Sunday, February 15, 2015

The Biggest Tax Breaks for Freelancers

Rebecca Lake for MyBankTracker.com writes:  Tax deductions reduce the amount of your income that’s subject to tax, which makes them extremely valuable if you earned a lot from freelancing and you’re worried about getting stuck with a big tax bill. With so many different deductions floating around, knowing which ones you can claim is a must to make sure you’re not paying more in taxes than you need to. Here’s a look at some of the biggest tax breaks for freelancers.

1. Home office deduction

The home office deduction gets a bad rap because it’s typically associated with a higher audit risk but the truth is, the odds of beingaudited automatically go up if you file a Schedule C. If you use part of your home exclusively for freelance work, you shouldn’t be afraid to claim the deduction as long as you’ve the necessary records to back it up.
Thanks to some changes in the tax code, there are now two ways to take the home office deduction:
1. You can use the regular method, which is based on the percentage of your home you use for business and your actual expenses.
2. The simplified method values the deduction at $5 per square foot.
If you’re not sure which way to go, running the numbers is a pretty simple way to see which one’s going to give you the biggest benefit. For example, if you use a 100-square foot room in your home for business, your deduction would be worth $500, based on the simplified method.
Now let’s say you live in a 2,000 square foot home and your total cost for maintaining the property, including your mortgage payments and utilities, is $20,000 a year. That same 100 square foot office would equal 5 percent of your home’s area, which means you can write off 5 percent of your total expenses, doubling your deduction to $1,000. If you’re not taking the time to figure out what the difference is, you could be costing yourself money.

2. Business equipment

Some freelancers require very few tools to get the job done. If you’re a writer or blogger, for example, all you may really need is a good computer and maybe a comfy place to sit. On the other hand, if you design websites or you’re a professional photographer, you’re probably going to need to invest in some specialized equipment.
The Section 179 deduction covers any tangible property you purchase for business use. That includes things like laptops, copy machines, printers, furniture and computer software.
For the 2014 tax year, the deduction was retroactively capped at $500,000, which is pretty sweet if you spent big bucks on new equipment last year. As of January 1st, the deduction limit dropped back down to $25,000 which means freelancers won’t be able to get quite as much of a write off as they have in years past.

3. Business travel

Freelancers who travel to meet with clients or work in other cities have the advantage of being able to deduct some of their expenses. Typically, this includes things like hotel stays, airfare, cab fare, meals and entertainment. If you normally drive your own car to get back and forth to out of town business meetings, you may also be able to write off some of your mileage.
To satisfy the IRS requirements for the deduction, you have to spend at least one night away from home and keep records of all your expenses. That includes things like credit card receipts from your hotel, receipts for meals, gas receipts or a mileage log of detailing the dates you traveled, the locations you visited and the distance.
Generally, you can only deduct half the cost of meals and entertainment. The standard mileage rate is set at 56 cents per mile for the 2014 tax year and it gets bumped up to 57.5 cents for 2015.

4. PayPal fees

Billing your clients through PayPal is a pretty easy to collect payments but there’s a catch, since there’s typically a service fee to process the transaction. You could ask your client to cover the fee on their end or just tack it on to your bill, but it’s not always an issue you can negotiate.
The good news is you can deduct any of those annoying fees you pay throughout the year.

5. Health insurance premiums

When you’re a freelancer, enrolling in an employer’s health insurance plan isn’t an option. Instead, you have to purchase your own coverage which can sometimes mean paying some high premiums. The good news is that as long as your freelance efforts produced a profit, the amount you pay in can be deducted when you file your taxes.

You don’t have to itemize to deduct your health insurance premiums but the deduction is only good for the months that you weren’t covered by an employer’s plan. So for example, if you worked the first three months of the year at a regular job and then left to go freelance, only the premiums you paid after that would be tax deductible.

Being a freelancer means juggling a lot of different balls at once but your tax filing isn’t one you can afford to drop. Every penny you deduct has a positive impact on what you owe so there’s no excuse for passing up any of these money-saving deductions.

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