I noticed that over the last year, many of our clients considered or took on contract work outside of W2 payroll. We also had many that have been freelancing for years.
For this reason, I wanted to summarize some helpful ideas before year-end.
Here are the top 8 tips that can help freelancers, independent contractors, and 1099-NEC recipients to optimize their tax savings.
It is also known as Section 199A deductions. The deduction allows eligible taxpayers to deduct up to 20% of their qualified business income (QBI).
Setting up a LLC can protect your personal assets, separate your personal finance from the business, facilitate business growth and give your business credibility.
You don’t have to set up a corporation to get the benefits of the S corp. You can convert the LLC by filing form 2553 with the IRS. One of the major advantages of an S corp is that shareholders of S corps don’t have to pay self-employment tax on their share of business income. This can immediately lead to thousands or tens of thousands in tax savings. You can also complete this retroactively in certain cases & obtain a large refund for previous years.
If you don’t have any other employees, you can open a 401(k) and make contributions. You can contribute the lessor of 1) $66,000 or $73,500 if age 50 or over, or 2) 100% of earned income. The contributions to the 401(k) are tax deductible & will immediately reduce your tax on your tax returns.
The SEP IRA allows you to contribute the lessor of 1) $66,000 or $73,500 if over 50 or 2) up to 25% of compensation of net self-employment earnings, with a $174,000 (salary) limit on compensation that can be used to factor the contribution. This amount contributed is a direct tax deduction.
Technically speaking, you can deduct any expense that is related to the business. For example, if you work from home, you can deduct the home office expenses. If you use vehicle for business purposes, you can use the vehicle expenses. Make sure you keep good track of your expenses, hopefully by using a simple bookkeeping software or spreadsheet.
No tax will be withheld for income from freelancing or contracting. Therefore, you are solely responsible to prepay all the estimated tax. If you fail to prepay sufficient amount, you will be assessed an underpayment penalty which can totally be avoided.
You can take up to $12,000 in deductions for hiring a child to work for you. This can then be put into a joint account and used for expenses related to your child.
Hopefully these help! If you want our expanded personal or business deductions checklists, please contact us below & we will send over.
If you need help with implementation of any of the above, please reach out as soon as possible so we can get to work on these.
Looking forward to hearing from you!
George Dimov CPA
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