A few weeks ago I had the opportunity to attend the Nashville Freelancers Union meetup to hear Clinton Hauser, CPA present on tax planning opportunities for freelancers and self-employed individuals.
As a self-employed individual myself, I understand how difficult it can be to keep your financial records in good order throughout the year, so it isn’t too much trouble come tax time. Another reason for staying organized is so you don’t miss any opportunities to reduce your tax bill. Although freelancers have seemingly a million different tasks to handle, it is crucial to stay up on the financial side of things to ensure you are helping your business succeed as much as possible.
The presentation by Clinton went over a wide range of topics for freelancers to be aware of, and also provided updates on the Tax Cuts and Jobs Act of 2017 (which is now in effect in 2018). Here are the main tips for freelancers to know:
Choose The Proper Business Structure
Business owners need to select a business structure when opening their business. This can also be changed as your business evolves but it is important to know the differences. The four main business structures are:
Sole Proprietorship (DBA)
General Partnership (GP)
Corporation (S-Corp and C-Corp)
Limited Liability Company (LLC)
Each business structure has its own pro’s and con’s. These revolve around the legal protection each structure provides (or lack thereof) and the tax consequences (or opportunities) of each. The business structure that is right for your business is highly dependent on the nature of the business, which is why it is best to consult with your accountant, attorney, and/or financial planner when deciding for yourself. Ultimately, you want to consider the legal protections of the business first and tax benefits second.
Have A Good Recordkeeping System
As a self-employed individual, it can be a challenge to keep your income and expenses separate from your personal life. However, by not co-mingling your business and personal transactions, you will steer clear of most accounting and legal issues. Co-mingling transactions not only puts you at risk of missing qualified business deductions but can also put your personal assets at legal risk if you have a corporation or LLC.
Regardless of your business structure, be sure to have an EIN and open a separate checking/savings account for your business. This way, you can make sure all of your business’s income and expenses flow through this one spot and not through your personal bank account. Utilizing a recordkeeping system like Quickbooks, Freshbooks, or Wave will also help in categorizing your expenses. If your business transactions get too complicated for you to handle yourself, hiring a bookkeeper can be well worth the cost.
Build Your Own Benefits Package
With all the lifestyle and financial perks of being a freelancer, you are probably really missing that one nice aspect of W-2 life -- a benefits package. Yes, that thing you dreaded updating each Fall is the same thing you now miss so much. You are now left to your own devices to piecemeal together your health insurance, disability and life insurance, retirement savings, and don’t forget the vacation days.
Fortunately these days, regardless of your health history, you can purchase health insurance on the Marketplace (aka Obamacare). If you are just entering the freelance world and are experiencing a shortage of income, you may qualify for subsidies which can potentially reduce your premiums to $0. Furthermore, any health insurance premiums you do pay as a self-employed individual are 100% deductible on your income tax return.
For disability and life insurance, you can either purchase individual policies directly from insurance companies (with the help of an agent), or find group policies through the associations you are a member of. One example is the Freelancers Union (which is free to join). They offer group disability, life, and dental insurance, which can be helpful in providing a base amount of coverage at an affordable price.
As a self-employed individual, you are probably most focused on using any profits your business generates to reinvest in the business. This is good to an extent, but you also want to be sure you are still saving up for your future retirement. By doing this, you will continue to amass assets in a tax-advantaged account and diversify your net worth outside of your business. The type of retirement account you use will depend on your business type. I described various retirement accounts in Retirement Saving For The Self-Employed.
Other Miscellaneous Tax Tips
Tax deductions must be “ordinary and necessary” for your business operations.
Keep financial records for at least three years, but up to six years is recommended.
Keep track of your mileage, as this can be a huge deduction that you may be missing out on. You can only deduct travel to a temporary location as part of your business operation - commuting to your office does not count.
If you use a home office, you can deduct $5.00 per square foot up to 300 feet.
Lastly, remember that tax planning greatly depends on the timing of your income and deductions. It is crucial to review your opportunities on a regular basis (and before a big event) with your accountant and/or financial planner in order to maximize your tax reduction strategy. If you would like one-on-one advice from me, email me at firstname.lastname@example.org.