Tax tips 2024: Freelancers

Tax time is a pain for freelancers. It hurts for anyone, but the tax burden for freelancers is bigger than just financial; it’s a mental and administrative workload that can sap your will to live as well as your bank account.

However, being self-employed also opens the door to potential tax deductions that salaried employees might not have access to. 

Lumin had a chat with a couple of tax experts: John Wood and Rob Burnette.

Wood is the managing attorney at Grant Park Legal Advisors LLC, a law firm that helps businesses and freelancers navigate the legal complexities of the United States tax code.

Burnette is an investment advisor representative and professional tax preparer at Outlook Financial Center in Troy, Ohio. 

We asked them: how can freelancers make the most of tax season?

Deduct “ordinary and necessary” expenses

Ordinary expenses are costs common in your trade or industry: things like insurance or bar dues.

Necessary expenses are costs necessary for the operation of your business: things like rent expenses, office supplies or software.

Wood says what you can claim as ordinary or necessary will possibly need to be defended. For example, you could deduct some of your rent or mortgage if you use part of it exclusively for your business. 

“A portion of your utilities may also be deductible,” he says. That portion depends on the percentage of time you use utilities for business. For example, if you use 40% of your monthly internet bandwidth on client communications, you may be able to write off 40% of your internet costs. 

Set up SEP IRA contributions

Burnette’s number one piece of advice? Set up and contribute to an Individual Retirement Account (IRA). There are four types of IRA, but the one Burnette is focused on is the SEP IRA (Simplified Employee Pension Individual Retirement Account). These are accounts business owners and freelancers typically use to save for retirement.

A SEP IRA is vital for freelancers planning to retire comfortably. It’s also a great way to reduce your taxable income. Sure, you might have less money to play with this year; but 70-year-old you will be very happy.

But, Burnette says, there’s a limit to how much you can contribute from your income. “The SEP IRA limit for 2023 is 25% of up to $330,000 of compensation,” he says. “The contribution to the SEP IRA is an adjustment to income that reduces your Adjusted Gross Income (AGI) dollar for dollar.” 

This means if you earn that maximum of $330,000, the most you can contribute to your SEP IRA this year is $66,000.

Let’s say you earned a round $100,000 in the last financial year. This makes the maximum contribution you can make to your SEP IRA $25,000. Do this, and your taxable income is now $75,000. 

“This is usually done prior to April 15,” he adds. Timing is vital as you will need to set up contributions after determining your net profits for the previous year.

Change your filing status

Burnette also suggested changing your filing status. “If you are incorporated as a single-member LLC, consider changing your filing status to an LLC taxed as an S-chapter corporation.”

What is an LLC?

Some freelancers may set up shop as an LLC – a limited liability company – because it legally separates the business from its owner. This means you’re risking fewer personal assets. 

However, LLCs don’t have their own tax category. This means a one-owner LLC (which you would likely have as a freelancer) pays tax as a sole proprietorship. This can work well, but once the business is profitable you can save money by filing to be taxed as an S-corp.

What is an S-corp?

An S-corporation is a tax status granted by the IRS. It allows corporations to avoid double taxation on corporate income by passing all income, losses, deductions and credits though to shareholders.

Having S-corp status means the business owner – you, the freelancer – can be a company employee. Pay yourself a reasonable salary and remember; payroll taxes are a company expense!

Why should I change my filing status?

Outside of writing off payroll taxes, you can also save a small amount on self-employment tax.

Any distributions you take in addition to your salary are considered dividends. While that dividend is subject to income tax, it’s not subject to payroll tax like Social Security and Medicare.

“The taxpayer would save 15.3% on self-employment tax on the amount of the dividend taken,” clarifies Burnette.

How do I change my filing status?

Don’t worry, the process for doing so is simple. Burnette says you can change your filing status by filing form 2553 with the IRS – read more on how to do that here.

The bottom line

There are plenty of things that you can do as a freelancer to reduce your tax burden. Those at the top of the list, according to the experts we talked to, are to deduct your ordinary and necessary business expenses, set up SEP IRA contributions, and consider changing your filing status.

And you can make it all even easier by doing that admin online.