Being a self-employed animator, graphic designer, Web designer, UI designer, or branding designer has lots of benefits—you’re the boss, following your dreams and working when and where you like. But there are a few challenges, like self-employed taxes. In this blog, we’ll share some tips to ease the pain and help manage the process.
Pay Your Business Expenses
If possible, you should pay all of your business expenses before closing your books for the year. By doing this, you can itemize those expenses on your current tax return instead of waiting until next year.
Prepare and Itemize
Gather all of your income and expense documentation, including receipts, logs, invoices, and bank statements.
Pro tip: it’s best to itemize this information throughout the year, so at tax time you only need to double check your information. By keeping a running tab all year, you can avoid having to make sense of everything at once.
After you’ve itemized your income and expenses:
- Make sure your information matches bank statements, receipts, invoices, etc.
- Compare it to last year’s return for any additional things to include.
- Keep your documentation safe.
Claim Your Deductions
As a freelance animator, graphic designer, Web designer, UI designer, or branding designer, you can apply tax deductions for supplies, equipment, health insurance premiums, vehicle expenses, home office expenses, and much more. Take time to learn what the IRS allows, how the deductions work, and how much the IRS will allow you to claim.
The home office deduction can be confusing. With it, you can deduct expenses for things like mortgage interest, home insurance, rent, and even home repairs. However, you can only claim it for the percentage of your home that you use exclusively as an office.
For example, if your home office takes up 10 percent of your home, you can claim 10 percent of the mortgage interest. By understanding how this and other possible deductions work, you can create more accurate tax returns and reduce the risk of an audit.
Collect and File Your 1099s
The IRS requires all taxpayers to file 1099s for any contractor they paid $600 or more. If you hired a website designer to get your website up and running or a graphic designer for a new logo, and you paid them more than $600, then you have to file 1099.
Pay Your Quarterly Taxes
The IRS requires the self-employed to make quarterly tax payments. The last payment is due by January 15th. Once you close your books, you’ll have a pretty accurate idea of your taxable income for the year. By estimating the remainder of what you owe at this point, you have a much better chance of making your tax payment on time.
Reduce Your Taxable Income
Below, we describe three ways freelance animators, graphic designers, Web designers, UI designers, and branding designers can reduce their taxable income by funding an IRA, funding an HSA, and deducting their health insurance premiums.
Funding an IRA – The self-employed can shield up to 25 percent of their earnings by contributing directly to an individual retirement account (IRA). If you can afford it, take advantage of this tax deduction and save for retirement.
Funding an HSA – Another vehicle for shielding income is a health savings account (HSA). In addition to its tax advantages, an HSA can help you save for future health care costs. To qualify, you need to be enrolled in a high-deductible healthcare plan (HDHP) that offers an HSA. For 2020, you can contribute up to $3,550 as an individual and $7,100 for a family. If you’re 55 or older, you can contribute an extra $1,000 to your HSA as a “catch-up contribution.”
Deducting health insurance premiums – If you pay for your health insurance, you may be entitled to a special tax deduction. If you qualify, the IRS will allow you to deduct 100 percent of your health insurance premiums–including dental and long-term care coverage–for yourself, your spouse, and your dependents. To qualify for the deduction, you:
- Must not be eligible to participate in a health insurance plan maintained by your employer or your spouse’s employer.
- May deduct only as much as you earn from your business. If your business earns no money or incurs a loss, you will receive no deduction.
Simplifying Finances for Freelancers and the Self-Employed
Tax season doesn’t have to be stressful for freelance animators, graphic designers, Web designers, UI designers, and branding designers. With a little planning and preparation, you can minimize the hassle and stress of filing your taxes.
With Lunafi, you can organize your income and expenses automatically and uncover tax deductions that can help you keep more of what you earn. Download the Lunafi app for free and get started today.