Once you have your last estimated tax payment for 2019 taken care of this month (it’s due January 15), it’s time to focus on this year’s freelance tax return. After all, the sooner you get your 2019 taxes filed and out of the way, the sooner you can look forward to any potential refund and moving on to accomplishing your 2020 goals. If you want to be among the first filers, make a note that the IRS plans to start accepting returns on January 27.
To help you get a head start on your freelance tax filing this year, here’s a review of some of the top deductions you may be able to use to trim your taxes:
Without a doubt, the Qualified Business Income (QBI) deduction (which is the 20 percent deduction available for qualifying pass-through businesses such as sole proprietorships, S-corporations and partnerships) is one that every freelancer should beware of because it can mean some serious savings. Freelance businesses are often considered pass-through because the business income is reported and taxed on the owner’s individual tax return
The 20 percent QBI deduction was new last year under tax reform and has since been updated by the IRS. Below are basic rules for the deduction based on the 2020 guidelines from the IRS. Keep in mind that you’ll use the numbers for 2019 to file your taxes this year:
How do these stipulations apply to freelance businesses? Here’s a closer look at the pass-through business deduction based on the 2020 tax rules:
Some other high-ticket deductions to consider on this year’s return include:
The home office deduction can help freelancers save a significant sum of money every year with just a little effort if you used the simplified version of the deduction. Simply calculate the size of the space you use exclusively for business and claim $5 for each square foot (to a maximum of 300) on your tax return. If your home office is large or your associated expenses are higher, you can opt instead for the regular method which requires you to track your actual expenses such as utilities, mortgage payments, rent, home repairs, home depreciation, etc., and then calculate your deduction based on the percentage of your home devoted to business.
The one important caveat for this deduction is that the space you claim must be used solely and regularly for the purposes of trade or business. This generally applies to a separate room or space in your home that is clearly defined as an office.
The standard deduction often raises the question of whether freelancers are better off itemizing their taxes or not. For many of us, the higher standard deduction that was introduced under tax reform is a better deal unless you have very high medical expenses or other eligible expenses. In 2019 the standard deduction was $24,400 for couples married filing jointly and $12,200 for individuals. In 2020 it is a little sweeter still at $24,800 for couples married filing jointly and $12,400 for individuals.
Business-related meals can really rack up expenses, especially if you take your freelance clients out to lunch, so be sure to gather up all of your receipts and use them to knock down your tax bill. Keep in mind that meal expenses for your business are no longer deductible at 100 percent of the cost (with the exception of office parties which are still fully deductible). Under the Tax Cuts and Jobs Act (TCJA) the deductions for meal expenses for businesses is now on par with the 50 percent limitation of meal expenses applied to individual taxpayer’s business-related meals. In addition, these amounts incurred and paid after Dec. 31, 2025, will not be deductible at any rate.
The deductions above are just the tip of the iceberg when it comes to what may be available to lower the tax obligation of your freelance business. While the deductions we’ve covered here are some of the largest ones commonly available, it is worth considering which others you qualify for and asking a tax professional for assistance if needed. Taking a look at your tax return now will also ensure that you avoid penalties for late payments and allow you the peace of mind of having your 2019 taxes taken care of early!
Jonathan Medows is a certified public accountant licensed in New York, New Jersey, Maryland, and Pennsylvania. He is also a recognized expert in taxation for freelancers and the self-employed—often tapped for his expert knowledge and perspective on self-employment taxation by national and regional publications such as The New York Post, BusinessWeek, Forbes taxation blog, WebCPA, CPA Practice Advisor, and others. You can read some of Jonathan’s press coverage here.
©2021 MEDOWS CPA, PLLC