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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.
