Balance Pro Staff
March 24, 2023
Individuals who are self-employed or own small businesses often find themselves investing a significant amount of personal funds into their work.
As the tax year comes to a close, these business expenses can lead to substantial tax deductions, which is particularly beneficial given the elevated self-employment tax rate. This rate encompasses not only income taxes but also self-employment taxes that cover Social Security and Medicare taxes.
It's no surprise that self-employed individuals strive to minimize their taxable income as much as possible. A frequently asked question among independent contractors and freelancers is whether they can claim the standard deduction while still deducting business expenses.
In short, the answer is yes. Here's a comprehensive overview of the standard deduction for freelancers.
The standard deduction is a tax reduction available to all American taxpayers. The following are the values for the standard deduction in 2022:
When it comes to the standard deduction, you've got a choice. You can either take the $12,000 and change, no questions asked, or you can itemize your personal deductions on your tax return.
It's important to note that these personal itemized deductions have nothing to do with your deductible business expenses, which you can claim on top of the standard deduction. More on that later!
Itemized deductions that you can replace with the standard deduction include the following:
Remember, you can choose between the standard deduction or itemizing these deductions on your tax return, depending on which option offers greater tax savings for your individual situation. Individuals opting for itemization should list their personal deductions on Schedule A of their tax return.
If all the itemized deductions you can take add up to more than your standard deduction amount, then it makes sense to track them separately.
Most people, though, take the standard deduction. (87% of taxpayers opted for it in 2019.) It's been especially attractive in recent years. The Tax Cuts and Jobs Act, for example, nearly doubled it in 2017.
As a self-employed person, you'll have to make this decision along with every other American tax filer. Your business expenses, though, go in a whole other category.
You can always take those on top of the standard deduction.
For individuals who solely have W-2 employment and earn less than the standard deduction amount, they won't be liable for income taxes since their taxable income is reduced to zero.
However, the situation is different for those who are self-employed. If you're a freelancer, gig worker, or small business owner, you'll always be required to pay self-employment tax on your 1099 income, even if it's significantly lower than the standard deduction.
Consider this example. Imagine you earn $60,000 annually, with $45,000 coming from W-2 employment and only $15,000 from 1099 work on the side, such as weekend Uber driving or occasional Airbnb hosting.
In this case, your 1099 income is considerably lower than the standard deduction. However, you would still owe approximately $4,500 in taxes for that income alone (assuming a standard 30% effective rate for 1099 income). That's a notable amount!
You can calculate the self-employment tax rate for your situation using our self-employment tax rate calculator. Input an income from 1099 work, even a relatively small amount, and observe how high the tax rate on it can be.
Self-employment income will always be subject to taxation, even if it falls below the standard deduction threshold.
While this may not be the most pleasant information, the good news is that you can consistently deduct your business expenses, regardless of whether you choose to take the standard deduction.
Many freelancers and independent contractors are unaware that they can still deduct business expenses while claiming the standard deduction.
This confusion often arises from mixing up personal itemized deductions with deductible business expenses.
As mentioned earlier, personal deductions are listed on Schedule A. However, itemized business deductions are a separate category, encompassing expenses incurred for your 1099 work.
To report these deductions, you'll need to complete Schedule C by following the form's instructions.
For self-employed individuals, whether operating as a sole proprietor or a single-member LLC, Schedule C is used to report both business earnings and associated expenses.
Utilize Schedule C to calculate your net earnings. After deducting your business expenses from your gross income, you'll identify whether you made a profit or experienced a loss on line 7a.
All expenses related to your freelance work or small business can be deducted on your Schedule C.
If you're seeking assistance in tracking your deductible expenses, consider trying Keeper. Our app automatically scans your transactions for eligible write-offs, eliminating the need for manual expense tracking. You'll also gain access to human bookkeepers who review your write-offs and can answer your tax-related questions.
To explore more about the write-offs you can claim, take a look at our introduction to tax write-offs, or try our job-specific deduction finder. We have guides for various professions, from real estate agents to freelance designers!
In the meantime, here's a list of typical business deductions to consider:
As a business owner, promoting your business is essential to attract customers and generate revenue. The good news is that all costs associated with promoting your business are tax-deductible, whether they're traditional forms of advertising like billboard ads or digital marketing efforts like Google ads.
This can include a wide range of expenses, from old-school print ads to digital marketing campaigns, including website hosting fees. By deducting these expenses, you can reduce your taxable income and ultimately lower your tax bill.
It's important to keep accurate records of all promotional expenses to ensure that you can claim the full deduction you're entitled to. This can include receipts, invoices, and other documentation that shows when and how you incurred these expenses.
Whenever you travel for your freelance work, the expenses incurred during those business trips can be deducted. This includes not only the evident travel costs, such as hotel bills and airfare, but also other expenses like laundry fees, Wi-Fi charges, and meals consumed during your trip.
As an entrepreneur, it's essential to stay current with the latest skills and knowledge in your industry. The good news is that you can deduct the cost of courses and study materials related to your field on your taxes. The best part? You don't even need to have a degree or certificate to qualify for this deduction.
It's worth noting that some purchases you might not expect can count as education expenses. For instance, if you're a music teacher, attending a concert can be considered a tax-deductible expense. This can be a valuable benefit, so make sure to keep track of all relevant expenses throughout the year.
If you're a freelancer or independent contractor who drives for work, you're in luck because you can deduct all of your car-related expenses on your taxes. This includes costs such as gas, insurance, lease payments, and vehicle depreciation, among others.
When it comes to claiming these expenses, there are two options: using the standard mileage rate or deducting your actual vehicle expenses. Each method has its own pros and cons, which you can learn more about in our article on mileage vs. actual expenses.
As a general rule, if you drive an average amount for your work, deducting your actual expenses is likely the better choice. On the other hand, if you're driving a lot for work, such as being a rideshare or delivery driver, you'll probably benefit more from using the standard mileage rate. Either way, make sure to keep accurate records of all car-related expenses to maximize your deduction.
As a business owner who leases a workspace, you can deduct your rent on your taxes. It's important to note, however, that the property you're renting cannot be registered in your name.
Additionally, if you're renting space to store inventory, you can also claim the rent you pay for that space as a deductible expense. This can include a separate storage unit or any other space where you keep your inventory.
By deducting your rent expenses, you can reduce your taxable income and ultimately lower your tax bill. Just be sure to keep accurate records of all rent payments and related expenses to ensure that you can claim the full deduction you're entitled to.
As a freelancer or independent contractor, a computer is likely an essential tool for getting your work done. The good news is that your laptop or desktop is tax-deductible, along with any software that you use for work purposes.
This can include a range of software, from web conferencing programs like Zoom or Microsoft Meets, to cloud storage systems and design tools like the Adobe Suite. By deducting the cost of these tools, you can reduce your taxable income and ultimately lower your tax bill.
It's important to keep accurate records of all computer-related expenses and software purchases to ensure that you can claim the full deduction you're entitled to. This can include receipts, invoices, and other documentation that shows when and how you purchased these items.
If you're self-employed and use part of your home for business purposes, you may be able to deduct a portion of your home-related expenses through the home office deduction. This can include expenses such as rent, utilities, home insurance, and home repairs.
To qualify for this deduction, you need to use at least a portion of your home for business purposes, such as storing inventory, meeting clients, or doing your work. To determine if you're eligible, you can take our home office deduction quiz.
There are two methods for calculating your home office deduction. The simplified method involves multiplying the square footage of your home office by a standard dollar amount, up to 300 square feet (currently $5 per square foot). Alternatively, the actual expense method lets you write off what you actually spend on housing expenses related to your home office. It's important to keep accurate records of all expenses related to your home office to maximize your deduction and avoid any potential audit issues.
If your small business has any W-2 employees, including yourself if you're running an S corp, you can deduct the salaries and wages you pay to your employees on your taxes. Additionally, if your employees make work-related purchases that you later reimburse them for, you can also deduct those costs as business expenses.
This can include a wide range of expenses, such as office supplies, equipment, travel expenses, and more. By deducting these expenses, you can reduce your taxable income and ultimately lower your tax bill.
It's important to keep accurate records of all employee-related expenses, including salaries, wages, and reimbursements, to ensure that you can claim the full deduction you're entitled to. This can include pay stubs, receipts, invoices, and other documentation that shows when and how these expenses were incurred.
For online sellers, the cost of inventory is likely to be one of the most significant expenses they incur. This cost is commonly known as "cost of goods sold" and is a popular write-off in the manufacturing and retail industries.
Here's how it works. When you purchase items that you plan to sell, those items are initially categorized as inventory. When you sell that inventory, it is then converted into your cost of goods sold. This calculation enables you to determine the profit you make on your sales.
By deducting your cost of goods sold on your taxes, you can reduce your taxable income and ultimately lower your tax bill. It's important to keep accurate records of all inventory purchases and sales to ensure that you can claim the full deduction you're entitled to. This can include receipts, invoices, and other documentation that shows when and how you acquired and sold your inventory.
As a business owner, you're likely to incur various license and tax-related expenses throughout the year. The good news is that these expenses are tax-deductible, which can help to reduce your taxable income and lower your tax bill.
Examples of deductible license and tax-related expenses can include annual LLC registration fees, state franchise taxes, and payroll taxes. Other expenses that may qualify for a deduction can include permits, certifications, and other fees required to operate your business legally.
It's important to keep accurate records of all license and tax-related expenses to ensure that you can claim the full deduction you're entitled to. This can include receipts, invoices, and other documentation that shows when and how you incurred these expenses. By taking advantage of these deductions, you can maximize your tax savings and keep more money in your pocket.
If you're a business owner who relies on shipping and delivery services to conduct your work, you can deduct all of your postage, shipping, and packaging expenses on your taxes. This can include a wide range of expenses, such as the cost of shipping products to customers, sending documents to clients, and even purchasing shipping supplies like boxes and packing materials.
By deducting these expenses, you can reduce your taxable income and ultimately lower your tax bill. It's important to keep accurate records of all shipping and delivery-related expenses to ensure that you can claim the full deduction you're entitled to. This can include receipts, invoices, and other documentation that shows when and how you incurred these expenses.
Whether you're running an e-commerce business, shipping products to clients, or just sending out important documents, taking advantage of this deduction can help you save money and increase your bottom line.
This post is for informational uses only and is not legal, business, or tax advice. Please consult with an attorney, business advisor, or accountant with concepts and ideas referenced in this post. Balance Pro assumes no liability for actions taken in reliance upon the information contained in this article.
As a freelancer, independent contractor, or self-employed worker, Tax Day can be more than just an annual hassle. In fact, depending on your self-employment income, you may be responsible for making estimated tax payments four times a year.
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