Tax advice for freelancers can be complicated, but the IRS offers helpful guides for self-employed people. If you’re a freelance graphic designer, for instance, you can deduct your business-related expenses such as computer equipment, software, and design tools, internet access, supplies, and business cards.
The tax burden on freelancers can be less stressful without the right advice, however, it is important that freelancers take steps to properly record their business expenses. Read on for our top tax tips for freelance businesses.
The freelancer’s tax structure
You can choose to either file your taxes as a sole proprietor or an S corporation, and this decision affects your tax bracket and tax obligations.
Sole proprietorship
If you file your taxes as a sole proprietor, the tax rate is 15.3 percent, and you must pay self-employment tax on your earnings up to $142,800 (as of 2021).
If you make more than $142,800, your tax will be calculated on your business income. If you make just under $142,800, you’ll pay your normal income tax, and any profit that you make above the threshold will be taxed at the business tax rate.
S corporation
S corporation tax is even more complicated, but it’s generally better for business owners. If you file your taxes as an S corporation, the federal tax rate is 15.3 percent for the first $117,000 of net income and 2.9 percent for the next $93,000 of earned income. The income you receive from your business is taxed at your personal tax rate, however, you can deduct business expenses such as rent, utilities, depreciation, office supplies, and equipment.
How to save on your freelance business taxes
While the IRS doesn’t require you to track your expenses, it’s often a good idea, especially for freelancers. If you keep track of business expenses, you can claim the deductions that you’re entitled to, which can reduce your income tax liability.
Freelancers can often deduct the cost of health insurance, office space, business licenses, and startup costs. If you’re self-employed, you generally qualify to deduct the cost of health insurance through your tax return. You can also deduct the cost of office supplies, transportation costs, professional dues, and the cost of child care.
Freelancers pay self-employment tax
Freelancers pay self-employment tax on their income, and this tax is the same rate as that paid by independent contractors. Freelancers may also have to pay state income taxes, and they must report their earnings to the IRS.
Freelancers can also reduce their tax liability by hiring a qualified accountant or financial planner. These professionals can advise on how to structure your freelance business, and they can organize your business records.
Get in touch with our experts at Abbo Tax CPA to learn more about tax savings and tax preparation for your freelance business.
