Freelancer Tax Tips: How to Maximize Your Tax Savings in 2020

There’s a lot to love about freelancing. Being your own boss can mean better work-life balance, more flexible hours, and more independence. Unfortunately, it also brings one big downside: taxes become a convoluted nightmare.

Wondering how to pay taxes for freelance work? It requires careful planning and preparation. Here are 10 tax tips for freelancers, to help take some of the sting out of tax season.

1. Deduct your expenses — all of them


One of the few tax benefits of being a freelancer is the breadth and depth of freelancer tax deductions. If you’re a freelancer, you can deduct all legitimate business expenses. That includes everything from paper clips to airline tickets.

If you work out of your home, you can even deduct certain home maintenance expenses, including mortgage interest, insurance, utilities, and repairs. And if you use your car for work, you can deduct auto expenses, like gas and maintenance costs. Click here to read a list of tax write-offs for freelancers.

Of course, remember to tally up your deductible expenses before deciding to itemize your deductions. You should only itemize your deductions if your business expenses add up to more than the standard deduction. The standard deduction that you qualify for depends on your filing status. You can find yours below:

Filing status2018 standard deduction
Married, filing jointly$24,000
Married, filing separately$12,000
Head of household$18,000

2. Keep meticulous records

If you plan to claim business expenses, keep detailed records. If there’s an audit, you’ll need to present receipts that justify the deductions you made on your tax returns. The IRS has a ten-year statute of limitations for auditing tax returns, so it’s a good idea to invest some time and resources in an efficient tax filing system.

Do yourself a favor and download a receipt filing app, such as OneReceipt, Shoeboxed or Wave, to your smartphone. These programs are a great way to get rid of those pesky paper receipts and organize them in a single electronic database.

3. Open up a retirement savings account

Piggy Bank with retirement formula

When you are your own boss, you forsake the luxury of monthly employer contributions to a 401(k). However, freelancers get their own perk when it comes to retirement savings: Simplified Employee Pension plans (SEPs). SEPs are available for businesses of any size, and let you contribute up to 25% of your pay.

And an SEP doesn’t just help you build retirement savings. It’s also a great way to shelter your business profit from taxation. Just like contributions to an IRA, you can deduct your SEP contributions from your taxes, up to a $50,000 limit.

To establish an SEP, just fill out Form 5305-SEP.

4. Buy health insurance

If you’re new to the world of freelancing, you’re probably still shell-shocked by the cost of health insurance premiums. Losing health benefits is what stops many workers from taking the leap into self-employment in the first place.

The good news is that, as a freelancer, you can deduct all your healthcare insurance premiums. That includes COBRA costs, if you’re transitioning from a previous job.

Unfortunately, health insurance deductions only reduce your income tax, not your self-employment (SE) tax. But there’s a way around this. Health insurance coverage for employees reduces both your income tax and your SE tax. As such, if you hire your spouse and provide them with family health insurance coverage, you can deduct those insurance premiums from both your income and SE tax.

5. Set up a home office

Tax Tips for Freelancers

Freelancers often shy away from claiming their home office as a deduction because they fear it might trigger an IRS audit. However, if you use your home office exclusively for work, you should definitely take the deduction. Check out IRS Publication 587 for detailed guidelines on whether your office qualifies for the deduction.

There are two ways to calculate your home office deduction: the Actual Expenses method and the Streamlined method. If you go the Actual Expenses route, you must divide your home expenses (including repairs, phone bills, and more) between personal and business use.

If that calculation gets too complicated, consider the Streamlined process. This method lets you claim $5 per square feet for your home office expenses, up to a maximum of 300 feet, or $1,500.

6. Open a separate business account

An easy and effective way to track your business expenses is to set up a different bank account for your business. Then get a separate credit card to pay for your business and healthcare expenses. Choose a business-specific card with a generous points or cashback program.

Not only will this help you track your cash flow, you’ll feel closer to your next vacation every time you go shopping for office supplies or fill your tank. It will surprise you how quickly you can build up enough points to pay for a flight to Europe. And best of all, the IRS doesn’t tax credit card rewards. As long as you didn’t have to place a deposit in a savings account to receive the rewards, they’re considered a rebate.

Ready to shop around for your business credit card? Check out these options:

7. Report all your income and pay taxes on time

Tax Tips for Freelancers

Don’t mess with the IRS. When there’s nobody looking over your shoulder, you might be tempted to leave part of your income out of your tax return. But the IRS knows how much you’re making, because your clients must file a 1099 form detailing how much they paid you. If there’s a discrepancy between the income you declared and what those 1099 forms say, you will have to pay the balance plus interest and penalties.

Report your income accurately and pay your taxes quarterly. The IRS wants you to pay your taxes as you earn them, just like at a regular day job. So if you expect to have a tax liability of at least $1,000 by the end of the year, you should pay taxes every three months. That’s one of the not-so-exciting perks of being a freelancer: tax season is all year round.

8. Open a separate tax savings account

Don’t make the mistake of thinking all that freelance money is yours to keep. Uncle Sam owns a big chunk of every check you earn. To avoid the temptation of spending money that isn’t yours, open a tax savings account separate from your personal savings account.

Get in the habit of depositing around 30% of every check you receive. It will hurt to part with your hard-earned cash, but it’s better than finding out that you can’t afford to pay your taxes.

9. Maximize your travel expenses

Tax Tips for Freelancers

If you travel for work, you can deduct 100% of your airfare, taxi ride, train ticket, and hotel stay. Make the most of your tax deduction by combining pleasure with business.

Traveling for business? Consider building a mini-vacation around your business trip. As long as you’re spending more time on business than on pleasure, you can deduct all traveling costs.

And even if you don’t travel for work, you can deduct your standard commuting costs. These include your mileage (56.5 cents a mile in 2014) and the cost of parking and tolls when visiting clients in person. But you must keep detailed records of your business driving. Otherwise, the IRS could deny your deduction.

10. Hire a tax preparation professional with experience dealing with freelancers

While doing your own taxes may have been easy when you were an employee, taxes for freelancers are much more involved. Don’t be too proud to ask for help. Tax professionals have the expertise and the experience to help you get the most out of your tax season.

A tax professional can maximize your deductions and help you avoid expensive mistakes that could trigger audits and penalties. With their assistance, you can make educated choices on questions you may not have considered. For instance, do you know whether you should depreciate your business assets annually using the Modified Accelerated Cost Recovery System, or in a lump sum via Section 179? A tax professional does!

Ready to find the right tax prep firm for you? Compare your options and read reviews from real customers here.