I’m a sole proprietor working with businesses and organizations, and so, like you, I had some concern about how the 2017 Tax Cuts and Jobs Act would affect me. I was also wondering how my clients would be affected, since many are also small and solo businesses. What affects my clients affects their ability to fund design, branding and marketing effort. This affects my revenue. It affects your revenue.
When the 2017 Tax Cuts and Jobs Act, a number of headlines and tweets incorrectly proclaimed that indy creatives would lose their business deductions. This is not true.
The Schedule C — income from self-employment and related deductions — is entirely different from the Schedule A: Itemized Deductions.
While a number of Schedule A business deductions have changed as of 2018 (home equity credit line interest is no longer deductible, for example) the deductions you can take on your Schedule C remain intact, with some happy extras that may work in your favor resulting in a lower tax responsibility for you.
As of 2018, all the usual business deductions are intact. But there are a few changes you want to be aware of.
When you’re self-employed, you are, in the eyes of the IRS, both an employer and employee. That means you’re responsible to pay both the employer’s and employee’s contributions to Social Security and Medicare. That’s always been the case.
The good news is that as of 2018, your employer’s share is now deductible. You’ll end up paying only half of the total you owe for Social Security and Medicare because you’ll deduct that share as a business expense.
You will still deduct business and art supply expenses, business use of your home and car, advertising and marketing, fees paid to independent contractors and suppliers, and a portion of your health insurance premiums. By the way, you’ll no longer be penalized if you don’t have health insurance.
Be sure you track your professional development and educational expenses. Those deductions are not going away. Anything you spend on schooling, online courses, continuing education, seminars, conferences, etc. will remain deductible on your Schedule C.
Qualified Business Income
Another benefit to the self-employed as of 2018 is the Qualified Business Income deduction. This means you may deduct up to 20% of your QBI if you’re a sole proprietor, partnership or S corporation. For many, this will prove to be a significant tax cut.
The QBI deduction may receive some tweaking in the coming months, so be sure to consult with a qualified tax or accounting pro about this one.
Standard Deduction Increase
In addition to your Schedule C business deductions, you can take a standard deduction on your Form 1040 . This deduction has doubled to $12,000 if you’re single and $24,000 if filing jointly. The Standard Deduction is based on your tax filing status. This increase means that you may not need to itemize deductions on a Schedule A, and that simplifies your tax preparation process.
The Nothing Owed, Nothing Paid Principle
Since I’ve been self-employed, which is since I entered the profession, my goal has been to not owe any taxes nor not receive a refund when I file. I’ve not always been successful with this tactic, but it’s still my goal. I don’t want to either under pay or over pay taxes.
Here’s my reasoning: If you’re overpaying taxes so that you receive a tax refund, you’re loaning the government your money without receiving interest on it. And you don’t have money on hand to work with when you need it, and may need to resort to taking out loans or acquiring credit card debt.
If you underpay your taxes, you’ll end up paying more than you’re obligation because of penalties and interest.
The best approach is to pay quarterly installments of the right amount so that the amount of tax you owe and the amount of refund due on your annual returns are zero.
Quarterly Estimated Payments
If you’re employed, your employer deducts tax obligations from each paycheck. Self-employed people don’t get paychecks. So instead we make estimated tax payments four times a year in April, June, September and January. What you pay in these installments is based on your expected total income for that year.
Quarterly estimated payments are not tax filings. When you prepare and file your tax return, you’ll include amounts of estimated payments subtracted from your total tax obligation. What you pay when you file or what is refunded, depends on the quarterly installments you paid throughout the year.
To make the payments, you’ll submit a Form 1040-ES along with your payment.
If you make quarterly estimated payments, you’ll pay less or nothing when you file your tax return. YOu might also receive a refund. If you don’t make quarterly estimated payments, you may owe additional amounts in penalties and interest. Do all you can to avoid that scenario.
Get Wise About Money
Money is a tool. The less of it you have, the less you’re able to conduct business. Learn what you need to know so that you can make wise decisions and accurate calculations.
One of the biggest business-killers for indy creatives is debt. Debt makes you a slave to your creditors. Interest charges are extra money going out of your pockets into someone else’s. That’s not good for your business or your life. Here are some tips for wise money management:
Create and follow a spending plan, otherwise known as a budget. We talk about this in my Business Road Map program where I guide you through the budgeting process. When you plan your spending you’re in control of your money. Budgeting does not mean you can’t use your money. It means you are in charge of how you use it.
Establish values and policies around how you will handle money and funding. For example, you can have a policy about shopping necessary equipment and considering refurbished items. Refurbs will be less costly than new, out of the box options. Write these policies down and include them in your business plan.
Avoid using credit cards and taking out loans. If you use a credit card, pay it off before interest is charged.
Avoid leasing equipment. Leasing is similar to renting in that you’re paying to use and are responsible for something you don’t own. Compare ownership costs to leasing costs. Whether it’s cars or computers, ownership is always the more prudent way to go.
Save for big-ticket items. Do all you can to put money aside weekly or monthly for big expenses like upgrading your 2009-vintage Mac Pro to a sleek, round canister version or an upgradable iMac.
Invest in your retirement. Set aside money regularly for your later years. Mutual funds are worthy candidates over bonds and annuities.
Be generous. Make giving and tithing part of your money management. No one who’s generous will tell you they went broke because of it. Just the opposite, they’ll tell you that they’ve received more. Generosity opens doors. It works like planting seeds. When you plant one, it yields a bunch more seeds.
My financial sources tell me that, as with any new legislation with this much complexity, things will shift as corrections and changes are made to the 2017 Tax Cuts and Jobs Act. Paying less in taxes, staying out of debt and stewarding your money and business policies will combine into a thriving business and prosperous life. But all in all, beginning with 2018, you’re probably going to be paying less in federal taxes all around as a freelance business owner, which means you’ll have more to work with.
You may also be interested in these articles:
DISCLAIMER: I am not an attorney or CPA. This information is offered in good faith for general information purposes only and is not exhaustive. It is not intended as legal advice or opinion. I do not make any warranty about the completeness, reliability, or accuracy of this information. Any action you take based upon this information is strictly at your own risk. I am not liable for losses and damages in connection with the use of this information. You should seek legal and other professional advice when establishing or conducting a freelance business.