As a freelancer, you have unique opportunities to take advantage of tax benefits that can save you thousands when the tax bill comes due. Unlike standard W-2 employees, freelancers can qualify for notable tax savings from expenses related to their work – such as health insurance, retirement contributions, and the home office deduction.
Something even better? Most of these freelancer-friendly benefits are above-the-line deductions, meaning you can claim them regardless of whether you take the standard or itemized deduction. Read on, as we reveal the five best tax “credits” for the self-employed, to help you keep more of your hard-earned income this tax season.
#1 – Self-Employed Health Insurance Deduction
Much ink has been spilled on the sky-high costs of health insurance. But, when you work for yourself, there is a silver lining. The IRS allows self-employed individuals to deduct 100% of health insurance premium costs (for themselves, spouses, and dependents) from their adjusted gross income.
#2 – Home Office Deduction
The home office deduction allows self-employed taxpayers to write off expenses associated with using their home as a place of business. The most salient eligible costs include a portion of rent/mortgage interest, utilities, maintenance, and renovations related to your workspace.
To qualify, you must use a designated area of your home exclusively for conducting your business – keeping it separate from personal family spaces as much as possible. Records and receipts for home office-related expenses are a must.
#3 – Retirement Plan Contributions
Don’t leave free money on the table – as a freelancer, you can open and contribute to tax-advantaged solo 401k and SEP IRA retirement accounts. In 2023, you can contribute up to $66,000 across individual and employer contributions into a solo 401k. SEP IRAs allow contributions up to 25% of your net earnings or $66,000, whichever is less.
#4 – Business Use of Vehicle
If you use a personal car or truck for business purposes like driving to client meetings or the post office, tracking mileage opens the door to substantial tax deductions. The standard mileage rate set by the IRS for 2023 is 65.5 cents per mile driven for business.
This 65.5 cent write-off covers gas, maintenance, depreciation, and insurance costs. The deduction quickly adds up for freelancers doing client visits or courier services using their own vehicles. You’ll need clear mileage logs with purposeful documentation to claim it.
#5 – Earned Income Tax Credit
The Earned Income Tax Credit directly reduces tax liability for lower-income households, which includes many part-time and new freelancers. The EITC for 2023 ranges between $560 and $7,430, depending on your adjusted gross income and the number of children you claim.
Next Steps for Freelancer Tax Savings
As the above tax deductions illustrate, freelancing brings unique tax-minimizing opportunities unavailable to regular employees. Make it a priority to take advantage of benefits tailored to the self-employed, so that you retain more of your income.
Be meticulous about recordkeeping and consider working with a skilled tax professional like Agro Accounting CPA to identify the best tax minimization approach for your situation. Proper planning means your freelance tax bill can be far lower than expected!
