Over the past couple years, I’ve noticed an interesting trend among both our established tax clients and new, incoming clients— a sizable increase in freelance work.
It seems like now, more than ever, professionals in every field are picking up a consulting gig or starting a side hustle to make more money, try on a new industry, or enjoy the freedom that comes with owning your business.
And while these self-employed workers’ entrepreneurial spirit is admirable, not every freelancer is fully aware of the tax advantages and drawbacks of going out on their own. Before they know it, they can end up with a tax bill that really takes the fun out of freelance.
Whether you’re still dreaming about a freelance job, deep in the startup stage, or a fully established self-employed professional, these three tax planning strategies can help you optimize your tax deductions and keep more of your self-earned income.
Tax Strategy #1: Leverage the right tax deductions
Both individuals and business owners have access to dozens of valuable tax credit benefits and tax deductions that can add up to significant savings every tax year. The best tax deductions for your situation depends on your state, industry, and business structure, but here are a few that many of our clients leverage:
Home Office Deductions
The home office deduction is a significant tax deduction you can use to offset the cost of things like your utilities, mortgage interest, home depreciation, and similar costs.
If you are chosen for an Internal Revenue Service (IRS) audit, you’ll have to provide detailed records and receipts for these expenses. But the tax savings is worth the effort— your home office deductions can add up to quite a bit every year.
Travel Deductions
Another common tax deduction freelance workers can enjoy is travel expenses. If your gig requires you to travel— to meet a client, perform work, or even gain a new skill— you can deduct the cost of your plane ticket or gas, meals, event fees, and more.
Loan Interest Deductions
If you took out a business loan to start your freelance work, or put some business expenses on a credit card, the interest you incur may also be tax deductible.
Tax Strategy #2: Be strategic about your business startup and structure
We’ve had a number of clients go out on their own and launch businesses like bakeries, wedding planning services, engineering firms, law firms, dental offices, and more. And this startup phase, that first couple years of planning, saving, investing, and hiring, that’s really where Cook Wealth offers a valuable service.
One of the first things you have to do as a startup business owner is choose a business structure. While there are only a few structures to choose from, once you’ve decided, it’s difficult to change your structure down the road. And the structure you choose, whether it’s a Limited Liability Company or a Corporation, for example, has a significant impact on your tax liability. No one wants to pay taxes on more income than they have to, right? So it’s essential to make the right tax planning decision from the start.
When you work with one of the tax planning professionals here at Cook Wealth, we’ll help you set up your business structure in a way that minimizes your taxable income, maximizes your tax-deductible expenses, gives you the opportunity to make charitable contributions and support causes you care about, and still leaves enough for enjoyment. Because the benefits of your hard work are meant to be enjoyed!
Tax Strategy #3: Plan for more (and more complicated) income taxes
One major disadvantage of being your own employer is that you’re required to pay self-employment taxes on a large chunk of your earnings. And self-employment taxes do take a significant bite out of your paycheck!
Typically, employees pay half of their social security and Medicare taxes at a combined rate of 7.65%, while employers pay the other half. But when you work for yourself, your tax bill suddenly includes both sides, for a total of 15.3%. On top of that, depending on where you live, you may also be required to cover tax liabilities like state taxes, capital gains taxes, payroll taxes, and more.
If your business has employees, your tax returns will become even more complicated— and tax planning even more essential.
Owning your own business is one of the most valuable, rewarding things you can do. But to do so successfully, you need a professional team of tax planners and advisors ready to tackle the numbers. That’s why Cook Wealth offers comprehensive tax and advising services for small business owners— so you can spend your time focused on what you do best.
Our tax planning strategies and responsive advisors help entrepreneurs minimize costs and maximize enjoyment
You work hard for every dollar you earn. And at Cook Wealth, we believe the right tax planning strategies and wealth management services can help owners and professionals not just earn more, but enjoy more along the way. Because money isn’t just about dollars and cents— it’s what you do with your wealth that really matters.
Ready to talk with a tax planning professional, update your retirement plan, or just get a second opinion on your taxes? Click Find An Advisor below to start the conversation.