As a freelancer, understanding the tax credits available to you is crucial for securing your financial well-being. We know that the ever-changing landscape of tax laws may seem intimidating! But that’s where we come in.
In this comprehensive guide, we'll explore how freelancers can learn about the tax credits they are eligible for, provide tips on gathering the necessary documentation, and help you determine your eligibility. By taking advantage of these tax credits, you can minimize your tax burden and maximize your financial benefits.
Tax credits are powerful tools that can significantly impact your financial situation. They work by reducing the amount of tax you owe on a dollar-for-dollar basis, making them highly valuable for freelancers. There are various tax credits available, each with its own eligibility criteria and requirements. Some common tax credits for freelancers include the Earned Income Tax Credit (EITC), the Child and Dependent Care Credit, and the Self-Employment Tax Credit.
But now, in addition to the standard tax credits, there are COVID-19-related tax credits that can help freelancers and entrepreneurs recoup income lost because of the pandemic. Specifically, the Families First Coronavirus Response Act (FFCRA) allows you to claim up to $32,220 in tax credits straight from the IRS! Check out more info about the FFCRA here.
While it might seem daunting to try and weed out which tax credits apply to your freelancing business, finding out specifics is easier than you think!
The IRS website is a great place to start, as it provides in-depth information and guidance on tax credits that are relevant to freelancers. Additionally, it's always a good idea to seek the advice of a tax professional or accountant who works with freelancers. They can offer personalized advice based on your circumstances and help you pinpoint potential tax credits.
Keeping good records is crucial when you are trying to get tax credits. Ensuring you have all your income, expenses, and relevant freelance documents organized, including invoices, receipts, and bank statements is important. Also, make sure to keep track of the costs related to your business, such as equipment, software, or courses. Having all this information ready and well-organized will help you get the tax credits you deserve.
Determining your eligibility for tax credits requires a thorough understanding of the specific criteria set by the IRS, but it’s not as overwhelming as it sounds if you know what to look out for. Here are a few tips to help you navigate this process:
1. Review IRS guidelines: Familiarize yourself with the eligibility requirements outlined by the IRS for each tax credit. Pay close attention to income limits, filing status, and other qualifications.
2. Consider your freelance income: Some tax credits have income thresholds, meaning your eligibility may depend on how much you earn as a freelancer.
3. Understand qualifying expenses: Certain tax credits, like the Child and Dependent Care Credit, require you to have qualifying expenses. Ensure you understand what expenses are eligible and accurately track them throughout the year. You can use an Excel spreadsheet/Google sheet if you’re trying to keep costs down, but bookkeeping software like Quickbooks or Freshbooks can do a lot of the heavy lifting for you by auto-categorizing costs and running profit/loss reports.
4. Consider if you have evidence to support your claim: It’s always a good idea to ensure you’ve got documentation to give the IRS in the rare case you’re audited. If you can’t provide evidence of your eligibility to the IRS when they request it, you may need to pay back the credit, plus penalties and interest.
Some tax credits, like the FFCRA, are only available for a limited time, so it’s a good idea to jump on your application long before the deadline. If you’re interested in applying for the FFCRA, we can help you calculate your refund and submit your application directly to the IRS! Take our 3-minute pre-qualification quiz here to see how much you can get back.
Freelancer tax credits are available now, and you likely qualify for at least a few! Do your research, get all the proper paperwork, and check the eligibility requirements. With a bit of know-how, you can save money and make the most of your freelance life.