While there are many names for your chosen career – freelancer, independent contractor, gig economy employee, among others – it effectively means that you work for yourself, that you are running your own business! Like any company, you are allowed to deduct the expenses associated with running your business for tax purposes. This is a huge benefit that you should ensure you’re utilizing. Deducting your expenses from your taxes will reduce the tax bill that you have to pay, keeping more of the money you earn in your pocket!
You pay taxes on your net income, or the amount of money left over after you’ve deducted all your expenses. If you make $100,000 and you have $40,000 of expenses, you would pay taxes on the net of $60,000. If your tax rate is 35%, by taking those $40k of deductions you save $14,000 on your taxes:
No deductions: $100k x 35% = $35k in taxes (a)
With deductions: ($100k – $40k) x 35% = $21k in taxes (b)
Saving from deductions: $14k (a) – (b)
A shortcut to figure out your tax savings is multiplying your tax rate by the amount of expenses. In the above example, $40k x 35% = $14k.
You have to keep careful records as the IRS can challenge your deductions. If that happens, you’ll need to provide them with your supporting evidence (receipts and other files) to show them that the trip to Europe was a legitimate business expense – for example, if you’re a personal trainer and you traveled with your client to a competition – and not just a vacation.