Ron Friedman for RiverJournal.com writes: Taxes for the self-employed and freelance worker can get pretty
complicated. For those in this segment of the economy often combine
their personal and business lives and, as a result, reporting to Uncle
Sam can get pretty complicated. Freelancers usually work out of their
own home, use their own car to get to and from sales calls and don’t
have a separate bank account to conduct their business affairs.
Whether you prepare your own taxes or have someone prepare them for
you, it’s still a good idea to know what deductions you might be
entitled to. The following is a list of common tax deductions for those
in their own business. Every profession and industry may have its own
unique characteristics; here’s a general list of what is available to
most:
Home Office: In order to qualify for the home office
deduction, you must have a dedicated space devoted to your business and
absolutely nothing else. Deducting the den in your house that contains
the family computer and serves as a guest bedroom is an invitation for
trouble. The deduction is calculated by the amount of square footage
devoted to your office divided by the total square footage of your home.
That fraction is applied to the costs of running your home will be the
basis for your home office deduction.
Automobile: The deduction for use of your automobile
is the greater of the actual costs of owning and maintaining it
compared to the standard mileage rate the Internal Revenue Service
publishes every year — 56 cents per mile for 2014. Actual expenses may
include lease or loan payments, registration fees, insurance, gas,
maintenance, repairs, garage fees and depreciation. The caveat here is
that the only deductible portion of the costs are those associated with
the business use of the automobile. It is advisable to maintain a car
log or diary, to distinguish business miles from personal miles.
Meals and Entertainment: The rules regarding meals
and entertainment can get fairly complicated, however, here are some
guidelines to determine if the expense qualifies:
1) The expenses has to be an ordinary and necessary expense that
is common in your industry/profession and is helpful and appropriate to
your business.
2) The expense has to be directly related to your business, meaning it occurred in a business setting, or the primary goal was to do business or for a particular business outcome. It does NOT have to result in business transacted.
2) The expense has to be directly related to your business, meaning it occurred in a business setting, or the primary goal was to do business or for a particular business outcome. It does NOT have to result in business transacted.
Equipment: Normally business equipment (phone
systems, computers, furniture, copiers, scanners, etc.) is tax
deductible (depreciable) over the useful life of the equipment. The IRS
publishes tables covering all kinds of equipment and their related tax
lives. However, one of the nuances in the tax code allows for 100%
depreciation in the year of acquisition.
Retirement Contributions: While not directly a cost
of business, the tax code allows those self-employed and freelance
workers the ability to lower their tax bill by contributing to a
retirement account. Whether one utilizes an IRA, SEP or KEOGH plan,
those contributions can lower your overall tax bill.
Health insurance: Premiums paid for health insurance
by freelancers are deductible. In fact, for those who are collecting
Social Security while freelancing, your premiums paid for Medicare
coverage are also deductible.
Insurance (other than health): Premiums paid for
business insurance (general liability, errors and omission, malpractice,
worker’s compensation, etc.) are deductible.
Advertising: Any expenditure for advertising and
promotion of your business would fit into this category, including
digital advertisements, business cards, promotional items, brochures,
etc.
Fees and commissions: If your state or county
requires you to carry a license or business certificate to do business,
this is the place to deduct those expenditures.
Contract labor: This includes all the independent
contractors and freelancers you hired to conduct your business and is
separate from anyone whom you treated as an employee. It includes the
computer consultant you hired to set up your network, or any
subcontractors you used to create a final product.
Wages: If you hire someone in your business
(assistant, administrator, etc.) even temporarily, you can deduct not
only the wages you paid but also, the related payroll employment costs
(employers’ share of Social Security and Medicare, Federal and State
Unemployment Insurance, etc.).
Interest: If you borrowed money to start or expand your business, the interest you paid during the year is fully deductible.
Legal and professional services: Fees to lawyers and
accountants used to initiate or continue a business are deductible,
including bookkeeping and tax preparation.
The most important part of managing the financial operations of your
business should be planning. Tax planning should be part of that. One of
the key short term strategies employed is knowing when and how much to
pay for your quarterly estimated taxes. It will go a long way to
avoiding surprises come tax day and more importantly, penalties and
interest to the government. Once you’ve gotten your business off the
ground, you should talk to your accountant about ways to maximize cash
flows and minimize taxes from year to year. Sole proprietorships are the
most common business organization form for the self-employed, however,
there are other corporate structures a freelancer can adopt and gain
significant tax and legal advantages.
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