How Tax Credits May Lower Your Tax Liability

Filing taxes may be daunting for freelancers or small business owners alike. Choosing which to apply could prove tricky with all the deductions and credits available. By being aware of how tax credits could decrease your tax dues and using an estimator tool like the 1099 Tax Estimator to help file taxes, filing taxes will become simpler while saving stress and money!

Self-Employed Tax Credits

Freelancers and sole proprietors have the heavier burden of paying both sides of the FICA (the Self-Employment Tax), including Social Security and Medicare taxes. This might end up being quite a cost for you and your business.

The Employee Credit for the self-employed and low-income people is known as the Earned Income Tax Credit(EITC). It was not available in the past, but now, since the 2020 tax year, it can be utilized because it is a refundable credit. When it comes income level, certain requirements must be met under the filing status before one becomes eligible for claiming the benefits of the EITC and this could reach $6660 because of the enormous possibilities.

Self-employed individuals are subject to a Retirement Savings Contributions Credit (more often referred to as the Saver’s Credit) as a tax incentive. In accordance with these incentives, employees who earn less than the average are able to invest in an IRA or 401K with respect to a certain contribution limit of up to $1000 for single-filing earners and $2000 for married couples jointly filed, depending on the income earned and the amount invested.

Deductions for Tax Liabilities as Independent Contractors

As an independent contractor or self-employed, some expenses can be used as tax deductions, which can allow for a decrease in the tax amount due and the taxable income.

Most independent contractors benefit from taxes as follows:

Home Office Expenses: Some people are able to claim their residence if part of it is utilized strictly for work purposes. Properties like rooms and offices can apply a depreciation cost if they are paid for, such as mortgage, property taxes, utilities, repairs, and maintenance. Therefore, any of these can be taxed when the individual files his/her taxes.

Travel expenses: When a person travels for business purposes, they can be claimed for deduction and include reasonable and necessary expenses related to running the business, such as lodging, meals, and transportation.

Educational expenses: If you are taking classes or attending work-related conferences, you can deduct tuition, travel, and accommodation from your taxes.

Equipment and supplies: All business supplies and equipment, including purchasing or leasing computers, buying software licenses, buying office supplies, and buying or making stationery, may also be claimed as business expenses.

Tax credits for small businesses

Multiple tax credits can assist small businesses in reducing their tax bills. Such as:

The Work Opportunity Tax Credit (WOTC) is a tax credit for employers who hire members of certain target groups, including veterans, felons, and long-term unemployed, and it ranges according to wage and employee classification. The Work Opportunity Tax Credit has also become popularly known by its acronym;

R&D tax credits are awarded for research and development on a project as a form of encouragement. They can help with taxes, but the application process is intricate and requires many supporting documents.

The Small Business Health Care Credit can be claimed for a maximum of two consecutive taxable years covering a period of either one or two years that reduces up to 50 percent of an employer’s premium payments.

Tax Breaks for Self-Employed Individuals Tax Breaks for Self-Employed Individuals Working Age Self Employed Individuals may also be eligible for certain assistance programs because of the COVID-19 pandemic due to the provisions that were enacted under the CARES Act, which was passed in the year 2020, which provides numerous tax assistance measures among those suggested below:

Late Payment of Self-Employment Tax Individuals working as self-employed, in this case, have until December 31st, 2021, to defer payment of 50% of their self-employment taxes, and there is no penalty up to that date.

Employment Losses Self-Employed: Under the CARES Act, businesses and individual eligible contractors are able to carry forward their net operating losses for five years. This started to apply in 2018 and runs to 2020.

Freelancers may be able to pay less tax

Reducing tax Burden Freelancers who may be able to remit lower tax payment due to the ever changing law. In broad terms, there is a larger incentive over the remittance of the tax, however, in doing so, freelancers must ensure they grasp all the details in the preparation and accordingly say aims to maximize savings in tax relief.

Kindly consider these pointers to ensure you do not end up paying more in taxes than you have to:

Recordkeeping: It applies to everything throughout the year, whether invoices, receipts, or bank statements, when it comes to remitting tax to ensure the accurate computation of tax owed.

Tax Consultant Sometimes, it will be worthwhile to speak to a tax professional about utilizing the cutoffs more so that they understand the tax laws.

Cutting Edge Tax Solutions: TurboTax & H&R Block: If you tire of filing taxes and want it to be efficient, then the solution is to utilize these tax filing services! By doing so, claiming deductions and credits while filing taxes becomes less of a burden than it would have normally been.

We all know that taxes are an integral part of a country and its economy. However, this information alone does not help with the fact that taxes can be a great determinant of how much a person earns. Hence, to earn more, it is wise to constantly keep track of what is changing over time.

To Conclude

With the availability of tax credits, petty cash such as contractor earnings and business earnings can all be retained with the credits’ reduction. However, it is important to be more diligent and keep perfect records, as a disrespectful approach can lead to greater inconveniences when a tax advisor is required. With the right strategies, earning and holding on to cash is easier.

Also Read : The Power Of Business Allowances And Tax Incentives