W-2 employees that work for a business or corporation pay between 7.65-15.3% on taxes but typically pay 10%. Federal income taxes must be withheld from each employee, but employers often pay a significant amount of their tax burden to the IRS before tax time.
1099-NEC independent contractors or freelancers pay 12.4% for Social Security, 2.9% for Medicare, and that total amount comes out of their pockets. The Self-Employed Contributions ACT (SECA) tax is hefty, but there are several things a freelancer can do to reduce it.
For one, freelancers can keep most of their income tied up in the business, so they only pay for what they personally use. For another, independent contractors can use the following freelancer tax deductions to save some cash. In the end, you may even pay less than you did as an employee.
12 Tax Deductions for Independent Contractors
Use the following tax deductions to save thousands of dollars per year. Since tax deductions count as reimbursements, keep your current tax documents on file for at least three years.
1. Form a Business L.L.C (Limited Liability Company)
To save even more money, consider becoming an L.L.C. or a sole business entity. Use a paystub creator to create and hand out custom paychecks to your employees. As an L.L.C., you pay business taxes, not self-employed taxes, which can keep thousands in your pocket.
2. Deductible Travel Expenses
A meal is a 50-100% tax-deductible business expense when you’re entertaining a client or going to a business conference. If your business travel lasts longer than an ordinary workday, takes place away from your home, and requires you to get sleep, it’s 100% deductible.
3. Business-Related Educational Expenses
Any educational expense you wish to deduct has to be related to improving or maintaining your skills for your existing business. It can’t be used for future ventures or “expected” expenses. For example, a yoga teacher could deduct a class on how to do yoga, but not a cooking class.
4. Home Office Deduction
There are several home office freelancer tax deductions, as long as they’re related to business. If you use a vehicle to meet a client or use the internet, your phone, workspace, or utilities for your company, you can take a percentage (10-30%) off of your home office taxes.
5. Home Buying and Selling Costs
Although buying a home is often more difficult when you’re self-employed, freelancers save on their home buying and selling costs simply because they work from home. What’s more, you can deduct taxes from your home, mortgage, and business insurance if you’re a remote worker.
6. Employee Business Expenses
Independent contractors can take advantage of multiple employee write-offs, including business expenses, like travel, rent, supplies, and office expenses. If you manage employees, you can also have your bank charges, administration fees, and property taxes deducted.
7. Health Insurance Premiums
Since you’re self-employed, you won’t receive a benefits package from your employer. Therefore, you can deduct 100% of what it costs to cover you and your family under health, dental and qualified long-term care insurance premiums unless you’re using your spouse’s plan.
8. Subscriptions and Publications
As long as your subscriptions or publications you purchase are directly related to your business, they count as a write-off. For example, if you run a computer software company and subscribe to Salesforce (onsite job management software), you can save a bit of money on your taxes.
You can deduct most mortgage loans and all business loans from your tax burden. However, you will need to track the disbursements if the loan you have isn’t solely used for your business. Credit card interest and most bad debt interest (non-business expenses) aren’t tax-deductible.
If you pay for Google or Facebook ads, TV commercials, billboards, or mailed flyers, you can deduct it, even if you used your ads to ask for donations. You can even deduct the cost of putting advertisements for your business on your car, although you can’t deduct the drive.
11. Start-Up Freelancer Tax Deductions
Businesses can also deduct their start-up costs. The IRS typically requires you to deduct major expenses over time as a capital expense, but you can deduct up to $5,000 in start-up costs within the first year of business or active trade. L.L.C.s can deduct $5,000 more on top of that.
Self-employment retirement plan contributions can help you save on your total tax burden. For example, if you place $10,000 into retirement and make $70,000 a year, you’ll only be taxed for the other $60,000. These savings may convince you to rack up on tax-deferred investments.