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As an online freelancer, it’s important to gather and report all sources of your income. Unlike traditional employees who receive a single W-2 form, freelancers often have multiple sources of income.
Tracking Income Sources
Keeping track of income can be more challenging for freelancers. You may receive 1099-NEC forms (previously 1099-MISC) from each of your clients to report your income. If you receive payments through online platforms like PayPal, you might also receive a 1099-K form. These forms are sent to the IRS to report your income.
Changes to 1099-K Reporting
The IRS had planned to implement changes to the 1099-K reporting requirement for the 2023 tax year. However, they recently delayed the implementation of the new $600 reporting threshold for goods and service transactions from third-party processors like Venmo and PayPal. For tax year 2023, the reporting threshold will revert to the previously higher threshold of over $20,000 in payments and more than 200 transactions. Even if you don’t receive a 1099-K, it’s still expected that you report all your income to the IRS.
As a self-employed freelancer, you are responsible for paying the self-employment tax in addition to regular income tax. The self-employment tax represents the Social Security and Medicare taxes that businesses pay and employees have taken out of their paychecks automatically. Since you are both the employee and the employer, you must pay this tax, which amounts to 15.3% of your income.
Reducing tax liability is a common goal when filing taxes. As a freelancer, you may have more business expenses than a regular employee, and you can take advantage of various tax deductions that are not commonly allowed. However, you can only deduct expenses that are ordinary and necessary for your business operations.
Typical Deduction Categories
Freelancers can often write off many expenses, including:
- Business-related food
- Travel and lodging
- Office expenses
- Required equipment or materials
- Phone and internet service
It’s important to ensure that your deductions meet the IRS requirement of being ordinary and necessary for your business.
Home Office Deduction
Since most freelancers work from home, the home office deduction can apply. You can deduct expenses such as rent and utilities for the portions of your home that you use as an office. However, the key requirement is that your office space must be exclusively used for your self-employment work. You cannot use shared spaces or spaces used for other purposes as your home office.
Travel and Meals
Deducting travel and meal expenses can be tricky for freelancers. You can deduct the costs of traveling to a job, excluding commuting to your office. Business meals with clients are also deductible, usually at a 50% rate. However, these expenses must be necessary for the development and operation of your business. Personal vacation costs cannot be written off as business expenses.
Education and Certifications
If you pursue educational courses or certifications related to your profession, you may be able to deduct the associated expenses. The costs of classes for certifications or to enhance your business knowledge are generally deductible. Similarly, business-related licensing, registration, or certification costs can also be deducted. However, these deductions must directly relate to your business and not for personal interests or unrelated fields.
Equipment and Supplies
Freelancers are responsible for buying their own equipment and supplies. However, if you need items like a computer or printer to perform your job, they are usually deductible expenses. Additionally, any other materials or items necessary for your business can qualify for deductions.
It’s important to keep your business and personal expenses separate to avoid issues with the IRS. For example, deducting the entire amount of your cell phone or internet service may raise questions if you only use them partly for work.
Remember to report all your income and consult a tax expert or use tax software like TurboTax to ensure you maximize your deductions and file your taxes correctly.