Top 7 Tax Deductions That Freelance Designers Miss

April 28, 2021
note that reads tax deductions

As a freelance animator, graphic designer, Web designer, UI designer, or branding designer, the success of your business is in your hands. While most freelancers would rather be working with or looking for clients, generating income is only half the story. Many find themselves Googling, ‘freelance pay taxes’ to understand just what their obligations actually are. To position your business for long-term success, it’s important to manage income, track earnings and expenses, and maximize your freelance expenses deductions for:

  • Computer equipment
  • Vehicle maintenance, repair, and other travel expenses
  • Software subscriptions
  • Office supplies
  • Web and marketing expenses

Check out these seven ways to make the tax code work for you. Your business will thank you after you file your return.

Taxes and Deductions

The U.S. government requires freelance designers to pay taxes on income of $400 or more in a year. To cover taxes on this income, financial professionals generally recommend that you save between 25 and 30 percent of your income, which you may need to pay every quarter rather than once a year. To reduce your tax burden, you can claim freelance expenses deductions in two ways:

  1. The standard deduction is a flat amount that reduces your taxable income and is determined by your filing characteristics. These are straightforward because you know exactly how much to deduct.
  2. Itemized deductions also reduce your taxable income. These are more complicated than standardized deductions because you need to complete more forms and justify all deductions.

#1 Home Office Deductions Worksheet

If you work from home, the U.S. government might subsidize some of your personal expenses. The key to the home-office deduction is to use part of your home or apartment regularly and exclusively for your freelance work as well as a home office deduction worksheet. You can deduct:

  • a portion of your mortgage or rent
  • property taxes
  • the cost of utilities
  • repairs and maintenance

To estimate the deduction, calculate the percentage of your home’s square footage that you use “exclusively and regularly” for your business. That percentage of your mortgage or rent, for example, becomes deductible. There is also a simplified option that lets you deduct $5 per square foot of your home business space, up to 300 square feet. A home office deduction worksheet can help you keep track of all deductions and ensure you don’t make mistakes.

#2 Business Use of Vehicle

If you use your vehicle to meet with clients, you can claim this deduction. There are two ways to calculate it--the standard mileage rate or your actual expenses. Using the standard mileage rate for 2020, you deduct 57.5 cents per mile you put on your car for business purposes.

To use the actual expense method, you have to add up your vehicle-related expenses for the year, including gas, oil, tires, repairs, parking, tolls, insurance, registration, lease payments, depreciation, etc. Then you multiply that total by the percentage of total miles driven that year for business reasons. So if your total vehicle expenses are $2,000, and 25 percent of your mileage was business related, you can deduct $500 ($2,000 * 0.25).

Be sure to keep a mileage log in case you’re audited by the IRS. Maintaining records is an important aspect of calculating tax deductions for freelancers.

#3 Health Insurance

If you purchase health, vision, dental insurance, or long-term care for yourself and your family, you may be able to deduct a portion of the premiums you pay.

But you can only take a deduction if neither you nor your spouse is eligible to participate in an employer-sponsored plan. So, if you’re a freelancer and your spouse has access to health insurance through their full-time job, you cannot claim the deduction.

#4 Qualified Business Income

If you’re eligible, you may be able to deduct up to 20 percent of qualified business income (QBI)—net income after you’ve claimed business deductions—before you calculate their tax bill. QBI is the net amount of income, gain, deduction, and loss from the business included in your taxable income fewer capital gains and losses, certain dividends, interest income, wage income, and a few other items. Consider hiring an accountant to help you with this complex deduction.

#5 Social Security Taxes

W2 employees pay 7.65 percent of their earnings to Social Security and Medicare with their companies paying another 7.65 percent. If you're self-employed, you have to pay the full 15.3 percent tax yourself. The good news is that you can write off half of what you pay. Plus, you don't have to itemize to take advantage of this deduction.

#6 Tax-sheltered Retirement Plans

To shelter earnings from the IRS (and to save for retirement), you can contribute pretax money to a simplified employee pension (SEP) or a solo 401(k), both of which have higher annual limits than regular individual retirement accounts (IRA). And you can still have an IRA, too.

#7 Expenses

When you buy equipment for your business, you can share the cost with Uncle Sam. There are two ways:

  1. Depreciation. To depreciate the cost, deduct the expenses over the number of years the IRS figures is the "life" of the equipment. For example, the IRS estimates that the life of a computer is five years, so you can write off the cost over five years.
  2. Expensing is the more popular option because it lets you deduct 100% of the qualifying cost in year one instead of over the life of the equipment. Common expenses include:
  • Computer equipment
  • Vehicle maintenance, repair, and other travel expenses
  • Software subscriptions
  • Office supplies
  • Web and marketing expenses

Simplifying Finances for Freelancers and Self-Employed

With Lunafi, freelance animators, graphic designers, Web designers, UI designers, and branding designers can manage their finances by understanding possible tax savings and taxes owed long before tax season. Lunafi provides:

  • Real-time tax estimation: See the estimated tax owed for your 1099 self-employment and federal income taxes for your freelance business.
  • All transactions in one place: Manage your expenses and business income by securely connecting your checking, credit card, and PayPal accounts.
  • Tax savings: See how much you will save with each business expense without the need for knowing IRS’s deduction rules.
  • Possible write-offs: Review suggested write-offs personalized to your profession.
  • Automated tasks: Create rules for your regular business expenses to automatically classify upcoming transactions.
  • Automated exclusions: Auto exclude transactions like payments to credit card balances and transfers to see only what is relevant to your business income and spendings.
  • Categorize your income: Categorize your business income correctly if you have a full-time job and side gigs.
  • Reports: Create Profit & Loss and Expense Reports and send the reports via email.

Tax Season Doesn’t Have to be Stressful

Tax season is often stressful for freelancers, but it doesn’t have to be. With Lunafi, you can organize your income and freelance expenses deductions you may be unaware of. Additionally, you can set up rules that keep you organized effortlessly, which makes it the best tool for tax deductions for freelancers. Download the free Lunafi app and get started today.

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