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3rd Quarter 2017

Tax Guide for Freelance Income

Doing some freelance or consulting work on the side can be a great way to supplement your income. Even if you have a stable income and benefits from a full-time employer, joining the gig economy in your extra time can pay off handsomely. But you'll need to learn about special tax issues for freelancers to cash in on extra benefits.

Report your freelance income and deduct your expenses. Uncle Sam expects to hear about your freelance income when you file your tax return, but you'll be able to hold down the tax bill on that income by deducting a lot of expenses, including the cost of business-related equipment, supplies, advertising, phone line, mailings, and travel. You'll need to submit Schedule C when you file your tax return next spring, or you can use the shorter Schedule C-EZ form if you have business expenses of $5,000 or less, have no employees, and have no home office deduction. See the Small Business and Self-Employed Tax Center at www.irs.gov/businesses/small-businesses-self-employed for more information.

Understand the home office deduction. If you use an area in your home "exclusively and regularly" for business, you may be able to deduct your home office expenses. Your home office must be your principal place of business or a place where you meet regularly with clients, and you must not do anything else in that area. If you qualify, there are two ways to figure the size of your write-off. The "simplified method" gives you a deduction of $5 per square foot for the portion of your home you use for business (up to 300 square feet, yielding a maximum deduction of $1,500). Or you can deduct a percentage of your actual expenses of running your home, based on the portion of your home you use for your office, if that gives you a bigger tax break. If your home office is one-tenth of your home, for example, then you can deduct 10 percent of your rent or claim a depreciation allowance based on 10 percent the value of your home (not including the land). Add in 10 percent of the cost of electricity, water, gas, and other utilities, as well as that portion of your real estate taxes and homeowners or renters insurance premiums. You can also deduct the full cost of any eligible expenses specifically for your home office, such as the cost of furniture, equipment, painting or repairs to that room. Keep receipts for all of those expenses. You can calculate the deduction using IRS Form 8829, Expenses for Business Use of Your Home at www.irs.gov. For more information, see IRS Publication 587 Business Use of Your Home.

Take advantage of tax-deductible small-business retirement plans. Once you generate self-employment income, you can make tax-deductible contributions to a Simplified Employer Pension or a solo 401(k) plan. Your contribution limit is based on the amount of your earnings. Contributions are tax-deductible and the money grows tax-deferred until withdrawn in retirement. See the IRS's Small Business Retirement Plan Resources for more information.

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