The more I learn about taxes, the more of a headache I get. However, I also get fascinated by it all. Since you are self-employed, you, for some reason, have to pay both federal income taxes, as well as a self-employment tax. The percentage of such changes depending on your income bracket.
With as little as 25% of your earnings going towards taxes, you may feel like quitting self-employment altogether. Don’t do that yet! There are some nifty things that you can deduct from your taxes that make life just a little bit easier.
But first things first: In the US, you are taxed based on your NET income. This means the amount of money that you made, minus your business expenses. So if you earned 10,000$ on Fiverr and elsewhere, but spent 3,000$ in business expenses, your net income would only be 7,000$, and that can save you hundreds of dollars on taxes.
So what can you potentially deduct from your taxes?
If you rent a place, you can deduct a portion of your monthly rent from your taxes. For instance, if you use 10% of your house for business usage, you can deduct 10% of your rent from your taxable income. This is the space where you have the desk, the chairs, etc. If it is in your bedroom, then only part of the bedroom is tax deductible space, not the whole room.
Are you a writer? If so, do you spend money on pens, pencils, notebooks, printer paper, and the like? That purchase can be deducted entirely from your taxable income. If you own a website that you use to promote your business, the money that goes into that website, including marketing and advertising, is tax deductable.
The same with the rent. If you use 10% of your house for business, you can deduct 10% of all of your utilities from your taxable income. I believe the bills have to be in your name, however. Even if you are paying for it, if it is not in your name, I doubt you can get a deduction from it.
From what I have discovered, if you use the internet for business 50% of the time, then you can deduct 50% of your internet bill from your taxable income.
If you go out to eat with a client and discuss business with them in any way, you can deduct 50% of the check off your taxes.
Use 10% of your house for business? You can deduct 10% of the cleaning supplies you use for your business space from your taxable income. I doubt toilet paper and dish soap is included in that, sadly. Save receipts though.
Saving up with a 401K retirement plan? Part of that is tax deductible too.
Earned Income Tax Credit.
If you make below the poverty line for your household, you can qualify for an Earned Income Tax Credit, where the government pretty much cuts the tax that you owe them.
So there is a lot of things that you can deduct from your taxes if you are self-employed. So it starts off at 25% of your income, but by the time all the deductions are completed, it may be less than 10%, depending on your qualified expenses.