Current statistics suggest that close to 30% of workers in the United States are self-employed. Being self-employed means that you’re able to work for yourself, set your own hours, and live wild and free, right? In a way, yeah. But there’s a lot more to it than that, particularly when it comes time to pay your taxes. In short, you're gonna wanna understand tax deductions for freelancers in order to maximize your earnings.
Freelancers, small business owners, and other self-employed individuals dread doing their taxes each year because it means looking at deductions, factoring in self-employment tax, and ensuring that they don’t get anything wrong, so they’re not audited.
Unlike W2 employees (people working for a company who receive a W2 each year), self-employed workers don’t automatically have taxes taken out of their paychecks. If you’re new to self-employment and don’t know this, it’s a massive, heartbreaking surprise come tax season.
Save yourself the heartache and some savings, and read through our guide on the tax deductions for freelancers that you’ll wanna know about if you’re filing taxes as a freelancer come 2022.
Already caught up on freelance taxes and just wanna invest your savings? Download the Wealth Stack app for iOS or Android.
Tax Season 2022: What You Need to Know as Self-Employed
As mentioned, freelance workers don’t have taxes taken out of each paycheck. Because a company isn’t taking them out for you, you’re the one who has to pay for social security and Medicare. So, if you’re DJing on the side as a solo entrepreneur or hustle as a freelance Uber driver, you’re gonna have to think about taxes on your own.
For the fiscal year 2020, the tax rate for self-employed workers was 15.3% (12.4% for social security + 2.9% for Medicare). But it’s not that simple. The 12.4% you pay for social security applies only on incomes up to $137,700 in 2020. The 2.9% Medicare tax, however, applies to all of your self-employment income.
Lise Greene-Lewis, a certified public accountant and tax expert at TurboTax, says that "You should keep some of your money [if you’re self-employed]. You have to pretend you don't have that much money because your income varies so often. You have to think about paying your taxes."
Aside from taking out at least 15% of your income to set aside for taxes, here are a few other things you need to know about the coming tax season (yeah, 2021 tax season has already passed, so if you haven’t paid those then get on that!):
- The standard deduction for 2020 increased to $12,400 for single filers and $24,800 for married couples filing jointly. Be sure to check it before filing your 2021 taxes at the beginning of next year. However, we don’t imagine it’ll go up that much.
- The income tax brackets were increased in 2020 to account for inflation (here are the current tax brackets for 2021). This is another important thing you’ll wanna check before filing your taxes as a freelancer.
What to Consider as a Freelancer When Paying Taxes
Shoshana Deutschkron of Upwork once spoke about suggestions she had for freelance worker and those who file their taxes as self-employed:
- Take your taxes into account when setting your prices. If you know that you’ll end up paying close to 30% in taxes just for working freelance, increase your prices to cover those costs.
- Keep track of your business expenses! Everything you purchase should be tracked and filed away so that you have a really good idea of what you can deduct at the end of the year. For just $5 per month, you’re able to get a subscription to QuickBooks Self-Employed, which includes expense tracking, invoicing, and mileage tracking.
Why’s it so important to think about these costs? Of the approximately 15 million self-employed workers, Pew Research shows that they tend to pay higher taxes than salaried employees. For the most part, this applies to business owners, which just seems like a systemic way to discourage people from starting their own businesses, but that’s a discussion for another time.
The point is this: If you own your business, you have access to tax breaks and write-offs. When properly leveraged, those additional tax benefits can offset the tax due and result in a lower total effective tax rate.
15 Tax Deductions for Freelancers to Consider
Your car, home, insurance, retirement savings, and even your education bills could earn you a tax break. While we can list off freelancer tax deductions though, we highly suggest speaking with a tax expert. They’ll be able to help you find the most deductions and ensure your tax bill is as low as it can be.
Still, there are many valuable tax deductions for self-employed workers, independent contractors, and sole business owners that you should be taking advantage of. Here are 15 great tax deductions to consider:
- Home office deduction
- Health insurance (in some cases)
- Continuing education (workshops, courses, etc.)
- Your car
- Retirement savings
- Self-employment tax deductions
- Business insurance premiums
- Office supplies
- Credit card and loan interest
- Phone and internet costs
- Business travel and meals
- Start-up costs
- Advertising
- Certain memberships
- The qualified business income deduction (through this, you’re able to deduct 20% of your income from your taxes; read up about the QBI here)
Prepare for Tax Season 2022
When you’re caught up in the initial excitement of what it means to work for yourself, it’s easy to forget to think about taxes. Forget about ‘em, though, and you’ll be crying at the tax office your first year (it’s happened to us). Instead, incorporate it into your year-end and year-round planning.
The key to being prepared with your tax obligations is to a) keep track of your expenses throughout the year and b) understand your tax rate. Both will help you plan ahead and ensure you have enough in your account to cover taxes for tax season 2022.
Another alternative is to put your tax money into a high-yield savings account, a retirement account, or put it to work through investing. Get the Wealth Stack app to continue learning about how you can power your wealth as you grow into your own money magnet.
Download the app for iOS or Android. It’s free, always, because we’re not about charging you for knowledge you deserve to have.
