One of the best parts about being a freelancer or independent contractor is that you can take a few deductions without having to itemize your entire tax bill.
In reality, who cares about taxes? The best part of being a freelancer is that you don't have to put on real pants, your cattiest colleague is actually your tabby, Mr. Ribbons, and nobody gets mad at you if you eat the rest of the cake in the fridge for lunch. But to be fair, being able to write off certain expenses as business costs is pretty nice too.
Let's take a look at a few different tips to help independent contractors and the self-employed get a little tax relief. Our first tip? Find out if you're actually a freelancer, anyway.
10: Know If You're a Freelancer/Contractor
In IRS parlance, any work you do as a nonemployee for a client or company -- be it freelance work or contract work -- makes you an "independent contractor." And best you know if you are, in fact, considered an independent contractor, lest you be accused of evading the IRS without knowing it.
The rules are pretty simple: If you're being paid more than $600 by any individual client, then they're obligated to report it to the IRS. If you are not an employee of that company, that's self-employment income, and that means that the IRS is watching for your tax return to match up as well.
Don't think you're in the clear if you're a full-time employee somewhere and just taking a little bit of the freelance pie when you can. If you make more than $400 from a self-employed enterprise, you have to report the income to the IRS [source: Lerner].
9: Keep Good Records
Sounds obvious, right? Well, you'd be surprised at how few independent contractors have a system for keeping track of their income, expenses, deductions and estimated taxes. (Oh yes, we'll get to that tax treat later.)
Obviously, good old paper receipts for costs or business expenses are useful -- but aren't necessarily the best strategy. They're hard to keep track of, for one, and even something like faded ink can make it hard to back up your purchases if you're ever audited. It might be wise to invest in a scanner so that you can immediately upload images of your bills or receipts. That way, you have both a hard copy and a digital copy. Beyond that, it's really important that you have an organized system for keeping -- and finding -- your income and expenses.
8: Get Financial Software
Don't know your expenses from your assets? You might want to take a crash course in some bookkeeping basics. If you're not entirely sure you want to take accounting classes at the community college, consider buying some financial software for an easy shortcut.
There are some obvious benefits of having a digital accounting system at your fingertips that don't even have to do with taxes. Consider that you can keep track of invoices and billing, for instance. You can even run reports on your financials to help with marketing or sales.
But the big advantage come tax time is that you'll have an organized, efficient way to access the history of your income and expenses. Some programs even let you e-file some of your tax documents straight from the software. And remember that if you are audited, you'll need to provide detailed records to the IRS. A bookkeeping system might just save you a huge audit headache should the IRS come calling.
Title 7: Know Your Deductions
While we'll go into a few of the most useful deductions, the broader message is important: Know what deductions are available, and don't be shy about claiming the ones that apply to you. Self-employed workers can also take a few more deductions above the line, which means they can still take the standard deduction while also writing off a couple more items. (Essentially, they're included as "business expenses" instead of miscellaneous deductions.)
It's important to note here that you can either take a standardized, flat deduction or itemize all your deductions based on your expenses. For most people, taking the standard deduction is going to be easiest, but if you have a ton of expenses, you may save money by itemizing. But to even begin getting deductions, you have to exceed two percent of your adjusted gross income. Do your research and see what's best for you.
6: Take the Simplified Home Office Break
One of the most popular write-offs for self-employed folks is the home office deduction. Unlike those suckers with full-time jobs, self-employed workers can take the home office deduction (and its associated direct and indirect expenses) without having to itemize. Basically, you can still get that sweet standard deduction, plus the deduction for the associated costs of your home office.
Not that the IRS is letting you call any old slab of counter a home office. You have to meet some strict requirements. For one, your office space must be used pretty much exclusively and regularly for only your business. (Good luck trying to claim the top of your air hockey table in the kids' playroom as a work space.)
But the good news is it's now easier than ever to figure out the deduction if you do qualify. It used to be that you'd have to figure out the business percentage of all your home office expenses (including bills and utilities) to claim the correct deduction; now you can simply multiply the square footage of your home office by $5 (for a deduction of up to $1,500) to get a much more simplified deduction. Unless you have a very large office or your expenses will equal more than $1,500, make it easy on yourself and use the simplified method.