Okay, real talk: By far the biggest bill I pay is my freelance tax bill. It’s bigger than rent. Bigger than my atrociously expensive health insurance. Bigger than both of those combined.
It feels like I pay through the nose every three months when I send checks to the IRS and the state, and I know I’m not the only one. So no wonder I loved it when my accountant scrutinized my last tax return and found about 10 different ways I could pay less in just our first meeting.
There’s a ton of advice floating around about how you can save money on freelance tax, but some of it’s just rumors spread by wishful thinkers. That’s why I’ve compiled this list of five accountant-approved tips to help you save money on your taxes.
1. Find Deductions You Missed Out on Last Year
If you can, have a business accountant look over your tax return from last year. Ask them to scrutinize every little thing, and point out deductions you may have missed out on.
Some accountants will do this for free if you hire them to file your taxes, but even if they don’t, the fee will pay for itself. I learned that I could deduct my cell phone bill, even though I used it for both business and personal purposes. It was a small savings, but every little bit counts. I also learned the rules of home office deductions, and that I should advance my LLC into S Corp status so I could save thousands.
Before you schedule an appointment, get your stuff organized. My own accountant, Jonathan Thompson at Austin CPA, PC, constantly stresses the importance of good recordkeeping. “If an individual has good recordkeeping, it usually helps reduce professional fees, but also allows the individual and his or her accountant to plan for taxes and come up with effective strategies to reduce taxes throughout the year,” he says.
So while he admits it’s boring and super accountant-like to say something like that, maintaining organized records really can help you save more on taxes than you’d imagine. After all, if accountants can’t see what you’re spending money on, it’s hard for them to give you specific tax-saving advice.
2. Deduct Your Home Office Space
A lot of solopreneurs won’t deduct their home office because they’re afraid of getting audited. But as long as your home office space is only your home office space (and not a couch you work from that doubles as TV seating and a guest bed), you’ve got nothing to worry about. So as small of a space as it might be, go ahead and count it.
“Figuring out the percentage of home expenses that is deductible for your business is simple,” says Dave Symmonds of the Tax Relief Center on the Less Accounting blog. “Measure your work area and divide by the square footage of your home. That percentage is the fraction of rent, mortgage, utilities, taxes and maintenance you can claim.”
3. Open and Use an HSA
Health insurance is a hot topic, especially with so many freelancers opting for alternatives instead. But if you know you’ll have some medical expenses beyond your monthly premium, you might as well use a health savings account (HSA) to set that money aside and make it tax-deductible. Unlike flexible spending accounts (FSAs), HSAs have no “use it or lose it” rule, and they can be established by individuals without an employer as long as they have an HSA-qualified high deductible health plan (HDHP).
“This type of health care coverage offers what amounts to a triple deduction or tax break,” says CPA Gary Kaplan. According to Kaplan, you can save money with these accounts because:
- Contributions are exempt from income taxes
- Account earnings are tax-deferred
- The funds you use for health-related expenses aren’t taxed
Triple deduction? Yes, please.
4. Take Advantage of Section 179
Section 179 is all about making the physical equipment you use in your business tax-deductible. Things like job-specific computers, printers and even vehicles work perfectly, as well as business-related software.
For some things, you can deduct the full cost of the item the year you purchase it. But for others, you can split the deduction across several years.
So if you’ve got a piece of equipment you need to update, or software that would make your workdays easier, go ahead and invest. There’s only one caveat: You need to make the purchase and begin using it in the same year you count it as a deduction.
“Since you are getting your tax savings upfront instead of over the life of the equipment,” says CPA Crystalynn Shelton, “you have additional money to use for your business that you would not have had if you used standard depreciation methods.”
5. Pay on Time, Every Time
I learned this one the hard way. A few years ago, I made the assumption that I only had to file and pay my taxes once per year, just like I did when I was an employee. But then I got hit with a late fee for not paying quarterly estimates.
“Late payment of taxes can result in high penalties and fees,” explains Joshua Zimmelman, president of Westwood Tax & Consulting LLC. “So you definitely want to avoid that extra and easily avoidable expense for your business.” Take it from me: You don’t want to learn this lesson the hard way.
Collect Paperwork Now and Save Later
Now that you’re an expert on earning more tax savings, go ahead and start setting aside the associated paperwork and receipts. If you try to do it all at the last minute, you might forget about an important form and get charged with a late fee or miss out on a deduction. Save yourself the time and headache during tax season by starting to prepare now so your taxes are a breeze later.