If you’re a freelancer, you enjoy a different kind of life than a traditional employee. You revel in the freedom and flexibility that comes with being an independent worker. You get to choose what to do, when to do it, and who to do it for. And while that lifestyle might not be for everyone, for most freelancers it’s a joyful way of making a living.
Except for when April 15 rolls around – tax day.
Now to be sure, nobody particularly enjoys tax day. So why is that day even more stressful for freelancers? It’s because tax day is a terribly costly day for freelancers. According to a multitude of sources – including the United States Government Accountability Office – independent workers are missing out on approximately $7.4 billion in potential tax savings every year.
Uncle Sam certainly isn’t going to shed any tears if you overpay on your taxes. But the thought of paying more than necessary of your hard-earned income might leave you reaching for the Kleenex box. Stay dry-eyed and take back your share of that $7 billion pie by capitalizing on all the tax deductions the government permits.
Here are the top 5 tax deductions that freelancers overlook:
1) Vehicle Mileage
Do you use your car for work? If so, keep track of every mile you drive. When you’re filling out the tax form, you’ll be able to multiply those miles by the standard IRS allowance for mileage, and deduct that amount from the income on which you’ll pay taxes. Or alternatively, you can fill out Form 4562, and itemize all of your deductible vehicular expenses.
2) Home Office
Many freelancers work from home. If that’s you, you might be able to deduct a significant amount from your income for home office expenses. To be deductible, your home office must be used “exclusively and regularly” for work. And you don’t have to be a homeowner to take advantage of this deduction, renters are also permitted to deduct home office expenses.
3) Educational Costs
Do you subscribe to professional periodicals designed to keep you on the cutting edge of your field? Have you attended classes or workshops for the purpose of honing your professional skills? Money that you spend to stay at the top of your profession is tax deductible.
4) Health Insurance
The cost of health insurance is a huge expense for most freelancers. Did you know that you might be able to deduct up to 100% of the premiums you pay for health insurance? Thanks to the Small Business Jobs Act of 2010, you might be able to write-off the costs of health insurance for you and everyone else in your family.
5) Money Set Aside for Retirement
If you’re a freelancer, you’re on your own when it comes to setting aside money for retirement. So hopefully you stashed away a nice chunk of change toward your retirement last year. If you funneled that money into a Simplified Employee Pension IRA, you may be able to deduct up to $50,000 from your taxable income for the year.
You’ll find each of these deductions, and many others, listed on Form 1040, Schedule C (The Freelancers Union offers a nice overview of Schedule C, and every permitted deduction).
Spend some time studying Schedule C along with the provided instructions for every possible deduction. You might find other hidden gems in the form of deductions you’ve been missing. And it might be well worth hiring an accountant to assure that you’re mining all of those hidden gems.
When tax day rolls around this year, lots of freelancers will play the fool again by sending the government more than their fair share of their income. You can avoid the April Fool’s do-over by making sure you’re taking advantage of all the tax deductions the law permits. To do otherwise is just, well, foolish.
