The Tax Benefits of Freelance
In the U.S., navigating the tax world is challenging. We recommend finding a trusted professional in finance and tax consulting to help you with your specific needs and eligibilities. This article will outline basic advantages for taxes in the freelance world, and is not designed to give financial advice for your specific situation. Always regard your tax professional when filing taxes to ensure you have the most updated information.
With that being said, taxes are a large part of our finances, despite only filing once per year. There are thousands of legal loopholes and differences between federal taxes vs. state taxes. Keeping your business in line with the ever-changing rules and regulations (especially post-Covid) can be even more difficult. With this in mind, there are basic concepts that are advantageous for taxes both as a Freelance professional and a small business owner.
Let’s get to it!
- The IRS rewards those who create opportunity
Did you know that the “everyday working American” pays among the highest tax bracket in the U.S.? This means they are one of the highest taxed individuals, simply for working and not contributing to the growth of the economy. It’s unfortunate, but it’s true. The IRS was designed to give “tax breaks” to those who employ others and provide job opportunities for others, thus contributing to the growth of our national economy.
This is why wealthy individuals who own businesses appear to pay less in taxes. They actually pay more – but because of the legal tax breaks they are offered, their tax burden is lessened. These same individuals work with intelligent CPA and tax professionals that help them understand the legal loopholes they are qualified for. Remember, there are thousands of various loopholes to tap into, so working with a knowledgeable professional is key to compliance.
How Can You Tap In ?
If you are a freelance professional, consider the benefits of going in as a “sole proprietor” or an “LLC” entity. By doing this, you have the legal authority to hire other individuals and operate as a small business. Essentially, you legally become your own boss. This protects you in many ways – and helps your wallet too. As a “sole proprietor” you may have access to tax write offs for any purchases made through your freelance business.
As an LLC, you are keeping your business separate from your personal finances. Again, as an LLC you may have access to certain tax write offs for purchases made under your business.
For our traveling freelance professionals and business owners, this means TRAVEL can potentially be claimed as a business write off for purchases made to support the operation of your business. A new travel van? Hotels? Food? Check with your tax professional for the most updated information on tax write offs for small business owners.
2. Help other small business owners
Due to the PRO act, and other legalities around how small businesses “employ” workers, you are helping other small businesses remain in compliance while building your entity. In most cases, business owners are not supposed to hire individuals to perform duties for extended periods of time – or they may be required to put the employed persons on payroll. Payroll is an issue for small business owners who cannot afford payroll taxes, or a full-time salaried employee (because of benefits, budget, etc.)
By operating a small business entity, other small businesses can purchase your “services” rather than “employ” you. It works as a partnership between businesses, in the sense that you are being hired as a business rather than a “freelance individual”.
What does this mean? This means the small businesses that purchase your services may be able to write off certain purchases as a business expense for the continuation of their business needs. Again, consult your tax professional for the most updated information to find the best solution for your business.
3. Set up your success story
Freelance work is becoming more popular as younger generations look for remote opportunities to make money. The corporate 9-5 jobs are slowly dying off, and employers are having a tough time filling positions to keep their businesses alive.
By operating as a business entity as a freelance professional, you may qualify for business rewards with banking institutions, credit lines, conferences, and more. This is crucial for success and your ultimate growth as a freelance professional. Small businesses are entitled to several types of grants, loans, and other financial support benefits by the SBA and other organizations that value small businesses. This allows you to tap into these resources, to grow or scale your services. You can use this money to outsource other small businesses, or hire a permanent team – or even focus on marketing for your brand.
When taxes come around, you’ll have several opportunities to write these off, or use them as leverage when disclosing income for your business. This is a benefit when looking for additional funding – as most lenders like to see a consistent income before offering lending.
For more information on monetizing your skills, please visit this page to secure a FREE eBook Download with must-have resources for monetizing your skills as a freelance professional.
