If you’re one of the 56.7 million people who took on some form of freelance work or a side gig last year, you may have some tax benefits coming your way.

Self-employed workers were eligible to receive unemployment benefits and take paid sick leave for the first time ever in 2020. Here are 12 tip you should know about taxes as you prepare your 2020 return and as you look toward next year.

1. Know what’s taxable income

With any type of income, Uncle Sam wants you to pay taxes on it as you receive it throughout the year. Freelancers, gig workers, and the self-employed usually receive 1099-NEC forms to help them report job income. You’ll also owe self-employment tax: 12.4% to Social Security and 2.9% to Medicare, for a total of 15.3%.

If you received unemployment benefits in 2020, your state should send you a Form 1099-G with the details of how much income you accepted from the program. Your state may have withheld taxes for you, too. But if they didn’t take out enough, you may owe the Internal Revenue Service. (More on that below.)

Close up of beautiful woman at her home, holds coffee cup and finishing paperwork
Close up of beautiful woman at her home, holds coffee cup and finishing paperwork

2. Know what’s not taxable income

Here’s some good news: Self-employed workers who received funds through the Paycheck Protection Program “don’t owe any taxes when the funds are received and won’t owe any when the loans are forgiven,” said Ben Henry-Moreland, a certified financial planner.

You also won’t owe taxes on certain COVID-19 relief funds like federal stimulus checks — and “donations through sites like Kickstarter are usually treated as gifts,” Henry-Moreland said, “which are nontaxable to the recipient.”

3. Paid sick leave benefit

The Families First Coronavirus Response Act (FFCRA) created a new tax credit for paid sick leave for eligible, self-employed workers. If you qualify to claim the credit, you’ll need to file Form 7202.

If you’re a self-employed worker, you can claim sick leave for each day you couldn’t work in 2020 due to a quarantine or isolation order or because you had COVID-19 symptoms. The tax credit is worth $511 per day or 100% of your average daily self-employment income, whichever is less.

4. Paid family leave benefit

Under the FFCRA, you can also claim paid family leave for each day you couldn’t work because you were caring for someone else impacted by COVID-19, or your child’s school or child care provider was closed or unavailable. The tax credit is worth either $200 per day or 67% of your average daily self-employment income, whichever is less. You’ll also need Form 7202 to file for this credit.

5. Use net operating losses to your advantage

(Photo: Getty Creative)
(Photo: Getty Creative)

If you’ve discovered your tax deductions are worth more than your taxable earnings, then your business has what’s called a negative income. You might be able to reduce your tax burden by taking a “net operating loss.”

With this method, you’ll carry losses back to the two previous tax years and apply them against your taxable income to get an immediate tax refund. This tax move applies to net operating losses incurred in 2018, 2019, and 2020.

This tax move can be complicated, so make sure to do your reading or consult with a tax pro.

6. Deduct business expenses

Businesses can deduct business expenses if they’re an “ordinary and necessary” part of running your business. That goes for all self-employed workers, from Uber drivers to freelance writers and Amazon shoppers. Here are some examples of business expenses you might be able to deduct:

  • Transportation
  • Health insurance
  • Supplies used for your business
  • The self-employment tax
  • Retirement plan contributions

But don’t go overboard here. You can only deduct the portions of these expenses that are related to your freelance work, per the IRS. For example, let’s say you use your cellphone for work 25% of the time as an Uber driver. That means you can deduct 25% of the cost of your cell phone plan on your taxes.

7. Take advantage of your home office

Rear view of young brunette female sitting on white chair in front of computer monitor while looking throguh collection of photos
(Photo: Getty Creative)

You can also take a home office deduction if your office space at home is exclusively used for business on a regular basis. It doesn’t even need to be a separate room. A corner of a room with a desk and chair suffices, again. if its exclusive use is for your business.

As part of this deduction, you also can deduct some of your utility expenses, taxes, repair costs, and depreciation. To figure out how much to write off, use one of the two formulas:

  • Simplified option: Deduct $5 per square foot — up to 300 square feet — of the part of your home that’s used for your business.
  • Regular method: Calculate the percentage of your home’s floor space that’s used for business and apply that to qualifying expenses.

8. You have options if you’re facing a tax bill

If you owe money to the IRS, you should still file your income tax return on time, which is April 15 this year. Your tax bill is also due by this deadline, and if you don’t address it, “you’ll still pay interest and late fees for as long as you have outstanding tax,” Henry-Moreland said.

Fortunately, you might be able to work out a payment plan with the IRS. Your main options include:

9. Defer what you owe

Self-employed workers can also defer 50% of their self-employment tax on income earned after March 27, 2020. If you elect to defer that tax, half is due Dec. 31, 2021, and the other half on Dec. 31, 2022.

“It won’t reduce your tax bill, but it does give you some extra time to pay a chunk of it if you have a better use for those funds today,” Henry-Moreland said.

10. Calculate next year’s quarterly tax payments

To avoid paying underpayment penalties, freelancers should pay quarterly tax payments throughout the year since they don’t have paycheck withholdings.

Use Form 1040-ES, Estimated Tax for Individuals from the IRS to calculate these tax payments. Use your most recent tax return to help fill it out. But don’t get too concerned if your calculations are a little off. You can lower you payment for the next quarter if you paid too much in taxes in the current quarter. If you paid too little, increase your payment next year.

Form 1040-ES includes blank vouchers for mailing tax payments. Or, you can make payments through the IRS Direct Pay site or through the Electronic Federal Tax Payment System (EFTPS).

11. Contribute to a retirement account

When you put money into a traditional IRA, it’s tax-deductible in the year you make the contribution. This could lead to a lower tax bill next year. If you haven’t filed your 2020 taxes yet, there’s still time to save. You can make IRA contributions for the 2020 tax year until April 15, 2021.

12. Get organized

Keeping receipts and organizing your tax documents will make it easier to figure the correct deductions “and be more likely to withstand an IRS audit,” Henry-Moreland said.

Source: https://www.cashay.com/tax-tips-for-freelancers-2021-smart-ways-to-file-taxes-192406988.html

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Categories: Finance

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