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En español | Last year’s major tax overhaul shook things up for freelancers, gig workers and sole proprietors, who now are starting to wonder about how the new law will affect their taxable income for 2018.
For the most part, the tax law will help many freelancers — from bloggers to caterers to tutors. While deductions for real estate taxes and state and local income taxes will be limited to a total of $10,000, and other miscellaneous itemized deductions disappear completely for individual taxpayers, business-income deductions are a different story.
(When it comes to taxes, it’s always an individual calculation. You should talk with a professional tax adviser to review your particular situation.)
There are some potentially big savings with the new business deductions. Here’s a quick rundown of the how the tax law could benefit freelancers, plus a handful of business-expense tracking apps that might ease your record keeping.
Qualified business income deduction. Between now and 2025, many independent contractors may be entitled to lop off a tax deduction of 20 percent on qualified business income — providing you earn under $157,500 as an individual (or less than $315,000 if filing jointly). The details of the new benefit, however, are complicated. It’s intended to apply to “pass-through” business income for freelancers who have set their businesses up as partnerships, limited liability corporations, S corporations or sole proprietorships. The nonpartisan Tax Policy Center provides a detailed analysis of the complex sweetener.
Higher standard deductions. The standard deduction was nearly doubled, to $12,000 from $6,500 for single filers (to $24,000 from $13,000 for couples). If you’re self-employed and fit the requirements, you can claim the standard deduction, plus the qualified business income deduction, and also deduct eligible business expenses such as rent, professional fees, training and education, licensing and certification fees and supplies and travel costs.
Freelancers typically receive a Form 1099-MISC, "Miscellaneous Income," from each client and report 1099 income — as well as expenses for home offices, travel and supplies — on Schedule C, which is attached to Form 1040. Here’s a rundown of the seven big tax deductions for expenses that freelancers may qualify for this year.
Home office deduction. If you work from your home or use part of it in your business, you should be able to deduct home office expenses that are prorated, based on the size of your home and office. These are costs such as your mortgage or rent, insurance and utility bills. If the square footage of your home office equals 10 percent of your home's total, you can claim 10 percent of its expenses. You might opt for the “simplified option” rule, which allows you to deduct $5 per square foot of your home office on your return, with a maximum write-off of $1,500 (based on a maximum of 300 square feet). You may want to take a picture of the space so that you have a record, in case the IRS does examine your return. To get the deduction, you must file Form 8829, "Expenses for Business Use of Your Home," along with your Schedule C.
New equipment write-off. The new tax law increases the immediate expensing and a bonus depreciation percentage from 50 percent to 100 percent for qualified property acquired such as a new computer, software, office furniture and even a car or truck, if the item was purchased and placed into service after Sept. 27, 2017, and before Jan. 1, 2023.
Business expenses. This aspect of the new tax law initially created some confusion and angst for freelancers, but, in reality, not much has changed here. Deductible expenses can range from business meals and travel to gasoline for your car to postage and shipping bills to rent for the artist studio where you create jewelry or other crafts. The only significant change is under the meals and entertainment category. You can still claim 50 percent of the cost of meals that you purchase for work purposes. What has changed is how the IRS looks at expenses for entertaining clients. Starting this year, the deductions you may have once claimed for client-entertainment costs — such as tickets to a sporting event or a concert — are abolished. However, you can write off 50 percent of the cost for treating your client to a meal where you discuss business. Work-related travel expenses to meet with a client or attend a conference across town or across the country are 100 percent deductible.
Medical expenses. For most freelancers, health insurance and medical bills are a weighty part of your budget. Under the new tax law, you can now deduct out-of-pocket pocket medical expenses that exceed 7.5 percent of your adjusted gross income, down from the previous 10 percent threshold. Under the new law, the 7.5 percent medical deduction threshold will revert back to 10 percent of income in 2019. If you bought your own health insurance policy, as I have, your medical expenses will also include insurance premiums. If you're self-employed and pay supplemental Medicare premiums, such as for Part B coverage, you can deduct these premiums.
Education and training. You can write off your costs for work-related education directly from your self-employment income as a business expense. These outlays include tuition, books, supplies and transportation to and from classes, according to the IRS website. The expenses are deductible only if the education “maintains or improves skills needed in your present work.” If you’re going back to school to switch careers, you’re out of luck. The lifetime learning credit, though, offers a tax credit of up to $2,000 to cover up to 20 percent of annual tuition, and you don’t have to be enrolled in a degree program. (The benefit phases out entirely for married couples earning $132,000 and singles earning $66,000.) For more, go to IRS Publication 970.
Automobile expenses. You can deduct the number of miles you drive in your car for business, multiplied by the IRS’ preset standard mileage rate — 54.5 cents per mile in 2018, up from 53.5 cents in 2017. Keep a mileage log; you’ll need it if you’re audited. (I also recommend taking a picture of your odometer at the beginning and the end of the year for backup documentation.) Your other option is to subtract your actual car expenses. These include depreciation, gas, oil, tolls, parking fees, insurance, lease payments, registration fees, repairs and tires. For more, IRS Publication 463 provides details.
Retirement savings. This year, freelancers without an employer retirement plan can put as much as $5,500 (plus an additional $1,000 if you’re 50 or older) into a traditional IRA, as I wrote about in another column. You can deduct a contribution of up to 25 percent of your compensation or $55,000 in a simplified employee pension or SEP-IRA and up to 25 percent of your pay in a solo 401(k), but your total contribution can’t surpass $55,000. For more details, check the IRS website.
Got all that? One key takeaway: Diligent recording of business expenses is essential. I’ve found the easiest way to separate out personal from work expenses is to use a designated bank account and credit card for my business.
There are also an increasing number of apps to lend a hand.
- Intuit's QuickBooks Self-Employed tracks business expenses by scanning bank accounts and credit card transactions. It also calculates mileage and can be used to send invoices. After a free 30-day trial, the monthly fee is $10.
- Expensify gathers expenses that need to be reimbursed, and you can create files to integrate with accounting software such as QuickBooks. The time-tracking can provide details of miles traveled and hours spent on a project. The basic app is free, but for up to $9 a month per active user you can add users and customized features.
- Shoeboxed lets you scan and organize uploaded receipts under categories of reimbursable or deductible. The app uses a GPS signal to track your mileage when you leave the office for a business appointment. You can also scan business cards. Fees start at $15 a month after a 30-day free trial.
Full disclosure: I just use a ballpoint pen to record the nitty-gritty of my business life — from meetings to phone calls and daily projects — in my old-fashioned monthly paper planner and calendar that is tucked inside a royal blue leather cover. It suits me. And while it’s not a shoebox under the bed, I stuff paper receipts for deductible business expenses inside manila file folders stored in my home office.
Don't get me wrong. Nowadays, I would be lost when April tax time rolls around without the year-end statements from my business bank account and credit card company that are available online and easy to download. I simply enjoy the tactile feel of interacting with something tangible and the act of writing and crossing things off my to-do list.
Kerry Hannon, AARP jobs expert, is the author of Great Jobs for Everyone 50+: Finding Work That Keeps You Happy and Healthy … and Pays the Bills; Getting the Job You Want After 50 for Dummies; Love Your Job; and What’s Next? Finding Your Passion and Your Dream Job in Your Forties, Fifties, and Beyond. Follow her on Twitter @kerryhannon.