Freelancers and small business owners have more tax breaks than ever thanks to changes that went into effect last year. Most significantly, there are new write-offs for buying business equipment and a massive “pass-through” deduction.

But there is nothing simple about claiming all the tax breaks you’re entitled to when you have income from freelancing and self-employment. Even if you have your taxes professionally prepared, you must understand some of the fine points of America’s Byzantine tax law to claim the most lucrative breaks.

Here’s what you need to know.

Individual vs. independent

When you’re an employee, you earn “wages.” When you are an independent contractor you receive “miscellaneous income.” This income could be classified as rents, royalties, non-employee compensation, or the great catch-all — “other.” The type of income you receive determines how it is taxed and what deductions and credits can be used to reduce it.

Wages, for instance, are 100% subject to “employment taxes”  that go to Social Security and Medicare. This tax amounts to 7.65% of every dollar you earn as an employee. (Your employer pays another 7.65%  into these systems.)

“Miscellaneous” income is only subject to Social Security and Medicare taxes after you subtract a litany of business expenses.  However, since you are both employee and employer when you work for yourself, you will pay 15.3% on the net income. You’ll also be able to deduct the 7.65% “employer” payment on a newly-created form, called the Schedule 1, though. (No one said this was easy.)

To claim most self-employment deductions, you must file a Schedule C — Profit or Loss from a Business.

Schedule C

The Schedule C leads you through a litany of expenses that you can subtract from your business income — everything from advertising costs to business travel.

What neither the form, nor a tax accountant or software, can do for you is prompt you to remember all the details — the many times you took a client to lunch; bought office supplies like business cards, printer ink and paper; the times you paid a social media expert to help you with Instagram; or the computer repair person you hired to wipe your virus-frozen hard drive.

It’s best to write down these expenses as you go. If you weren’t that organized, go through all of your credit card and bank statements to jog your memory. Every legitimate business expense reduces the income you pay tax on and can drop you into a lower tax bracket. It’s worth claiming every possible dime. 

Legitimate write-offs

What should you be looking for when searching for legitimate write-offs? All of the previously mentioned costs, as well as the cost of any office equipment you purchased during the year, rent you paid for office space outside of your home, interest expenses on business loans and professional fees paid to accountants and attorneys.

There are also a large number of deductions that vary based on what you do.

For instance, if you drive for Uber, your gas, tolls, car washes, client snacks, waters and supplies, as well as a portion of your auto lease payments and auto insurance costs, are deductible. If you rent rooms via Airbnb, the wine, coffee and condiments you buy for renters, as well as linens and some home decor, would also be deductible. Likewise, if you make art to sell on Etsy, your art and craft supplies are dedutible, as are the commissions and fees you pay to the site. 

If you work from home, you should also seriously consider taking a home office deduction this year. Home offices allow you to write off a number of maintenance costs, as well as depreciation — a cost on paper only — on the portion of your home used as an office. These deductions can get complex, but are often lucrative enough to warrant the extra effort. (See Why Every Side Hustler Needs a Home Office.) 

Schedule 1

Three significant deductions for self-employed people have moved to a brand new form, called the Schedule 1. The deductions are not new — they used to be claimed on the 1040 —  but the form is.  Don’t miss the deductions because they’ve seemingly disappeared from the spot where you’d normally claim them. The deductions you claim on the new Schedule 1 are:

  • the employer’s contribution to Social Security and Medicare taxes (figured on Form SE)
  • health insurance premiums paid for yourself and your family
  • contributions to self-employment retirement plans, such as SEP IRAs.

Big changes 

But the two biggest tax changes that affect freelancers and sole proprietors this year are the boost to business expense write-offs and the new 20% pass-through deduction.

Business expense write offs

If you bought expensive property or equipment for your business — cars, computers, office furniture, etc. —  you can write off 100% of the cost to a maximum of $1,000,000 in 2018. Normally, the cost of this property would have to be written off over time.

However, you can’t create a business loss by writing off more in capital expenditures than you earned during the year. So if your expenses exceeded your net business income — or even come close — consider depreciating the asset over time. This allows you to spread the deductions over several years, which could make these write-offs worth more in tax savings.

Pass-through deduction

Once you subtract all the relevant business expenses from your business income, you get one more deduction — the so-called “pass-through” entity deduction. This takes 20% off the top of your business earnings, reducing your taxable business income even further. 

What’s the catch? If your taxable income is over $157,500, as a single filer, or $207,500, when married, you may lose all or part of this deduction.

If you have income in that range, the best advice is to seek professional help. The complexities of filing an accurate return when you are self-employed are mind-boggling in the best of circumstance. The pass-through deduction makes them even more befuddling.

The good news? Fees you pay to your tax accountant are tax deductible.