Six Things I Learned That Helped Me Pay Less Taxes As a Freelancer
“Worried about an IRS audit? Avoid what’s called a red flag. That’s something the IRS always looks for. For example, say you have some money left in your bank account after paying taxes. That’s a red flag.”
— Jay Leno
I’ll never forget that God awful day: April 15th, 2019. I found out that I owed taxes to the Federal Government for the first time in my life.
The bill was approximately $4500. I had always worked traditional jobs that withheld taxes, and I’d freelance a bit on the side. Still, I would always get a refund of several hundred dollars. How did I end up owing so much?
The short answer is, I didn’t know what I was doing. 2018 was the first year that I had made about half of my income from freelancing. All of it was self-employed income with zero taxes taken out. But the very next year, I was able to reduce my tax bill down to $50, and with a bit more planning, I realized I could even end up with a refund in the future.
The following are strategies that I am using to lower my taxable income, while also saving money, and getting stronger financially all-around
- Contributing to an Individual Retirement Account — Limit: $6000
One thing I always told about being self-employed is that you have to pay taxes every quarter, or save up throughout the year to pay taxes in April. And that’s true. But I found out that in my case, I didn’t need to save that money so I could pay the government. Rather, the government was willing to pay me, to pay myself!
I could contribute up to $6000 to a Traditional IRA, all of which would lower my taxable income. And it was a win-win, since I was a little behind on retirement savings anyway. I started running the numbers in my tax software. I saw a big difference immediately.
2. Setting up a Health Savings Account — Limit $3500
I learned that with certain high-deductible insurance plans, I could set up a Health Savings Account, and use all of the money I contribute to lower my taxable income even further — up to $3500 per year. I can withdraw those funds at anytime to pay for any qualified healthcare expense, which includes dental, and vision. (See: IRS…