The Holidays are upon us and there is so much to do! Shopping (remember to buy gifts for special clients), holiday cards (everyone you’ve worked with over the past 5 years will receive one), parties and catching up with dear friends and colleagues. You may also find it advantageous to change your health insurance plan before open enrollment ends in your state, or make a retirement account contribution before January 1. It also makes sense to review the years’ invoices to calculate gross revenues and decide how to handle December billings.
Especially for invoices that are due on or after the 15th, should you keep those earnings in this year and invoice at the usual time, or invoice on January 2 and push earnings into next year? If you earned more than expected this year, consider pushing earnings forward, to limit taxable income. You could also make a retirement plan contribution, if you haven’t reached the year’s maximum amount (whether you bill clients in this year or the next). Here are a few more tax season preparation tactics to consider:
Find all invoices and confirm that they’ve been paid. Send a reminder to those clients who have not paid up. As noted above, calculate your revenues (i.e., income before deductions) and determine whether to invoice on time or later. Of course you can do other good things with your windfall, if you have one, such as registering for a class that will be held in the new year and paying for it now (and taking the deduction in this tax year).
Calculate your self-employment tax. In addition to our regular income tax, Freelancers are responsible for paying the 15.3 % self-employment tax levied on the first $132,900 of net income and 2.9% of net income beyond that amount. This tax represents the Social Security and Medicare taxes that traditional employees have taken out of their paychecks automatically. The amount includes as well the employer portion of those taxes, since Freelancers are considered both employer and employee.
Freelancers are able to write off business expenses for these categories:
Business-related travel, meals and lodging
Membership in business and professional associations
Office required equipment or materials
Home office. Most Freelancers work from home and are therefore eligible to take this deduction. The Internal Revenue Service allows independent workers to write off a corresponding percentage of rent/mortgage and utilities when our home is also our office. Get out your measuring tape and determine the dimensions of your workspace as a percentage of the square footage of your home to calculate the amount of your deduction. Be advised that office space must be used exclusively for self-employment work. One cannot, for example, “borrow” a child’s bedroom from 9:00 to 5:00 and consider that your home office.
Office equipment and supplies. One of the downsides of being a Freelancer is that we are unable to use an employer’s computer, scanner, printer, staples, or paper clips. We pay for that stuff out of our own budgets. But since we need certain resources to do client work, the IRS allows us to deduct their cost from gross sales revenues. To avoid IRS problems, keep your business and personal expenses separate. For example, check in with a smart accountant before you decide to deduct your cell phone or Internet service while using them only partly for work.
A real benefit for those who will buy office equipment is the Section 179 Deduction, which allows the business owner (or Freelancer) to write off the entire purchase price of qualifying equipment for the current tax year, up to $1,000,000. Qualifying items include office furniture, computers and software programs such as QuickBooks and InDesign.
Travel, meals, lodging. This category of deductions is the most confusing for Freelancers and business owners. We are allowed to deduct the costs of traveling to our work assignments, client meetings and conferences, including gasoline, tolls, parking, trains, planes, buses, or Uber/ Lyft. One cannot deduct costs associated with commuting to your separately leased or owned office space. Hotel/ airbnb/ B&B rooms are 100% deductible, except for personal expenses such as movie rentals or the mini-bar.
The cost of taking clients and prospects out for a meal are deductible at a 50% rate, while costs associated with company-wide parties, picnics and restaurant meals when at least half of your employees attend are 100% deductible. Keep all receipts —take a picture with your phone as back-up.
As with all Freelancing expenses, deductions must directly relate to one’s business. We cannot write off the tuition for a workshop on baking or flower arranging if one is a website developer, nor can we write off education that trains us for a new occupation. But if we take classes to earn certifications in our field or to enhance business knowledge, then we can typically write off all associated costs. The same is true for any licensing, registration, or certification costs that we incur.
Thanks for reading,
Illustration: Henry Holiday The Tax Collector at Work, created for the Lewis Carroll poem The Hunting of the Snark (1876)