The freelance work field in the U.S. continues to thrive. It lives through the pandemic and the economical crisis and attracts even more employees. Let’s learn about the most effective tax breaks for freelancers in the United States.
Most Important Tax Breaks for Freelancers
Freelancers are doubling. So many people started working from home during the pandemic, then went through the Great Resignation, and realized they want to work for themselves. Upwork, a freelance platform, found that freelance workers have contributed $1.3 trillion to the U.S. economy in 2021. Moreover, 59 million Americans have tried freelance tasks in the last year. So, if you’re also curious about joining the freelance force in the States, it’s time to learn about tax breaks! A home office tax deduction is one of the most popular means to minimize taxes. A self-employed person using their home for business can qualify for the deduction even if they rent out the place. “Knowing that you’re not a 9-to-5 [worker] anymore, you can now take advantage of the home-office deduction,” said Sheneya Wilson, CPA, and founder of Fola Financial in New York.
It’s also one of the most powerful ways to cut down on taxes. Unfortunately, remote workers employed by a company can’t take the home office deduction. Previously, the rule was a little different – so, take notes from the words of the IRS itself! “Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home,” the IRS said in a September 2020 reminder on the home-office deduction.
How To Calculate Tax Deductions
Several years before, IRS allowed a home-office deduction for all remote workers, even if they were employed by a certain company. In the Tax Cuts and Jobs Act of 2017, rules state that workers are banned from taking the deduction from 2018 to 2025. How can eligible freelancers claim their tax breaks? They have two ways: simplified and regular. First, let’s find out whether that home office qualifies for the reduction. The IRS states that the worker should use it regularly and exclusively – only for business purposes. Secondly, the freelancer in question should use the office both for work and business meetings. Otherwise, the place won’t be suitable for any tax breaks.
Now, to the simplified option. It’s a quick way to see how much tax deduction your office might get. Count the total square feet of the office and multiply it by $5. Remember: it shouldn’t be bigger than 300 square feet in this calculation! In case it’s 300 square feet or more, freelancers can get a deduction of $1,500 on their tax returns. The regular method works with percentages. The deduction will be based on the percentage of the home office occupies in the home. Divide the home office square footage by the whole home’s square footage. Afterward, multiply this percentage by the sum of the home’s allowable expenses. So, the 300-square-feet office in a 1,500-square-feet home would receive a 20% deduction from allowable expenses.
The regular method only claims expenses like rent, mortgage interest, insurance, taxes, and utilities. “If you’re eligible for it and the government is going to give you the money for it, you should take it,” said Wilson.