Although many people dream of going into business for themselves, one of the main reasons they don’t is because of all of the economic uncertainty. You can make it easier for your clients – and help them keep as much of the money they earn as possible – by helping them make intelligent choices about their tax deductions.
- Better Expense Tracking. Larger enterprises can afford many accountants, in order to keep track of business accounts and stay current on trends in accounting best practices. The equivalent for the freelancer is a good accounting software, such as QuickBooks,® or, depending on their Schedule C, QuickBooks® Self-Employed. You can help your clients enter everything, or set up integrations with their online bank account or payment software. The self-employed often also forget to include business-related travel expenses, which are 100 percent deductible, and meals/entertainment, which are 50 percent deductible. Bank fees, educational expenses, advertising and interest payments on business credit cards are also under-recognized. For more information, visit the IRS’ Self-Employed Individuals Tax Center.
- Home Office Deduction. Self-employed workers normally work at home, but their home office deductions tend to receive a lot of attention from IRS auditors. You don’t want clients to be frightened of an audit, as long as they play it safe. The great news is that this deduction was revised in 2016 to reduce their administrative burden. The best place to learn about these changes to the tax code is the official Home Office Deduction. At minimum, tell your clients that their home address must be their principal place of business, and the room or rooms they set aside must be for business-use only. Their living room doesn’t count.
- Depreciation. If people think about depreciation at all, they will usually tie it in with heavy equipment or real estate. The fact is that all assets can be depreciated, as long as they help generate income and are used for multiple years. Computer equipment is a good example. Read over the Brief Overview of Depreciation on the official U.S. tax code. Depending on how your clients’ other finances are going, they might want to depreciate them in full, in the year they went into service.
- Health Insurance. In the past, people used to look for jobs just for the good insurance. That’s not necessary anymore. In 2016, health insurance as an industry was in the midst of a major overhaul. Your clients can deduct their health insurance payments, and may also be able to deduct health insurance premiums for the rest of their family and dependents.
- Retirement Plans. The future will be here sooner rather than later, so the earlier your clients start saving for retirement, the greater the impact of compound interest. Freelancers can watch a video about their potential tax deductions for retirement plans at the IRS site. Help them gather all the information they can on 401(k)s, IRAs, SEPs and other savings plans, and tell clients to remember that they save twice: once in the account and a second time when they take it off their income.
There are many more deductions you and your clients need to be aware of, including deductions for self-employment tax and the cost of attending networking events. When the going gets tough and you start to feel overwhelmed, console yourself with the knowledge that you are ahead of the curve. By 2020, 40 percent of U.S. workers will be self-employed; yet, you will already have years of experience. Friends and contacts may come to you for advice on tax deductions and smart financial moves, and they will see you as valuable resource and mentor for the new freelance.