Deducing Your Deductions
You might already be aware of some of the usual freelance deductions, such as your computer, home office and gas mileage for any business trips that you make. There are also several other deductions that you might not think about or even be aware of, including:
- Business banking fees
- Camera for any articles that require original photos
- Western Union and PayPal fees
- Paid site submissions
- Blog expenses
- Fees for business credit cards
- Business equipment rentals
- Tax filing and accounting fees
- Promotional products
- Unpaid invoices
- Cost for trademark or copyright
- Writing retreats
Make sure that you think before you start plugging deductions onto your tax forms willy-nilly. Just because you use the computer on your desk to write articles, doesn't automatically mean that you have a home office—both the computer and the area you work in can only be used for business and nothing else. The government may not send an impeccably-dressed hit squad to come after you if you list something that doesn't actually qualify as a deduction, but it's always best to use the utmost level of caution when it comes to your finances and taxes.
Give Yourself Some Credit
Another useful piece of tax information that you need to be aware of is that tax deductions and tax credits aren't one and the same. It's better to think of them as siblings rather than twins. To make matters even more confusing, you've probably also heard of a tax write-off, which can be either a credit or a deduction. Clear as a financial fog bank, right?
A tax credit can be defined as something that decreases your total taxes owed dollar for dollar while a deduction subtracts money from your taxable income, which is also dependent on your tax bracket. For example, let's say that you're in the 25% tax bracket and you qualify for a $1,000 tax deduction. Instead of getting a full thousand dollars shaved off of the taxes that you owe, your owed taxes will only be reduced by $250 (25% of $1,000). If you qualify for a $1,000 tax credit, then your owed taxes will be lowered by a full $1,000, and that doesn't matter which tax bracket you fall into.
The reason it's vital that you learn the difference between tax credits and deductions is so that you won't be surprised to learn that that fancy $2,000 laptop won't qualify you for a full $2,000 tax return. There's also the fact that there are some items that qualify as a credit and a deduction, meaning that you have to choose which one will save you the most in the long run.
Stay in Your Tax Lane
While it's a great idea to keep your tax bracket in mind if you're trying to control how much of your income will be taxed, you'll first want to get a better understanding of tax brackets and how they're actually taxed.
Let's say that you're single and your taxable income last year was roughly $35,000, which is hovering between the 15% and the 25% brackets. If you made $35,000 last year, you'll have to pay $5,250 in taxes (15% of $35,000) this year. If you made $35,400, you pay $8,850 (25% of $34,000). That's a difference of $3,600 all because you worked a little harder and made an extra $400.
Before you start cringing, you should know that you're actually only taxed for the money that you make within a tax bracket. So now let's say that you made $35,000 last year, which means that you owe $4,815 (roughly 13.7%). If you earned $35,400, you'll owe $4,869 (roughly 13.75%). I like this scenario much better than the first.
Now that you're better aware of how taxes work in the world of freelance, you can save yourself money, time and frustration. Since I'm better with words than I am with numbers, I encourage you to sit down with a certified and experienced accountant ASAP to go over your tax situation so that you don't land in hot water with the IRS and so that you don't shoot yourself in the financial foot.
This is a guest post by O’Brian Gunn from Denver, CO.
For more tax tips, check out 6 Reasons to Consider Doing Your Own Taxes