A freelance career not only changes who your boss is and how you work, it can also change how you file and save money on your taxes. Here are four tax tips that anyone starting a freelance career needs to know.
#1 Keep Accurate Records Of All Income
You are responsible for keeping track of all your sources of income, regardless of how much income you made from that source. That means if you complete a contract with a company for $400, and that is the only contract that you do with them this year, you need to document that source of income.
Although companies are required to provide you with tax documents if they pay you over a certain amount each year, the burden of keeping track of all of your income sources is placed on you and not the companies you contract with. You shoulder all of the responsibility of keeping track of the work you do and the income that you generate.
#2 Create A SEP
You need to make sure that you continue to plan for your retirement. As an independent contractor, you can set up a SEP-IRA or self-employed retirement plan contribution. A SEP-IRA provides you with a way to make tax-deferred contributions to your retirement fund. This is a great way to lower your taxable income, especially since you can contribute more to a SEP-IRA than to a regular 401(k). The IRS allows you to contribute up to 25% of your income or up to $53,000, whichever is less.
#3 Obtain Health Insurance
Health insurance can seem like a large expense; however, when you are self-employed, it is a tax-deductible expense. You can deduct the total cost that you pay for your health care premium from your income. This is another way to lower your taxable income and potentially your tax base.
Depending on the amount of money that you spend out-of-pocket on your health care costs, beyond your premium, may also be deductible if you take an itemized deduction instead of a standard deduction on your taxes.
#4 Define Your Work Space
If you are literally working out of your home, make sure you define your workspace. For you to take an itemized or standard home office deduction, you need to have a distinct space in your home you use only for work. That area cannot be used for other purposes, such as a dual home-office and guest room. To benefit from this often generous deduction, you need to make sure that your work space is really only your work space.
For more information, contact companies like DSJ CPA.