Tax Tips for Freelancers
If you’re self-employed as a freelancer or a contractor, you already know doing taxes for your business isn’t easy. But do you know there are hundreds of expenses you could deduct (write-off)? Find out more about that, plus more great tips during our 30-minute webinar with Ro Williams.
Ro Williams is the Tax Research Manager at ComplYant. She is an experienced professional in the tax industry and has previously held positions at an International Law firm and Public Accounting firms.
Note: This topic covers U.S. business taxes only.
- 3:40 - Business entity formation
- 7:20 - Industry Type
- 10:47 - Accurate Accounting
- 12:57 - Business Banking
- 14:54 - Sales Tax License
- 16:47 - Bonus: 1099
- 19:37 - Q&A
What type of expenses can home businesses or family businesses write off?
Whichever expenses this qualifies in their industry type. That's what we're looking for. We're looking for ordinary and necessary expenses within your industry type.
Necessary doesn't have to mean "my business will fall apart and burn down if we don't have these things," but it does have to be needed for the business to function. It's like hiring that extra body at the workplace. You may not be behind in work, but you don't wanna get behind in work.
Just make sure the expenses are common to your industry. And if you have to think about it twice, I would avoid it. If you have to take a step back and say, "I don't know," then it's a no.
What percentage of total net profit from an S Corp can be set as your salary?
There isn't a set percentage of the total net profit. The IRS will look at what is reasonable for that person in that geographic location to live in-- that's how specific it is. So, if you live in Los Angeles, your salary is gonna be different than someone who lives in Oklahoma City. We're in two different places, two different geographical locations, and two different population types. The salaries are going to be different. So, you look at the median in that area. And if what your business is producing cannot meet that median, then you essentially don't qualify.
That's not saying you can't make the election. However, if you get audited, you're gonna have to pay all that money that you made those savings on back. If you get audited, you're gonna have to pay all the taxes, the self-employment, all the FICA on that. And then what else comes with being audited? Penalties come, and interest comes.
So just make sure that the salary that you take from the S Corp in order to make it S Corp is reasonable enough for a person.
Tax Tips for Freelancers
Hello. Thank you, guys, for joining us. First and foremost, my name is DeMei. I'm a customer support specialist here at ComplYant, and we're so excited you all could be a part of the conversation we're having today. While we're waiting to get started, just a few more minutes here. We'd love it if you guys got really engaged in the chat with us. If you let us know your name, where you're located, your industry, and the name of your business, that would be awesome. We love getting an opportunity to get to know you all better. So yeah, please feel free to share any comments and questions as well you might have for us. And for anyone who's new to our platform, ComplYant is a really powerful app that combines the tools you need to manage all of your business-related deadlines, your tax-related business deadlines.
So as long as time permits today, we should be able to take some live questions as well after Ro presents for us, super excited. So yeah, again, feel free to get engaged in the chat with us. Let us know your name, where you're located, your industry, and the name of your business as well. And again, we should be able to take some live questions at the end here. Feel free to drop any questions in the chat as well. And again, thanks for joining us, guys.
Alrighty. Again, thank you guys so much for joining us. Since we got started a little late here, we'll go ahead and jump in. I would love to have you guys check out ComplYant if you haven't yet. It'll take just a few seconds to get signed up. And we have Ro Williams, our awesome tax research team member here presenting today. She's very experienced in the tax industry and she's previously held positions at public accounting firms as well as an international law firm. So, she's a great resource. We love having her here at ComplYant. And she's gonna be presenting for us today. So, whenever you're ready, Ro, you can take it away.
Thank you to DeMei. I'm Ro, I am the tax research manager here at ComplYant. I hold a law degree that's focused on taxation and business transactions, and I've worked in public accounting for seven years and in tax law for about four/five years.
Tax Tips Overview (02:35):
So, I'm gonna jump right into this topic. Hopefully, you guys find it extremely useful, and I give you some good tidbits. Don't be too distracted by the words on the slide. Listen more so to what I'm saying so you can pick up the tax tips that I'm trying to give. So, I'll go off-camera and I'll come back on when it's time for the questions. So again, I'm Ro and we are going to talk about tax tips today for freelancers and contractors, and small business owners in general. There is something called the 50 common deductible tax write-offs and that's what I'm gonna focus on in this presentation. These text write-offs can usually be applied in any business industry or entity that you choose. So, we're gonna start with business entity formation.
Business entity formation (03:45):
Now, I know business tax isn't a fun topic and it can be confusing but understanding the basics about business tax can save you hundreds of thousands of dollars. So, business entity structures and formation - I don't think people take entity structure seriously enough, usually is chosen without a lot of thought or planning, but selecting your business entity structure is one of the most, if not the most important foundational steps you will take for your business. The overall purpose of selecting a business entity structure is to obtain the most favorable tax treatment for your business. This process of selecting your business tax entity structure tells the IRS how your business should be taxed. So that's your chance to step in and say, hey, I want to be taxed this way. In order to make sure you are getting the most favorable tax treatment, you need to make sure you are selecting the correct tax treatment for your specific business. So, the things that you need to think about are how do you select the entity structure and how do you know the one you're selecting is correct?
Consult a professional (05:05):
So, for this, I have to make sure I say always consult a professional regarding your specific tax needs. Again, the information I'm giving you today is only for informational purposes, and you should always consult a professional for your specific tax situation. By consulting this professional, they'll be able to tell you what tax type is most favorable for your business and for what you are trying to do. So, let's say we have a person named Spencer and Spencer wants to start an apparel company. Spencer is talking to a couple of his buddies and he's debating if he should form an LLC or an S Corp. For the most part, S Corps and LLCs are similar. However, the tax benefit of one greatly outweighs the other. Unlike an LLC, S Corps aren't taxpayers, and instead, they only pay FICA payroll, payroll tax on employment wages.
The remaining profits from your S Corp are not subject to self-employment tax or other FICA taxes. So those are only subject to income tax. So, when it comes to looking at an S Corp versus an LLC, there's a huge tax saving there, but there are also qualifiers in order for you to actually become an S Corp. So that's why I said, you have to look at your specific tax situation and definitely consult someone who's experienced, a tax practitioner, an accountant, a tax attorney to let you know, like, hey, you don't qualify or you do qualify for this. So, let's go ahead and make that election. And at the federal level, it's important to know that S Corp is not a tax-type structure. An S Corp is just a tax entity selection. It's just an election that you're making to tell the IRS to tax you in a certain way. So, you'll probably still be an LLC, you'll just be taxed as an S Corp. But to have that election as an S Corp is very, very favorable.
Industry types and Write-offs (07:21):
Next, we are going to touch on industry type. Now, I noticed that some business owners do not really know which industry they are in. So, I definitely wanted to address that. Along with entity structure, it is extremely important for you to know what industry your business operates. This is important because some tax write-offs are only applicable to certain industries. In order to make sure your write-offs are appropriate you or your accountant or your practitioner have to determine if the write-off applies to your business industry type. We know that a write-off applies by the term ordinary or necessary. That is the IRS looks at write-offs, which are derived from your expenses and your investments of the business, and questions if the expense is ordinary and necessary for your particular business. The IRS defines ordinary as anything that is common and accepted in the specific industry or trade that you're in and defines necessary expense as anything that is helpful and appropriate, but not indispensable.
So let's go back to Spencer. Spencer and his apparel company, it will be ordinary and necessary for Spencer to order large quantities of t-shirts to sell. However, if Spencer went and purchased a Maserati and tried to claim that that Maserati was necessary because he needed a car to deliver his orders in then his accountant will immediately know that Spencer was going out of his mind. There is nothing necessary about an apparel company needing a Maserati to any extent. Spencer should have started a luxury car rental service company if he wanted his company to purchase a Maserati. However, if Spencer decided to get a car under $30,000, that he would use for deliveries to get to popups or other events or run company errands or do anything related to the company with this purchased vehicle, then we would have an argument for the IRS saying that the vehicle is necessary. It was a necessary purchase for the company, and it's actually something ordinary. And again, ordinary means that other companies do the same thing or should be doing the same thing. And we'll go from there.
So likely the $30,000 car - we’ll be able to possibly write off the car or at least write off the maintenance or the mileage or figure out how to make the car a tax-advantageous purchase. So, the main takeaway here is to make sure the items you are purchasing and the expenses you are gaining in order to write off and decrease your gross income are actually ordinary or necessary to the industry you are in. So basically, look at your competitor and see if your competitor, Hey, did my competitor purchase this, did my other competitor purchase this... And if the answer is yes across the board, more likely than not, you're good to go. But remember, consult with your tax professional.
Accurate Accounting (10:47)
Next, we'll touch on accurate accounting, which is my personal favorite. So here, we're gonna talk about your everyday bookkeeping. Accounting may seem daunting, but through accounting, you see how much you spent on your business in specific categories. And this will assist with tax write-offs and deductions. It is super important for you to keep track of how much money you need in relation to your business and how much income your business earns. You want to keep track of your income and expenses through an accounting system because this is how you determine through your chart of accounts, how the information is reported to the IRS. Chart of accounts, big word. I knew I throw it out there. Your chart of accounts is inside your accounting system. And some of the terms that I'm saying, if you don't know them, we have a glossary on ComplYant.co and you are able to go and look up the terms that you do not find familiar today.
Accounting Systems (11:53):
An accounting system is a program where you can manage items such as income expenses and equity. The accounting system provides a chart of accounts for you to categorize your business' financial information. Systems that are considered accounting systems are QuickBooks Online, Soho, Xero, things of that nature. You should not consider a POS or website platform such as Square, Shopify, Wix, Venmo, CashApp, or anything in that realm as an accounting system. Those are just platforms that host you on your website or collect payments for you. You should not take any information directly from that website and apply them to any of your taxation forms or your compliance forms. You should definitely combine them with your accounting system first from your platform or your payment processor that you use so you can have your full scope of numbers for your business.
Business Banking (13:00):
Next, I'll touch on business banking and business banking is so important. It's probably one of the most underrated but definitely one of the most useful. First and foremost, you should have a business bank account. If you have a business, you should definitely have a business bank account. Those expenses that you want to put towards your write-offs and those deductions that you want to receive, they have to trail back to your business bank account. When it comes to tax write-offs, having your own bank account is useful because your accounting accuracy will be higher. And again, we get our tax write-offs and deductions from our charter accounts and our accounting system and the money from our bank account flows to our accounting system. So, everything essentially works together. When you connect your business bank account to your accounting system, you don't have to worry about personal items being pulled in or categorized as company expenses when the expense was personal if you have your separate business bank account. You will avoid a lot of time guessing about an expense if you use a bank account dedicated to your business only. And if you ever are in an audit, having a business bank account helps tremendously in defeating the IRS.
How can a simple bank account assist in an IRS win? Because we aren't guessing if the expense is personal or related to the company if it is standard practice within your business to only use the business card when there is a business expense. That is a viable explanation of something and something that's generally accepted. So having your business bank account for your business expenses that flows into your accounting system that supports the write-offs on your tax return, foolproof.
Sales Tax Licenses (14:54):
Sales tax licenses. Now I know you're thinking, how could you possibly get a tax write-off from a sales tax license. First, you can actually write off the cost of a sales tax license. If you have to pay $30 for that license, you are entitled to get that $30 deducted from your taxable income for your tax return. Or even if the paperwork for your sales tax license was completed by your accountant or tax attorney, you are able to write off that entire expense as well. So not only the license fee but now the fee that you paid the persons to do the things that they did. But the big bang when it comes to a sales tax license is that in most states, once you apply for a sales tax license, you qualify to receive a seller's permit, which is a huge tax saving. For example, take Spencer, we have his apparel company. Since Spencer buys bulk or large quantities of items with a seller's permit, these items can be purchased from wholesalers. Buying from wholesalers, allows the buyer to not pay tax directly on what is being purchased, but to pass the tax to the customer when they purchase goods from the buyer. And the buyer in our example would be Spencer. So, Spencer doesn't pay sales tax. He's going to pass that expense along to his customers. So basically, the business owner gets out of paying the sales tax directly.
Third Party Payment Processors (16:27):
And to me, that is a huge benefit because now you are just taking this money from your customer. You're holding the money cause the money's not yours. You're holding the money in order to pass that money that belongs to the state to them. And last, but certainly not least. I want to go ahead and touch on this whole 1099 craze that's going on. There's not much of a tax benefit per se, but I think that it is important that you guys know about this. So, what's going on? Anyone who uses a third-party payment processor, such as CashApp or Venmo, Square will receive a 1099K for transactions of $600 or more for payments for goods or services. Payment processors are trying very hard to make sure that none of these transactions are mixed up with peer-to-peer transactions, but things happen. And that's why you have your accounting system to double-check your numbers.
So, for the third-party payment processors for sending the 1099Ks, that means if you send a contractor $600 or more in a year, the payment processor will send you and the contractor the 1099K because you both use the service and you both sent or received this $600. So Venmo or PayPal has sent you a 1099K, now what? If you are a business owner, you still have to send your contractors or employees a 1099 NEC. And a 1099 NEC is a non-employee compensation 1099. This is saying, hey, I pay this person for whatever they did. However, they are not my employees. If it is an employee who you sent a payment and they got a 1099, you got a 1099, then you need to send a W2 because they're an employee. A contractor, or a freelancer, you send a 1099 NEC.
So basically yes, these companies are sending these forms and they're basically reporting, but they're meeting their reporting requirement. You still have to meet your reporting requirement and your reporting requirement is not them sending, but actually, you compiling and you sending. If you are a freelancer or a contractor and you received a 1099 K, you should be expecting a 1099 NEC. If you don't receive a 1099 NEC, then you should reach out to that person and verify that they in fact did not qualify to send you one. And we have actually a blog up or going up soon on ComplYant that addresses this 1099 K and NEC debacle. And you can always email us if you have questions.
So that is it. It is time for Q and A.
Excellent, thank you so much, Ro. That was awesome. Super informative. So, we're gonna go ahead and jump into questions here. And as Ro said earlier, we just wanna remind everyone that we are simply a tax compliant software and we are not an advisory firm, again, as Ro said. So, any information we provide is not intended to be taken as advice or a specific position on any type of tax law. So, it looks like we may got additional few questions in the chat and we'll go ahead and jump in. Feel free to leave any other questions, or last-minute questions in the chatbox as well.
Q1- Write-offs for mobile business expenses (20:22):
It looks like we had a question from Johnny Baker, and he asked what are some good examples of mobile business expenses that can be written off? And then Ive in the chat had mentioned something about like a business cell phone. So, I feel like that might be good for that question as well. What are some good examples of mobile business expenses that can be written off?
So, I'm going to give you what everybody knows and by everybody, I mean like tax accountants, we all know this. So, in the beginning, I mentioned these commonly accepted expenses, which are expenses that get you your write-offs and your deductions. There are about 50 or 60 of these commonly known expenses. And some of them they qualify for a mobile business or a restaurant or an apparel company or a luxury car business. So, you know, cell phone, of course, you're doing business on the cell phone, you're using the cell phone for business, of course. It gets complicated if it's your personal phone or your business phone because then you get into, how often do you use it? Do you use it just for your business or do you be calling your mom, your dad, and your cousins on it? So that has to be considered, but yes, a cell phone is a commonly known expense.
If you have a mobile business, then it sounds like to me, you have some type of vehicle, truck, car, and it's directly related to your business. So, I'm sure if you talk to your tax professional, they'll say like, we can do something with this vehicle. There is some tax-advantageous way we can use this vehicle. Inside of the mobile, you have to get the mobile business cleaned. That's an expense. Everyone knows that a janitor is a tax-deductible expense for a business. Cleaning supplies are tax-deductible for a business. If you have a car and you're using it for a business, that mileage or that gas may be tax-deductible, depending on what you were doing while you were driving. So, things of that nature. And again, if you maybe Google commonly known tax deductions, these will come up and it's about 50 of them. And of course, you have to actually meet the standards for the 50 of them to get all 50. But it's really helpful when you know that these 50 exist and you can use them to your advantage.
Absolutely. Thank you so much, Ro. And we did get started just a few minutes behind, so we'll go just a few minutes over getting some questions.
Q2- Why is S Corp favorable? (23:09):
We also had another one from Erin in the chat, she was asking why is an S Corp favorable?
I hope I touched on that, and you guys can go back and listen in the recording. But basically, it's favorable because you get that extra tax benefit and in an LLC the income is passed straight through to, well, in a regular LLC, cause don't forget, all S Corps are not tax structures, it's an election. So, in an LLC, the income passes straight through to you. In an S Corp, it kind of passes straight through, and then it doesn't, it stops. Because the S Corp is saying like, hey, I wanna be my own person. And so, when it makes its own person, now it has this barrier right here. So, the income actually stops, it pauses, and some drops off. Those are just profits for the company. The rest passes to you. That pass-through that comes to you, it's called a reasonable salary. In order to make an S Corp election, you have different qualifiers. One of those quiet qualifiers, which means it's not a check the box, but if you don't meet the standards, once they come through and audit you, then you have to repay all that money.
One of those quiet standards is basically you have to be able to receive a reasonable salary from your business in order to create it as an S corp. If your business is only making $10,000 a year, it's not very likely, that you'll be qualified as an S Corp. If your business is making $60,000 if you can live on $40,000, awesome. Now, we can make this an S Corp. So that $40,000 passes to you as your salary, because remember your business said, hey, I'm my own personnel, we're separated. So, you get your salary, your business gets its part of its income, and that's how your business is taxed. Your business is taxed on its income and then you're taxed on your salary, like a regular person, y'all are separated. You do not receive the full taxation of all the income, unlike an LLC. And that's a huge tax saving.
Q3- Write-offs for home office expenses (25:23):
Definitely. Absolutely. Another one we got was from Julie asking what are some good examples of home office expenses that can't be written off? So maybe some things you may not want to write off when it comes to your home office expenses.
That's a great question. Let's remember home office expense, there are two versions of it. And not only are there two versions of it, but you can also only do so much in that space. Something that you cannot write off. I wanna see somebody write off plants. I've never seen anyone write off plants in a home.
That sounds real.
I haven't seen that. That would be a good one when it comes to home office expenses. So, it's not really a home office expense, it is a business expense and your home office is an expense within that business expense. But I will hope that I've never seen someone write off plants before, but I feel like you can't, but that's my business. So consult your tax professional.
That is super, that's great. And then we had one from Nikki that was saying, are there any extra expenses I can write off as an LLC that I can't write off as a sole proprietorship?
Any expenses that you can write off as an LLC...
That you cannot write off as a sole proprietor.
So if you hire someone to incorporate your LLC, you can't write that off as a sole proprietor. But generally, no, not really. I'm sure there's something out there. I don't come across it often, but an LLC mirrors a sole proprietor. They're like fraternal twins, the only difference is one's incorporated and one isn't. So I wanna really say not really. Google it and let me know
Q4- Write-offs for family businesses (27:25):
Great answer. And I guess there was just one last one here. What type of expenses can home businesses or family businesses write off?
Whichever expenses this qualifies in their industry type. So that's what we're looking for. We're looking for ordinary and necessary expenses within your industry type and remember necessary isn't my business will fall apart and burn down if we don't have these things. It just says like, hey, we need this. It's like hiring that extra body at the workplace. And it's like, we're not behind in work, but we don't wanna get behind in work. So it's kinda like that. Just make sure the expenses are common to your industry. And if you have to think about it twice, I would avoid it. If you have to take a step back and say, I don't know, then it's a no. That's plan safe. So yeah.
Got it. Great. It looks like maybe we had one about vehicle purchases. I know you were just mentioning if you get in touch with a tax professional, they can let you know specifically what it is that could be written off as far as the vehicle goes for your business.
Percentage of total net profit (27:30):
And then another question looks like in the chat might have been a little specific as well about a percentage of total net profit that people normally have as salary for an S Corp.
I can answer that one. So, I would not say that there is a percent of total net profit. What I will say is that what is reasonable for that person in that geographic location to live in, that's how specific it is. So, if you live in Los Angeles, your salary is gonna be different than someone who lives in Oklahoma City. We're in two different places, two different geographical locations, two different population types. The salaries are going to be different. So, you look at the median in that area. And if what your business is producing cannot meet that median, then you essentially don't qualify. You can still do it. That's not saying you can't make the election. That's saying like, mm, you probably gonna get audited more likely than not, you are gonna get audited. And when you get audited, you gonna have to pay all that money that you made those savings on back. So, remember when I said the business only has to pay income tax on the portion that they have left behind, that's not going to happen. If you get audited. If you get audited, you're gonna have to pay all the taxes, the self-employment, all the FICA on that. And then what else comes with being audited? Penalties come, and interest comes. So just make sure that your salary that you take from the S Corp in order to make it S Corp is reasonable enough for a person. And it can be like, well, I'm a person and I could live off $15,000, can't be like that. A regular reasonable objectionable person to live off of.
Business Banking (30:41):
Absolutely. It looks like you answered Janie's question. Excellent. Well, Ro, I wanna thank you so much for hosting today's webinar today's episode. It was extremely informative. You did awesome. Thank you so much.
You're awesome too.
Thank you. You're the best. If anyone has any additional questions you can feel free to email us at hello@complYant.co and that's C O M P L Y A N T. co. And then also, if you guys have any suggestions for webinars we should do in the future, you can feel free to drop those as well. So, again, wanna thank you guys all for tuning in. I hope you have an amazing day and the rest of your week. Thank you, guys. See ya.