Filing your taxes as a self-employed freelancer might seem like a Y2K level disaster at first. But, once you get the hang of things, you’ll realize that planetary destruction is not imminent because you can take advantage of some helpful deductions.
Whether you’re working full-time or part-time, there’re lots of ways that you can save on taxes when you work for yourself. What are some of the top tips from pros that can help you save big on your taxes as a freelancer? Check out our list of the six smartest tax strategies below, ordered from the least to most effective for tax savings.
Please keep in mind that, while we’ve made every effort to ensure this information is up-to-date and accurate, it doesn’t constitute legal or tax advice, and it shouldn’t be considered a substitute for legal or tax advice. When in doubt, always seek professional guidance from an attorney or tax expert.
Establish a health savings account
First up is establishing a health savings account, also known as an HSA. It’s like a medical IRA, so if you get sick, it’ll help cover your medical expenses.What if you never get sick? Congrats on being a superhero and keep that HSA around because it still gives you major tax benefits.
To establish an HSA, you’ll need to go to a bank or other financial institution that offers HSA accounts. Ugh! Doing stuff- I know. But, don’t worry. It’s super easy to find a bank that’ll open an account for you and some are even online.
Just keep in mind that you must also get a high-deductible health insurance plan—which have lower premiums than plans with lower deductibles.
How can an HSA help you when tax time rolls around?
- You can deduct your annual HSA contributions from your income taxes every year, up to the annual dollar limits listed below.
- Any income that the money in your HSA earns will be tax-free.
- If you make withdrawals to pay for health-related expenses, they’ll be tax-free. Withdrawals for nonmedical expenses will be taxed and penalized.
- Once you reach the age of 65, or if you become disabled, you can withdraw your funds from your HSA for any reason without penalty. And if you use the money for nonmedical expenses, you’ll only have to pay regular income tax on those withdrawals.
The other nice thing about an HSA is that the money you put into it is yours FOR-EVA. How much can you contribute to your account every year? There’s no minimum amount that you’re required to contribute annually, which means you don’t have to contribute anything if you don’t want to.
But if you have individual coverage, the max you can contribute to your HSA for 2019 is $3,500. And if you have family coverage, the max you can contribute is $7,000. If you’re over 50, you can add $1,000 to your annual HSA contribution.
Time year-end income and expenses
Virtually all freelancers use the calendar year as their tax year, and they’re cash basis taxpayers.
Wait, what does cash basis mean? It means you count money as income only in the year you receive it. And you deduct an expense in the year that you paid for it. Why does this matter? Because it lets you do some clever tax planning at the end of the year.
Want to minimize your taxes for the year? Well, you could defer income and speed up paying deductible expenses. One way to defer income is by refraining from billing clients until the following year. Keep in mind that you can’t avoid having taxable income by simply not cashing a check until the following year.
Under a legal doctrine known as constructive receipt, you must count income as any money or property made available without restriction during the year. That means a check counts as income when you receive it, not when you cash it.
You can also opt to increase your deductible expenses for the year by buying things for your business prior to the end of the year. The best part is that you don’t even have to pay cash for it by December 31 in order to take advantage of the deduction. Instead, you can use your credit card and deduct the full amount of the expense.
About the authors
Ugur Kaner is the co-founder and CEO of Collective, the online platform that helps freelancers save $10,000 or more in taxes.
Stephen Fishman writes for Collective and is an attorney and author who writes useful and recognized guides on taxes and business law for freelancers. He is the author of over 20 books and hundreds of articles.
Ugur Kaner
Ugur Kaner is the co-founder of Collective, the all-in-one financial platform for solopreneurs that offers formations, bookkeeping, business tax, and compliance support all under one login.
