Freelancing can be a great way to pursue your passion, work on your own terms, and make a living. However, it also comes with the responsibility of managing your own taxes. As a freelancer, you are considered self-employed, which means you have to pay self-employment tax in addition to income tax. However, there are also many tax benefits and deductions available to freelancers in the US that can help reduce your tax liability and maximize your tax savings.
In this comprehensive guide, we’ll cover everything you need to know about tax benefits and deductions for freelancers in the US, including:
- Self-employment tax
- Estimated tax payments
- Home office deduction
- Business expenses deduction
- Health insurance deduction
- Retirement plan deduction
- Education and training deduction
As a freelancer, you are considered self-employed, which means you have to pay self-employment tax. Self-employment tax is a combination of Social Security and Medicare taxes, and it’s calculated as a percentage of your net earnings from self-employment. For the 2022 tax year, the self-employment tax rate is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare.
Estimated tax payments
Since freelancers don’t have an employer withholding taxes from their paychecks, they are responsible for making estimated tax payments throughout the year. Estimated tax payments are typically made quarterly and are based on your expected income and self-employment tax liability for the year. If you don’t make estimated tax payments or don’t pay enough, you may be subject to penalties and interest.
Home office deduction
If you use part of your home exclusively and regularly for business purposes, you may be eligible for the home office deduction. The deduction allows you to deduct a portion of your home expenses, such as rent, mortgage interest, utilities, and insurance, as a business expense. To qualify for the home office deduction, your home office must be your principal place of business or a place where you regularly meet with clients or customers.
Business expenses deduction
As a freelancer, you can deduct expenses that are necessary and ordinary for your business. This includes expenses such as office supplies, equipment, travel, and meals and entertainment. However, it’s important to keep accurate records of your expenses and only deduct expenses that are directly related to your business.
Health insurance deduction
Freelancers in the United States can deduct their health insurance premiums as a business expense on their federal income tax return. This deduction can help reduce their taxable income and save them money on their taxes.
To qualify for the health insurance deduction, the freelancer must meet the following requirements:
- Be self-employed: The freelancer must be self-employed and not eligible for health insurance coverage through an employer or spouse’s employer.
- Have a net profit: The freelancer must have a net profit from their self-employment. The health insurance deduction cannot exceed the net profit from their business.
- Have a qualifying health insurance plan: The health insurance plan must be established under the freelancer’s business, or the freelancer must pay the premiums for the health insurance plan from their business income.
The health insurance deduction is taken on the freelancer’s Form 1040, Schedule 1, Line 16. The deduction is limited to the amount of the freelancer’s net profit from their business. If the freelancer has a loss from their business, they cannot take the health insurance deduction.
It’s important to note that the health insurance deduction is not available to freelancers who are eligible for health insurance coverage through an employer or spouse’s employer. Additionally, the deduction cannot be taken for any months in which the freelancer was eligible for subsidized health insurance through the Affordable Care Act (ACA) Marketplace. Freelancers should consult with a tax professional to determine their eligibility for the health insurance deduction and to ensure that they are following all tax laws and regulations.
Retirement plan deduction:
Freelancers in the United States can take advantage of several retirement plan options to save for retirement and reduce their taxable income. The most common retirement plans for freelancers include the Simplified Employee Pension (SEP) plan, the Solo 401(k) plan, and the Individual Retirement Account (IRA).
- Simplified Employee Pension (SEP) Plan: Freelancers who are sole proprietors, LLCs, or partnerships can set up a SEP plan. With a SEP plan, the freelancer can contribute up to 25% of their net self-employment earnings (up to $61,000 in 2021) into a tax-deferred retirement account. The contributions are tax-deductible, and the investment earnings grow tax-free until the funds are withdrawn in retirement.
- Solo 401(k) Plan: A Solo 401(k) plan is another option for freelancers who are self-employed or have no employees other than their spouse. With a Solo 401(k) plan, the freelancer can contribute up to $19,500 in 2021, plus an additional 25% of their net self-employment earnings (up to a total of $58,000). The contributions are tax-deductible, and the investment earnings grow tax-free until the funds are withdrawn in retirement.
- Individual Retirement Account (IRA): Freelancers can also set up an IRA, which allows them to contribute up to $6,000 in 2021 ($7,000 if they are age 50 or older). The contributions to a traditional IRA are tax-deductible, and the investment earnings grow tax-free until the funds are withdrawn in retirement.
It’s important to note that the contribution limits and tax benefits of these retirement plans can vary depending on a freelancer’s income and other factors. Freelancers should consult with a financial advisor to determine which retirement plan is best for their individual situation.
Education and training deduction:
If you take courses or attend conferences to improve your skills or knowledge in your field as a freelancer, you may be eligible for an education and training deduction. You can deduct the cost of tuition, books, and other related expenses as a business expense, as long as the education is directly related to your business.