3 Smart Ways to Lower Your Taxes if You’re a Freelancer

Cute Blonde Freelancer Using Her Living Room As Office.
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Gig workers represented 35% of the U.S. workforce in 2020, up from 14% to 20% in 2014, according to Forbes. “After being laid off or unable to work their normal jobs due to the pandemic, many people worked as independent contractors with food delivery services, companies that provide online tutoring or as virtual assistants,” says Wade Schlosser, founder and CEO of Solvable.com.

See: How to Turn Your Natural Talent Into Cold Hard Cash
Find: Everything You Need to Know About Self-Employment Tax

These are just a few avenues that individuals took to earn money in 2020; others set up ecommerce stores, joined direct sales companies or tried their hand at making crafts for money.

However, taking a freelance job or launching a business can present tax-time challenges for people who are accustomed to having taxes withheld from their paychecks. “Gig workers don’t have taxes taken out by their employer and, instead of a W-2 form, receive a 1099 form to show their pre-tax earnings. For those who aren’t familiar with paying taxes as an independent contractor, it can get complicated,” Schlosser says.

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Here are three ways you can reduce taxes as an independent contractor.

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Find: Necessary Tax Tips for People with Side Hustles

Know What Business Expenses You Can Deduct

“It’s important to remember that you can deduct all your business expenses as an independent contractor, including tools you need to do your job, such as a computer, software or apps, a smartphone and internet access,” says Schlosser. “You may be able to deduct mileage, maintenance and repair expenses for your car, as well as a portion of your lease or loan, if you use it in your freelance business.”

If you started a business selling crafts or merchandise online, you can deduct expenses such as PayPal fees, website hosting and advertising, too.

If you took any courses to help you perform your duties better, you can deduct the costs of books and classes.

Don’t have receipts for your purchases? You can also use credit card statements and bank statements as proof of purchase.

See: These Are the Receipts to Keep for Doing Your Taxes
Find: 10 Common Tax Deductions You Shouldn’t Miss

Contribute to Pre-Tax Investments

You can reduce your adjusted gross income with contributions to a health savings account and individual retirement account. By paying into an IRA as a freelancer, you’re reducing your tax liability now and building your retirement savings for a better future, since you most likely don’t have an employee pension or 401(k) to rely on.

“It’s not too late to contribute to lower your taxable income,” says Tony Molina, CPA and senior product specialist at Wealthfront. “You can do this up until April 15.”

See: 8 New or Improved Tax Credits and Breaks for Your 2020 Return
Find: It’s Not Too Late to Get These Tax Breaks for 2020

Work with a Tax Professional

Tax accountants can help you file 1099s properly and account for deductions in the appropriate places on your tax returns. Tax professionals also understand what deductions you can legally take as a freelancer, and what claims might raise red flags to IRS auditors — even if you have legitimate receipts.

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“Consult with a tax accountant who specializes in small businesses and independent contractors to ensure you’re taking all the tax deductions you deserve to minimize your tax liability and lower your tax bill,” Schlosser advises.

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About the Author

Dawn Allcot is a full-time freelance writer and content marketing specialist who geeks out about finance, e-commerce, technology, and real estate. Her lengthy list of publishing credits include Bankrate, Lending Tree, and Chase Bank. She is the founder and owner of GeekTravelGuide.net, a travel, technology, and entertainment website. She lives on Long Island, New York, with a veritable menagerie that includes 2 cats, a rambunctious kitten, and three lizards of varying sizes and personalities – plus her two kids and husband. Find her on Twitter, @DawnAllcot.

3 Smart Ways to Lower Your Taxes if You’re a Freelancer
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