Breaks For Freelancers
by Julian Block
Recent law changes include valuable breaks for freelancers and other self-employed people. What follows are the highlights of three tax savers.
Health Insurance Deductions For The Self-Employed.
Starting with 2003, freelancers get to deduct 100 percent (up from 70 percent for 2002) of their payments of medical insurance premiums for themselves and their spouses and dependents.
Bigger First-Year Expensing Deduction.
There are two ways freelancers can write off of their outlays for equipment purchases such as computers and file cabinets. One is the "standard" route -- recovering the cost through depreciation deductions over a period of years. Or, they can opt for the often-overlooked tactic of "expensing," under tax-code section 179, and deduct a specified amount of equipment in the year of purchase.
Let's say your equipment purchases include $4,000 for computers. Instead of depreciating the computers over five years, they can be immediately expensed. A $4,000 write-off lowers taxes by at least $1,080 for an individual in the 27 percent bracket, plus applicable state taxes.
There's a cap on the deduction. The ceiling is $25,000 for 2003, up from $24,000 for 2002. But small-business organizations are lobbying for a significant boost in the ceiling and Congress abounds with bi-partisan backing for a sweetening of the break, budget deficits notwithstanding.
The paperwork for first-year expensing is straightforward. Freelancers have to complete Form 4562 (Depreciation and Amortization). They carry the Form 4562 deduction to, and enter it on, the line for "Depreciation and section 179 expense deduction" on the two-page Schedule C (Profit or Loss From Business), which is where they report receipts, along with equipment costs and other expenses, to arrive at a net profit or loss. Once that has been accomplished, Form 4562 and Schedule C are supposed to accompany Form 1040.
Profit From Paying Your Kids.
Do your children help out with your business? Could they? A savvy way to take care of their allowances at the expense of the IRS is to pay them wages for work they do. This tactic keeps income in the family but shifts some of that income out of your higher bracket and into their lower one. For 2003, a child sidesteps taxes on the first $4,750 of earnings (that figure is scheduled to increase in later years). For this business expense to stand up under IRS scrutiny, your children must actually render services and you must pay them reasonable wages.
Internal Revenue Code Section 3121(b)(3)(A) exempts the wages you pay your children under the age of 18 from Social Security taxes, provided you do business as (1) a sole proprietorship (IRS lingo for the lone owner of a full-time or part-time business that's not formed as a corporation or partnership) or (2) a husband-wife partnership. To put it another way: This exemption doesn't apply to a family business that's incorporated or a partnership with a partner other than a spouse.
TIP: Write-offs for equipment purchases and wages enable freelancers to save more than just income taxes. They also reduce self-employment taxes owed for 2003 on the first $87,000 of net (receipts minus expenses) earnings.
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