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 deductions for:
Check out these seven ways to make the tax code work for you. Your business will thank you after you file your return.
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 deductions in two ways:
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. You can deduct:
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.
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.
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.
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.
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.
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.
When you buy equipment for your business, you can share the cost with Uncle Sam. There are two ways:
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:
Tax season is often stressful for freelancers, but it doesn’t have to be. With Lunafi, you can organize your income and expenses and discover tax write-offs 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.
If you wonder what is schedule C on a tax return, read the basics of a Schedule C form for freelancers in this article.
Good press can bring a lot of traffic and income to your business. It is generally an efficient form of business marketing and advertising. There are different ways to generate press for your business. Read our blog to get into the details.
Speaking of a portfolio, while word of mouth is an excellent tool for getting your name out there, building a freelance portfolio website will not only make you stand out in a potential client or employer's mind, but it will continue to speak for you even if you're not available.
Join thousands of subscribers and stay-up-to date on product updates, resources and tips and tricks for freelancers.