As professionals in the working world, we all know that careers have their pluses and minuses. Being a nine-to-fiver may lack the degree of independence held to freelancers but this division of the working class faces its own unique set of challenges. Check out our basic guide to filing taxes as a freelancer, including some of the most common IRS mistakes. If you play your cards right, it can be a very worthwhile undertaking.
One of the primary ways to decrease your annual declared earnings (in order to lower the amount you owe to the Fed) is by deducting professional expenses. As a freelancer, sometimes it’s difficult to differentiate between a personal or professional expense which is why this mistake ranks at the top of the list!
Based on IRS regulations, the two basic requirements to claim a “home office” deduction is exclusive use as well as it being the regular place of business affairs. What exactly does this mean? Well, the first point is pretty straightforward but what constitutes the word “principal” is often misunderstood. If you conduct business affairs in a space other than the home, you may not qualify for the deduction. Since this rule is somewhat obscure it’s best you seek IRS tax help from a professional organization. There is good news for freelancers and entrepreneurs come the 2014 tax season. The IRS created a new deduction which expands upon one rule. The deduction grants $5 per square foot of home office space for a total $1,500 or 300 square feet. The “exclusive use” clause does not apply if you provide day care services for either children, elderly individuals or the handicapped. Review the complete details to make sure you qualify.
Using your vehicle for professional affairs may allow you to deduct basic auto expenses as well as mileage and maintenance costs. The prescribed IRS standard, as of January 1st, was 56 centers per mile for business miles, 23.5 cents for medical/moving purposes, and 14 cents per mile in service of charitable organizations. You also have the option to calculate the actual cost of the vehicle as opposed to the prescribed standard allowance.
Tax Deductions versus Tax Credits
These two terms may sound similar but be cautious that they are not interchangeable. Both tax deductions and tax credits reduce an individual’s income tax liability but the value of a deduction is contingent on the tax bracket they fall into. For example, if you fall in the 50% bracket, then a $1,000 deduction would lower your tax bill by $500. A tax credit on the other hand would lower your bill by the full $1,000 regardless of which bracket you fall into. Levytaxhelp.com can help you determine exactly which deductions and credits you’re eligible to receive as well as IRS tax help.
Working on a freelance basis can pose some problems when tax season rolls around. Be conscientious to keep the aforementioned points in mind and you may walk away with a pretty penny in your pocket.