Tax and Insurance
March 15, 2021
Handling your Taxes for Freelance Work
Be it a side hustle or full-time job, freelancing has many unique benefits.
Obviously it is nice to be your own boss: choosing your own hours, projects, and schedule. Long gone are the constant early morning alarms, restrictive business hours that you feel a need to be in the office for, and endless days in business attire. Now, you are able to work flexible hours and operate from a task-based standpoint rather than your traditional 9-5 schedule.
However, all of these freedoms do have a price: the complications of doing your own taxes. This is not an easy task and if you are not careful, you could lose a large amount of income to our dear friend Uncle Sam. However, if done right, there are many deductions you can take advantage of.
The self-employment tax essentially exists because you are both the employee and employer of your business now. Usually, there is an automatic deduction from your paycheck and then your employer matches this. However, you now bear the burden of both, leading to a 15.3% tax rate.
The upside is now that you are the employer, you are now able to deduct a significant amount of your expenses from your taxable income. You are only able to take deduction for ordinary and necessary things specific for your business.
Think about all of those advertising and marketing expenses, travel and business meals, home office deductions, and utilities. When keeping track of these, it is extremely important to carefully document everything. You should save all receipts and invoices, and you may even want to open a separate checking account specifically for your freelance work. This will help you keep you personal and business finances separate while tracking what expenses you can claim.
While there are many ways to deduct taxes, you cannot simply deduct everything. What you are able to deduct is going to be largely based on what specific job you have. It is important to keep personal and business expenses separate. The key is to remember that every deductible item must be both necessary and exclusively used for your business.
With all of the savings you can accrue through taking advantage of freelance tax deductions, you can start to focus on bigger picture items such as retirement savings. While this can be more difficult without employer sponsored accounts, you can still open a traditional Roth IRA as a simple and effective way to start saving for the future.