How to Thrive in the Growing Gig Economy

If tax time doesn’t bring you a lone W-2, but instead a 1099-MISC — or even several of them — you’re no longer that unusual.  More than one-in-five members of the working-age population are freelancers or self-employed, according to the Freelancers Union.

And more than a quarter of Americans supplement their income with side gigs — bringing in an average $3,075 per year, according to a study by Finder.com. It’s only natural that you’d want to keep as many of those dollars as absolutely possible. Here are a few suggestions on how to do that when filing your taxes this year.

Keep a folder of business expenses and deductions.

It’s easy to put off gathering up expense receipts and figuring out potential deductions until the last minute, but doing so doesn’t just result in unnecessary stress — it can mean missing out on big savings. That’s why for each year, you want a folder labeled “Expenses” on both your physical desktop and computer one. Add receipts and records for all of your business expenses from today forward into each folder. Get in the habit of using your phone to snap pictures of your receipts to easily upload them to your computer and reduce the risk of losing track of them later on. (Many can be turned into deductions when tax time rolls around.) If you’ve got a home office, for example, you’ll want to keep track of receipts for office-exclusive furniture and electronics as well as bills related to your home. (Note: Those won’t always be 100 percent deductible, but they will partially. More on that in a moment).

You’ll also want to keep a record of everything you buy or do that relates to your business itself. If you’re an entrepreneur, for example, and bought a businessman’s autobiography or a how-to guide this year, those are likely deductible. If you spent any money on advertising this year, keep track of that — including Facebook ads for your business or upkeep fees for your website or domain. Networking coffees and business meals or travel are also partially deductible. Additionally, in-person or online classes to develop new skills for work are deductible as well as software (that Adobe Creative Suite or Microsoft Office subscription you just renewed, for instance), your cell phone bill if you regularly use it for work and mileage if you often drive to meet clients. To easily determine which expenses qualify as deductions, you can use online tax filing software. (TaxAct, our partner on this series, has a Freelancer product including a Deduction Maximizer feature which provides tax guidance tailored to a freelancer’s specific area of work. So if you’re a photographer or a blogger, the software is designed to identify deductions that are most common for your profession to make sure you don’t miss out on anything.)

Take the home office deduction (carefully).

On days they worked in 2016, 22 percent of employed people did some or all of their work at home, according to the Bureau of Labor Statistics. Whether you’re a full-time freelancer, a business owner or have a frequent side gig, it’s important to be clear on what you can — and can’t — deduct when it comes to your home office. To be deductible, the space must be exclusively used for your business. It can’t double as a guest room, playroom or anything else.

Once you’ve answered that question, home office expenses fall into two buckets. The first is direct expenses, which can be 100 percent traced to your home office, like exclusively used furniture, electronics and lighting. The second is indirect expenses, which are partially deductible, like utility bills, mortgage interest and real estate taxes. To figure out how much to deduct for indirect expenses, you will need to calculate the square foot percentage of your home office, then use IRS Form 8829 to multiply that by each indirect expense. Note that if you use something for business more than 50 percent of the time or its worth less than $2,500, you can generally deduct the entire amount (we’re talking desks, computers, etc.).

Your other option is going with the “simplified” home office deduction. That allows you to deduct $5 per square foot of your home office or the square footage of your home office multiplied by 5. It’s capped at $1,500 or 300 square feet. (And note that although this deduction is going away for employees in tax year 2018, it’ll still be an option for freelancers, says CPA Andrew Oswalt.)

Save for retirement to lower your tax bill. 

Think you can’t save for retirement without a workplace retirement plan? Think again. If you’re a full-time freelancer, have a side gig or are otherwise self-employed, you can contribute to a traditional, Roth or SEP IRA. And even though the calendar year has turned, you’re not too late to contribute for 2017 and lower your tax bill as a result.

The contribution limit on traditional or Roth IRA contributions is $5,500 ($6,500 if you’re 50 or over). (Note: Only traditional IRA contributions are deductible.  Roth contributions are made with after-tax dollars, but withdrawals aren’t taxed.) The contribution limits on SEP IRAs are considerably higher, up to 25 percent of your income or $54,000 in 2017 ($55,000 in 2018). SEP IRAs might give you the best bang for your buck deduction-wise, says Oswalt. The deduction is set up to be a percentage of your self-employed income, and although it’s a complicated calculation, it usually comes out to be around 20 percent of your taxable income.

Get strategic for 2018.

Finally, note that starting in 2018, the structure of your small business will make a bigger difference to your bottom line. The new tax law created a 20 percent deduction on pass-through income (or income reported by individuals with smaller business entities). That’s good news for small business owners and freelancers.

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Source : TaxAct Blog