3 Smart Ways to Lower Your Taxes if You’re a Freelancer
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.
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.
Here are three ways you can reduce taxes as an independent contractor.
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.
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.”
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.
“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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