April 15th is fast approaching! Don’t forget about these tax breaks for freelancers! NOTE: Be sure to check with your CPA or tax professional to see if you qualify for these deductions.
Health insurance deductions for self-employed individuals:
Many freelancers needlessly overpay their taxes because they’re unaware that the law entitles them to deduct 100 percent of their spending for medical insurance premiums (including qualifying long-term coverage) for themselves and their spouses and dependents. They take the health insurance deduction “above the line” on Line 29 on the front of the 1040 form, thereby reducing their adjusted gross income (AGI), Line 37.
This is a big break for freelancers and other self-employed individuals, regardless of whether their unreimbursed medical expenses aren’t high enough to claim as itemized deductions on Schedule A of Form 1040, according to a New York Times article (February 19, 2017.)
Long-standing rules forbid itemizers from writing off all of their medical outlays:
Itemizers can claim their expenditures just to the extent they exceed 10 percent of AGI. No deduction for anything below the 10-percent-of-AGI threshold.
There’s an exception for people 65 and over. Their threshold is 7.5 percent. This break went off the books at the close of 2016, though there is bi-partisan support in Congress to extend it beyond 2016.
First-year expensing:
Tax-savvy freelancers know they have two ways to write off their outlays for purchases of equipment—for instance, computers and file cabinets.
Freelancers who go the “standard” route recover the cost through depreciation deductions over a period of years. Their other option is the frequently-overlooked tactic of “expensing,” meaning they deduct a specified amount of equipment in the year of purchase.
To illustrate, a self-employed person’s equipment purchases might include $10,000 for cameras, computers, copiers, tape recorders and the like. Instead of depreciating them over 5 years, they can be immediately expensed under Internal Revenue Code Section 179. A $10,000 write-off lowers taxes by $3,000 for an individual in a top federal and state bracket of 30 percent.
The paperwork for first-year expensing is straightforward. Businesses have to complete Form 4562 (Depreciation and Amortization). Self-employed individuals carry the Form 4562 deduction to, and enter it on, the line for “Depreciation and section 179 expense deduction” on the two-page Schedule C (Profit or Loss From Business), which is where they report receipts, along with equipment costs and other expenses, to arrive at their net profit or loss. Once that has been accomplished, the IRS mandates that Form 4562 and Schedule C must accompany Form 1040.
Profit from paying your kids:
Do your children help out with some of the chores connected with your business? Could they? Then a savvy way to take care of their allowances or spending money is to pay them wages for work they do on behalf of the business. This holds true, whether it’s a full-time, long-established operation or just a new, part-time sideline.
Putting your children on the payroll is a perfectly legal way to keep income in the family, while shifting some out of your higher bracket and into their lower bracket. IRS auditors require this kind of expense to pass a two-step test. First, your children have to actually render services. Second, you pay them wages that the IRS deems “reasonable”–agency lingo for not more than the going rate for unrelated employees performing comparable chores like clerical work or deliveries.
Code Section 3121(b)(3)(A) authorizes another break. It permits you to sidestep Social Security taxes on the wages you pay your children under the age of 18. To qualify for the exemption, you must operate as a sole proprietorship, meaning the lone owner of a full-time or part-time business that’s not formed as a corporation or partnership, or do business as a husband-wife partnership. Put another way: No exemption for a family business that’s incorporated or a partnership with a partner other than a spouse.
Depending on your type of business, and the work required, it would be wise to check with your attorney or the government regarding child labor laws.
Another bonus for business owners is that write-offs for equipment purchases and wages save more than just income taxes. They also reduce self-employment taxes owed.
RELATED:
Tax Tips For Freelance Writers By William Pepe
Deducting the Home Office By A.J. Cataldo, Ph.D., CPA, CMA
“On-Site” Freelancers and Contractors Might Be Entitled To Benefits and Overtime Pay!
Julian Block writes and practices law in Larchmont, N.Y., and was formerly with the IRS as a special agent (criminal investigator) and an attorney. He is frequently quoted in the New York Times, the Wall Street Journal, and the Washington Post, and has been cited as: “a leading tax professional” (New York Times); “an accomplished writer on taxes” (Wall Street Journal); and “an authority on tax planning” (Financial Planning Magazine). His books include “Julian Block’s Easy Tax Guide for Writers, Photographers and Other Freelancers,” available at julianblocktaxexpert.com.
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