rideshare drivers, for example, a subscription to a music streaming service can be a tax deduction.
Business travel deduction
A tax break for airfare or taxis and even hotel accommodations are all available for freelancers and self-employed people who take a business trip. They can even write off these expenses if they’re combining leisure time with their business trip.
What are the most important tax credits?
There are numerous tax credits the federal government has designed to make life a little easier for taxpayers who have lower incomes. Those most people are familiar with help taxpayers with lower incomes get a break on the cost of childcare or get an education credit.
The Child Tax Credit helps parents pay less in tax, so they can better support their kids. The American Opportunity Credit gives students a break on education-related expenses. And the Earned Income Credit helps people working low-wage jobs pay less tax on their income.
If you work for yourself, it’s important to know the differences between tax deductions and tax credits, so you can take advantage of every opportunity to save on your taxes. FlyFin's unique combination of A.I. and CPAs gives freelancers, self-employed individuals and independent contractors industry-best tools to take advantage of both.
What’s FlyFin?
FlyFin caters to the tax needs of freelancers, gig workers, independent contractors and sole proprietors.
But anyone can file taxes through FlyFin! FlyFin tracks all your business expenses automatically using A.I. technology.
Then, our CPA team files a guaranteed 100% accurate tax return for you – to save you a couple thousand dollars and a ton of time on your taxes.
In addition, you can download the FlyFin app and have your taxes filed in less than fifteen minutes, saving time and money.
Expert tax CPAs ensure 100%-accurate tax filing
A.I. finds every tax deduction, eliminating 95% of your work
On average users save $3,700
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