Taxes for Freelance Developers – Full Course

Key Takeaways

Luke ciciliano has been a freelance developer for many years in this course he will teach you how to manage your taxes as a freelance developer this course will be especially applicable to people living in the United States hi my name is Luke cisano I'm a self-employed web developer I've done a few articles and videos for free code camp on various issues related to how uh self-employed developers and Freelancers can better manage their business can make more money can get customers things of that nature um I've decided to expand on those discussions with this video and a written article that's going along with it that written article will be linked to down below um and the discussion in this video is going to be one of the topics that might cause self-employed people more frustration than anything else and that is the management of your taxes um obviously if you've worked for yourself you know taxes can be frustrating to deal with it can be confusing so the goal of this video is really going to be to clear up quite a few things and hopefully help people keep a little bit more of what they make now before I get into what all is going to be covered in this video the one thing I really want to stress is that I am not holding myself out as a licensed tax professional I am not a licensed tax professional um knowing it for you code Camp is holding themselves out as tax professionals this video should not be taken as professional tax advice this everything I'm going to be saying is just matters of personal opinion and it only relates to how I do things in my business um in terms of your own personal situation you really do need to discuss it with a CPA or a tax attorney or someone of that nature with that being said I have been working for myself for quite a few years and um fortunately I've been able to get good tax advice along the way so what I'm going to be just doing in this video is sharing a little bit of just personal knowledge personal opinions and things of that nature so again if you've worked for yourself you understand how frustrating it can be dealing with taxes not just filing your returns but things you've got to file file every quarter if not every month managing withholding um things of that nature so what we're going to be getting into in this video is a number of topics uh number one we're going to talk about why taxes matter in other words why you really need to be mindful of what you're paying to various governmental entities in income tax uh this taxes tend to be something where a lot of people just think well they're my taxes there's nothing I can do about it I pay what I pay whereas the truth of the matter is you can really get ahead financially by being more mindful of your taxes than most people are okay so the first thing we're going to look at is why taxes matter in the first place the second thing we're going to look at is some important Concepts to get our get our arms around before we even really dive into how to maximize deductions and things of that nature because understanding how taxes in the US work on a basic level is important to understanding how you're going to get the most out of your various deductions and how you're going to get the most out of your opportunities to save some money on what you send to the government the third thing we're going to look at is the fact that how you structure your business is going to impact how much you're paying in taxes at both the federal level the state level the local level etc etc so how you structure your business is actually going to have a very big impact on your tax bill at the end of the year the fourth thing we're going to look at is maximizing your deductions in other words making sure that you aren't missing deductions and as a result over reporting your income and as a result of that paying more in taxes than you need to at the end of the year you'd be surprised at how many people Miss really important deductions um the fifth thing we're going to look at is how you can go about making your payments to the government during the year because when you're an employee and you get W2 and you get a paycheck every you know every week or every two weeks you're used to your employer holding out your taxes and managing all that for you well now that you're selfemployed you got to do that yourself so it's really important to know how you go about making your payments during the year and the sixth and last thing we're going to look at is something that a lot of people don't stop to think of and that is the fact that where you live in the United States really impacts how much you're paying in taxes so let's take a look at each of these and and just remember that this course is really meant to only I shouldn't even say really meant is meant to only deal of Taxation in the United States I have no personal experience paying taxes in other countries I have no personal knowledge of or opinions about tax structures in other countries so this deals with the us only okay so with all that said let's get to it and talk about why you should be mindful of your taxes in the first place okay so the first point I want to get into is the importance of being mindful of your taxes in the first place unfortunately quite a few people and most people for that matter see their taxes as something they just have to pay they think there's nothing they can do about it they think there's nothing they can do to control how much they're paying in taxes and most of those same people also aren't aware of just what their taxes mean to their financial stand okay for most people and I do mean the overwhelming majority in the United States if their taxes aren't their largest bill during the year they're probably the second largest bill and for most people they are the largest bill it's just unfortunately people don't think of it in those terms um whenever I have this discussion with people one way I always challenge individuals to look at it is to say hey what are your two biggest expenses and people will usually list their housing number one and then for number two you know they might list a variety of bills Maybe Healthcare premiums maybe a car payment whatever um but then if you say really do you really think those are your two basic expenses and they stop to think about it for a minute they realize they're actually paying more in taxes than you know whatever they're paying for that number two bill or usually they might even be paying more in taxes and what they're paying for housing okay so your taxes really are just a really large amount of money that you know you're paying out all the time um during the course of the year and by by by being mindful of that you can get that tax bill down which lead leaves a lot of money in your pocket at the end of the year cuz it's really important to just be mindful of the fact that it's really hard to get ahead if somebody's just taking a huge chunk right off the top right so really be thinking of how do I get my tax bill down and that's what we're going to be getting into a little bit um over the course of this video by being mindful of your taxes I really do think you you will find that you can get ahead financially in this world a lot faster than you would otherwise because again as I said a moment ago it's hard to get ahead when somebody's uh you know taking a chunk off the top but one thing but to be mindful of and I know I'm going to catch a lot of flak and might even get some negative comments over saying this is that a lot of today's discussion about um income inequality and a lack of opportunity and things of that nature kind of misses the point when it comes to the US tax code um you know a lot of people think the tax code is in in the United States is set up to favor wealthy people and things of that nature the US tax code is actually not set up to favor individuals it's set up to favor activities okay it is set set up to favor people who run businesses and who invest all right so if you're not running your own business which you know as a freelancer you're running your own business um but if you're not running a business which even if it's a solo business and if you're not investing you're going to wind up paying a lot more in taxes so by going the freelance route being mindful of your taxes and investing you can really get that tax bill down and you will just keep a really much larger proportion of what it is you're making and as a result of that you have more money to invest and then that allows you to get ahead financially okay don't fall into the Trap of thinking that uh worrying about one's taxes is something that financially comfortable people do okay financially comfortable people don't worry about their taxes because they're financially comfortable one of the big reasons they're financially comfortable is because they worry about their taxes okay so by engaging in activities such as working for yourself and investing which we're going to get into in this video you can really get your tax bill down and get yourself in a better spot all right so be very mindful of your taxes understand it's one of your biggest expenses and understand you have a lot of control over how much you pay like in taxes you just need to be mindful of it and it's something you need to always be thinking about I mean if you're watching this video chances are you think about other expenses you think of how do I get my housing bill down how do I get my gas bill down how do I get any number of bills down start thinking that same way when it comes to what you're paying out in taxes um during the course of the year so with all that being said let's look at some important Concepts that we need to get our arms around in order to understand how you can and get your tax bills down okay so there's a few different concepts we need to look at to like I said earlier get our arms around how the tax system works so we can then understand how to save money on taxes as a self-employed developer or a freelancer of any kind for that matter doesn't matter if you're freelance writer uh freelance developer uh freelance you name it these all these same tax rules are going to apply so this is relevant to anybody who's self-employed um so these Concepts we need to get our hands around that a lot of people um May struggle with or just simply be unaware of is number one understanding the difference between revenue and income number two understanding how an employee is taxed versus how businesses and business owners specifically are taxed uh number three we need to look at an explanation of the different kinds of taxes that uh we have here in the United States we have federal taxes state taxes local taxes and even those get broken up into various subsets um also we need to understand how graduated tax brackets work and then also we need to understand the differences between taxes paid dur for the year and then taxes paid in during the year which are two different things so like I said these are all Concepts that if you ask people about them they may not really be able to explain very well or they just may not be aware of how they work so let's take a look at each of these in turn okay so in terms of understanding the difference between one's revenue and one's income okay when you work for yourself revenue is what comes in the door so in other words if you're building an app for somebody um if you're a freelance writer and you're writing like an ebook for somebody and they pay you $5,000 to do it you have made $5,000 in Revenue however you have expenses in running your business okay so let's say you have $500 in expenses $100 whatever in expenses and running your business that Revenue minus those expenses is your profit or other words your income so your income is not what you bring in it is what you keep which is uh your Revenue minus your expenses so I'm going to put up a slide and as you can see uh my slides are not exactly a work of art um I also don't in addition not holding myself out as a tax professional I don't hold myself out um as an artist but under our example here if someone brings in again using uh my example from earlier let's say you bring in $5,000 in Revenue so in other words someone pays you $5,000 to do work uh during for the month let's say and then during the month you spend $200 in advertising you pay out $50 for uh let's say business insurance let's say you pay out $50 for software subscriptions uh AWS maybe a g Suite account things of that sort so in other words after your revenue and then your $300 of expenses your net income is $4,700 so what you made was not $5,000 what you made was $4,700 okay and I talk to self-employed people all the time that if you ask them what they make they actually tell you their revenue number as their income not their profit which if they're reporting their taxes that way then they are paying way too much in taxes because they're paying taxes on $5,000 worth of income wor versus $4,700 worth of income and you're only actually required to pay taxes on your income not your Revenue so it's really important that you understand the difference between uh revenue and profit slet income and that you're reporting that correctly okay so remember you pay taxes on your income not your revenue and it's important that you understand uh the difference between the two um another thing to really understand is the difference in how you're taxed when you're an employee versus uh when you're a business owner if you're an employee in the United States that means you get a W2 at the end of the year you get a paycheck every week every two weeks and you are the most Happ individual in the United States okay because employees in the United States they get taxed on uh they pay federal income tax on all their income they pay social security tax otherwise known as FICA and Medicare on essentially um all their income um and they also pay state and local income tax on if if that's applicable on all of their income so when you're an employee yeah you're getting a paycheck and uh you know your taxes get taken out of it and you're being taxed on a higher percentage of your income than people that work for work for themselves so but if you are uh getting a paycheck from somebody and getting a W2 you are an employee okay um now that is being an employee is different than being a self-employed person a freelancer SL business owner because when you're a freelancer you really are just a business owner and even if you're only even if you're the only one in your business so for the purposes of our discussion um in this course we're really going to look at uh three different kinds of business structures that exist in the United States one is a sole proprietorship which a lot of um freelance workers are going to go this route a sole proprietorship is just that it's so meaning you know um you haven't gone out and formed an actual company you're just doing it as an individual um maybe you got some people working for you but typically not a sole proprietor is usually just themselves um you know and they haven't formed a separate entity they haven't formed a business um uh like they haven't started like a corporation or an LLC or something like that so the first kind of business form we're going to look at as a sole proprietor and again that's just you have not started a separate entity okay the second kind that we're going to look at is an LLC which is a limited liability company as Oppo as opposed to a sole proprietorship an LLC is an actual separate entity an LLC can buy property sell property um has has its own bank accounts things of that nature so if you form an L if you're working for yourself and you form an LLC then uh you have formed an actual legal entity that you're doing business through uh the Third Kind of uh business structure I want to look at is an what's called an S corporation um I'll spare you why it's called an S corporation but you can actually uh choose to have your LLC tacked as if it were an S cor S corporation you don't have to uh uh form an S corporation you can form an LLC and elect to have that treated as an S corporation we'll talk that a little bit later in the video um so for tax purposes if you're working for yourself chances are you're either going to be taxed as a sole proprietorship you're going to be taxed as uh through an LLC or you're going to be taxed through an Corporation okay those are the three main that you're going to be falling under if you are uh working for yourself so again if you're an employee you get a paycheck your employer manages all your withholdings you're paying taxes on all of that if you are working for yourself you're probably either a sole proprietor in LLC or an LLC being taxed as an S corporation and you actually uh get some tax breaks that way by um structuring your business okay so understanding in addition to understanding the difference between uh revenue and income you need to understand the difference between being an employee and being a business owner okay um the third thing we really need to understand in terms of Core Concepts is that there are different levels of Taxation in the United States a lot of people talk about their taxes and lump it all into just kind of one bucket again there are different levels of Taxation in the United States first the federal government um is someone you're going to be paying money to and you are going to pay that in the form of federal income tax uh federal income tax is what the government uses to run operations things like uh run government offices fund the military um uh things of that nature so your federal income tax you pay the federal government that funds the government on a day-to-day basis you you also pay FICO which is Social Security and Medicare tax to the federal government those specifically go for funding Social Security payments to people and uh funding the Medicare system so those are all taxes you pay just to the Federal Government Federal Income Tax FICA and Medicare but then you're also going to be paying state income tax in some states not others okay it depends where you live uh uh like if you live in uh California for example you're going to be paying income tax to the state some states don't like Nevada don't require the payment of any state income tax and in some states uh if you're self there might be state income tax but if you're self-employed there's no state income tax we'll get into all that in a little while but for right now understand that there are different levels of Taxation there's Federal taxation which can be broken off in the SE several subsets there's state level taxation um and then you might even also pay local ta taxation so if you live in the wrong place you might be paying federal income tax you might be paying income tax to the state you live in and then you might be paying some form of income tax to the city you live in um on top of that so the third core concept that we need to understand is that the federal tax system works through what are called graduated brackets all right um You might hear people all the time say things like oh I'm in the 22% tax bracket or they'll spit out a number and there tends to be a lot of misunderstanding about what a tax bracket means um if you were to tell somebody again I'm just using the numbers to prove a point if you were telling somebody hey I'm in the 22% tax bracket that person might think that means you pay 22% of all of your income to the federal government okay but that is not how uh tax brackets work and for to understand tax brackets I'm going to put up a different slide and again here's another one of my ugly slides the US tax brackets are for the federal system are graduated and by that I mean uh up to a certain point you'll pay a certain rate and then after that you'll pay another rate and then after that you'll pay another rate and so on so forth so under my scenario here let's say somebody's making $4,525 for the year in taxable income again their taxable income is $4,525 what you'll see is in the United States this is for 2021 again the 2021 tax year you would pay 10% of your first $99,950 in federal income tax okay any income after $99,950 would get taxed at 12% so in other words the 12% bracket starts at 9,951 so that $9 1,951 would have 12 cents taken out of it for federal income tax okay so in other words these brackets are graduated so if you're whenever you hear somebody say you know I'm in the 22% tax bracket for exam example that means some of their income they paid 10% at some of their income they paid at a higher bracket some of their income they paid at a higher bracket and it's not really um it's not accurate to say all their income was taxed at 22% what it is is that their highest uh bracket they broke into was 22% if somebody's saying they're in the 22% bracket this slide is all of the IRS tax brackets for 2021 so you can see your first $9,950 of taxable income is tax at a rate of 10% income between taxable income between $ 9950 and 4525 is taxed at 12% okay um in come between 4525 and 86 375 is p taxed at 22% and so on and so on and so on so again as you can see if someone were to tell you hey I'm taxed in the 37% bracket all they're saying is that they had income taxable income of over $523,111 so understand that tax brackets are graduating and you pay a portion of your income at different rates okay um but there tends to be a lot of misunderstanding when it comes to tax brackets and how that works it's really important you understand that graduated structure and that earning a certain amount can push you into a higher bracket and if you keep your income down you stay at a lower bracket okay um and you keep your income down by capturing deductions which we'll get into shortly um the last core concept that we need to stand is the difference between taxes paid for the year and taxes paid in during the year these are two different things so a lot of people when they get their paycheck from their employer and I'm just making up numbers to prove the point they see that their employer held uh you know $500 out of their paycheck for taxes they think they paid $500 in taxes what they did is they paid in $500 in tax taxes for uh towards their annual tax bill at the end of the year when you complete your 1040 form that 1040 form is going to say here's what you earned here's what your tax obligation is based on what you earned and then it's going to look at what you paid in during the year which are those withholdings if you're a W2 employee and if you paid in more than your tax obligation you get a refund back for the difference if you paid in less then the tax obligation then you owee the government the difference okay so paying in taxes during the year is not paying your taxes you don't know what you uh pay in taxes until you do your 1040 at the end of the year and again what you what your tax obligation is is then charged against whatever uh you paid in during the year so understanding the difference between what you're paying in during the year and the fact that your tax obligation is not calculated until the end of the year is a very important concept um you know for people to understand all right so uh now that we've been over each of those things uh you'll remember a moment ago we talked about there are different ways you can structure your business as I was saying you can either be a sole proprietor an LLC or you can be taxed as ANS Corporation now while all those structures have benefits uh that exceed being a W2 employee there are different levels of Taxation and tax breaks that can apply to those different kinds of businesses so let's take a look at how each of those different kinds of entities are taxed okay and understanding how those entities are taxed can go a way towards helping you understand how you want to structure your business okay in the last part of our video we talked about the three kinds of business structures you can have generally speaking if you're going to be a freelance developer freelancer of any kind and those business structures are typically going to be either a sole proprietorship forming an LLC or forming an LLC uh with what's called an S corporation election okay so in this part of the video we're going to look at uh the tax benefits and consequences of each of those and before we do that though it's important to understand something called the qualified business income deduction so the first thing I'm going to do is explain the qualified business income deduction which is commonly referred to as the qbi and then we're going to look at again the consequences of how uh of choosing one of those different business structures and see what kind of benefits you get on your taxes for that the first thing to understand in this is the qualified business income deduction uh the qbi came about as part of the 2017 tax cut and jobs Act uh in other words the tax cut law that was passed in 2017 created the qbi which is something new to the US tax code and what the qbi does is it for self-employed people it makes the first 20% of your business profit non-t taxable generally speaking there are some exceptions to this but as long as your total income for the Year from all sources is less than $164,900 for 20 21 you will not pay federal income tax on the first 20% of any income that is uh related to your freelance business again generally speaking okay so uh what how does this work in practice so to understand this I'm going to go ahead and put up another one of my ugly slides I am a better web developer than a slid maker but again this is just a really simplified breakdown of the qualified business income deduction for someone in 2021 let's say somebody was a freelance developer and they had no source of income other than uh their freelance business they earned $100,000 in Revenue you know we talked about Revenue earlier that's the total of what came into the business but then the business had expenses on top of that so let's say you had one expense that was $5,000 you had another expense that was $5,000 so you have net income of $90,000 okay but the thing is while somebody who's earning a W2 is going to be looking at federal income tax on $90,000 worth of income if you're self-employed and you get to take that qbi deduction you take the first 20% off so you only pay federal income tax towards $72,000 not towards the $90,000 in other in other words the simplest way to think of this is that the first 20% of business related income for a freelance developer gets skipped out of federal income tax okay which can really go a long ways so the qbi is going to apply to all levels of self-employment whether you're a sole proprietor whether you're running an LLC or whether you're being taxed as NS Corporation okay um so just by running your own business in general you're going to get a big tax break over somebody who is working a W2 job uh due to the qbi so now that we've talked about how the qbi works let's understand some of the benefits of and detriments I should say along with the benefits of uh these different business structures if you're a sole proprietor you have taken the easiest route for starting your business okay a sole proprietor is somebody who is doing freelance jobs on the side uh on a continuous basis and getting a 1099 at the end of the year and or somebody who has um gotten a general business license and started a trade name but they haven't gone out and actually started a company in other words they just went to the Secretary of State's office and got their business license started their trade name and um you know they're running everything that way those that is the easiest way to start up that is the least expensive way to start up that is the way to start up that involves the uh least amount of paperwork okay um so either the 1099 route or the actually getting a business license is what a lot of people are going to do when you do that you get to take the qbi on your profit meaning uh you know your profit in your business is your income minus your expenses and then you're only going to pay taxes on 80% of that profit that's federal income tax you will pay self-employment tax which is the equivalent of Medicare and Medicare a on uh all of your income okay so under the scenario I put up a minute ago if somebody's earning $90,000 after their expenses they'll pay employment taxes on the whole 990,000 and federal income tax on 72,000 they'll also be subject to State and local income tax depending on where they are so sole proprietorship is going to mean the least amount of Hassle and aggravation getting started you're going to save on taxes um because of your qbi and there really aren't going to be any benefits to it after that okay if you form an LLC you have formed a separate actual entity an LLC is a legal entity um apart from its owner okay it's a it's a company it can buy property and sell property in its own name things things of that nature uh it gives you liability protection there are other benefits that come with owning an LLC if you do an LLC and choose to not have it taxed as an S corporation then all the money from the LLC on your T will flow through to you on your tax return the LLC pays no taxes during the year so what will happen here is if the LLC has $90,000 in profit the owner of the LLC will then report $90,000 of income on their personal tax tax return okay um there are benefits to owning an LLC outside of taxes those benefits include uh liability protection uh you know the ability to bring in Partners easily um things of that sort but for tax purposes owning the LLC and being a sole proprietor if you're a freelancer really aren't going to be that different um you'll get the qbi deduction which again saves you money over having a W2 two job but you're also going to pay self-employment taxes which are the equivalent of Medicare and Medicaid um so tax consequence wise LLC with no escorp election and sole proprietor both better than getting a W2 job and uh you know not m not much else other than that qbi benefit keep in mind with the LLC you have started an actual company which means there's more paperwork and Hoops to jump through to maintain than just being a sole proprietor the third step on the Spectrum we've been talking about would be to form an LLC and have it taxed as this as if it were an S corporation what happens when you do this is you form an LLC the company is an LLC but the IRS kind of just says for tax purposes only we're going to pretend as if it's an S corporation and what happens when you own an S corporation is you are in employee and the owner of the business simultaneously so as the employee you have to pay yourself a reasonable salary and I got to stress the reasonable part you can't just pay yourself a dollar you've got to pay what someone doing the work you do would reasonably make so if a reasonable reasonable developer salary is $60,000 you need to pay yourself a salary of $660,000 that salary will be taxed like any other paycheck would for a W2 employee because again you've got to pay that salary through uh a payroll service or something of the sort so you're going to pay taxes on that just like any employee would the profits however on top of the salary in an ESC Corp is where you really start to see the tax benefits of this because those profits are subject to the qbi meaning that the first 20% of those profits um are not subject to any federal income tax those profits are also completely exempt from self- employment taxes meaning you will pay uh nothing equivalent to Social Security Medicare Medicaid on that um so no employment taxes and only federal income tax on 80% of those profits so if you have your reasonable salary and a lot of profits on top of that this all this profit is really tax advantaged because you're paying no social security Medicare Medicaid on any of that and you're only paying federal income tax on 80% of that the downsides of ANS Corporation is again you've got to pay yourself a reasonable salary as an employee meaning you've got to go through all the paperwork that goes with having an employee yourself um so we pay a service uh into it full service payroll to manage that for us because we are taxed as an S corporation um I'm going to link to uh into it mer uh full service payroll I should say into to it full service payroll will be linked to below um so in other words there's expense if you're going to run an escorp there's expense you have to incur mainly the payroll service and there's Hoops you have to jump through uh and you know and regulations you have to deal to deal with in running that so your income needs to be high enough to justify the expense and the aggravation of running the ESC Corp so really if you're going to run a sole proprietorship if you're going to run an LLC C or if you're going to run an S corporation depends on how much you're trying to grow your business okay if you're just doing the occasional project here and there on the side it might be a thing where a sole proprietorship is best for you if you are engaging a more regular business um activity and you really want to grow your business um you know you might need an LLC if you know and if you're really fores seeeing a lot of profits then you know you might want to do NS Corporation these are all things to talk about with an accountant just be mindful of the fact that the higher you go up that ladder from sole proprietor to LLC to escorp the more potential you have for business flexibility and tax savings okay as you work your way up that uh which one to pick really just depends on uh your particular situation and those are things you really need to discuss with a a tax professional so now that we've talked about all that let's understand what tax deductions are and look at the importance of making sure you're taking all your tax deductions okay now we're going to talk about the importance of tax deductions and making sure that you're maximizing them um again there are a lot of deductions available for uh small business owners AKA you as a freelancer so in this part of our video we're going to look at a understanding exactly what deductions are and why they're important um then we're going to be looking at expenses for your business that can be deducted um there are obviously more common ones that people don't miss but there are a lot of ones that do get missed we're going to make sure that you're not missing those and then the other thing is we're going to look at how you can be maximizing uh your retirement savings as a form of a tax deduction and that can greatly subsidize uh your retirement Investments Okay so so let's take a look at each of these in turn the first thing to do is to understand the concept of a deduction in general and for this I am going to put our slide back up on Revenue versus income that we talked about earlier in this video uh you'll recall we said that revenue is everything you bring into your business soever every in other words this is everything your customer pays you but your net income is what you actually pay taxes on you don't pay taxes on Revenue you pay taxes on income so let's just say for example somebody brought in $5,000 but then they didn't write off their expenses of advertising insurance and software subscriptions that means they're paying taxes on $5,000 even though they only made $4,700 so they're paying more taxes than they really should be paying which means they're donating money to the government and that's how I want you to think of it not capturing legitimate deductions is is essentially donating money to the government and under our little scenario here advertising insurance and software subscriptions are deducted from revenue that's what a deduction is you are deducting something from your business income you are deducting something from your taxable income to arrive at the number that you're actually going to pay taxes on so a tax deduction lowers the amount of income that you are uh going to be paying taxes on so what are deductions for a business owner again there are some that are a lot more obvious there are some that are less obvious okay what you want to do to make sure you're capturing all your deductions is ER on the side of making sure or I guess I should say ER on the side of thinking it's deductible and then let your accountant figure it out because if you have an expense here doesn't matter what the expense is but you don't tell your accountant about it your accountant has no way of ever deducting it off of your taxes right so what you're better off doing is just making sure you put all your expenses in all your business expenses into your bookkeeping and let your accountant tell you hey this is not tax deductible okay you're better off giving your accountant all the potential deductions and then letting your accountant decide what is and what isn't deductible versus you not giving the account and all the information and then potentially missing a deduction as a result of it and if you miss that deduction again you pay extra in taxes okay so or on the side of assuming things are deductible when you're doing your bookkeeping and putting your expenses in there and let your account straighten that out uh for you this is also on a quick side note why it's so important to be doing your bookkeeping um on a regular basis so make sure you're keeping your book straight because if your books aren't straight chances are you are overstating your income and again paying too much in taxes so now that we know what deductions are and we know the importance of getting them submitted to your accountant let's talk about expenses in your business which can be deducted and for this I'm going to look at ones that are commonly deducted in other words most people know to deduct them but then I'm also going to look at ones that are uh less commonly taken because some people may not understand that they can take the deduction so your common ones are pretty obvious right if you rent uh any kind of office or workspace for your business then you're going to deduct your office rent if you pay utilities at that office you can deduct that you can deduct Services you have to pay for so if um you're paying for AWS um in your business to host and maintain stuff for your customers um then that is an ex that AWS expense is something you're going to uh deduct out of your Revenue when you're arriving at your income any Services you pay for in your business are going to be tax deductible um AWS um if you're paying for office software like Google workspace or Office 365 um would be an easy one software subscriptions um uh you know like if you do if you're a freelance web developer and you also do a lot of Graphics work uh for your clients um you know like your subscriptions to um a service like Adobe you know for Adobe Photoshop and whatnot is going to be tax deductible so your services various services that you're paying for are pretty much always going to be deductible along with things like rent utilities uh liability insurance things like that those are the pretty easy ones and most people know to deduct those and they don't miss those however there are a lot of common deductions that are missed in other words deductions can't that people can be taken taking which will lower their taxable income which will result in them paying less taxes but they just missed the deductions they don't know to take them so let's look at what a few of those are and there's a bunch of them but we're just going to go over a few one of them is mileage and travel um under the uh tax cut Act of 2017 that created the qualified business income deduction or qbi that we talked about earlier the ability of uh business owners to write off their mileage got reduced quite a a bit however one thing you can still do to write off your mileage is if you are being taxed as an S corporation which we are in our business um if you're being taxed as an S corporation it is possible to write off any mileage that's work related and you do this by having the business which you own write a check to the employee which is you for the for the mileage incurred that becomes tax deductible to the business but because it's a reimbursement the employee doesn't get taxed on it so in other words it's deducted on the business side and not taxed on the employee side which means it becomes tax deductible okay and for 2021 if you're driving for work you can uh do that at the rate of 56 cents per mile now driving to and from your office in other words your daily commute is not tax deductible but let's say you got to drive to a customer's office for a meeting you got to drive to Best Buy to buy a new computer for work um um you know you need to buy drive to another vendor somewhere you uh you know uh you you're driving around with a customer to show a customer potential ideas or something like that you can write all that mileage off at the rate of 56 cents a mile so that's a really important one to take um if you're using your personal cell phone uh for your freelance business you can write off um a portion of that uh again you can write off the that is business related is the thing to understand here so let's say uh 40% of your personal cell phone use is related to your business you can write off 40% of that bill so in other words if your cell phone is cell phone bill is 100 bucks a month you pay that personally because it's your personal phone but 40% of it is business related uh every month that's $40 a month you can write off as a business expense or $480 a year which would lower your taxable income by that much so when you're using personal things like your cell phone for partial work purposes make sure the portion of that that's work rated is uh being deducted off your taxes equipment purchases fall into the same category as cell phones uh let's say you buy a new laptop and I'm going to use round simple numbers to prove the point let's say you pay $2,000 for it let's say 50% of that laptop is used for work of its time is used for work 50% of it is used for uh personal stuff you can write off $1,000 of that cost you may have to depreciate it but that's an issue for an accountant you'll be able to write off half the cost if half of it is used for work purposes so that's something to talk to your accountant about uh travel that is necessary and non- extravagant can be deducted okay so in other words um if you tra if you're travel if you are traveling like taking a trip this this can include airfare hotels meals things of that nature and the primary purpose of the trip is for work and it's not extravagant you can deduct the work rated expenses with that so in other words let's say for example I live in Ohio and let's say I've got to fly to Montana to meet with a customer um the primary purpose of me going is to meet with the customer it's not I'm not going to Montana for a vacation and oh I'll meet with the customer while I'm there the purpose of the trip is to go to Montana and meet uh meet with the customer I can deduct the airfare I can deduct the hotel um you know I can deduct my meals things of that nature now if I do things on that trip that are purely like personal entertainment that aspect of it won't be deductible but the necessary part of it for the business trip that can be uh deducted from my taxes now again it has to be non- extravagant so for example flying coach might be deductible flying first class might not you know things of that sort so those are things to talk to your accountant about but if you are traveling for work and it's a necessary work trip that's something that is uh tax uh tax deductible so mileage and travel through an ESC Corp deducting uh the business as the business portion of things like your cell phone bill deducting uh the business portion of equipment purchases of things like laptops things of that nature and uh necessary and non- extravagant travel are just four examples of deductions that people miss all the time make sure you're not missing those uh talk to your accountant about them and see what you can deduct those are ways to get your taxable income down quite a bit if you have those deductions and it always does surprise me the extent to which I see people who miss out on those deductions one of the biggest deductions that most people miss out on is the tax benefits that come from retirement savings and one of the big reasons people miss out on these deductions is because they don't save their retire for their retirement that's an entirely different rant but the one thing to understand especially if you're a business owner is that there are provisions in the tax code that allow you to save for your retirement you can save a lot on your taxes by Saving on your retirement or saving for your retirement which means that those tax benefits help pay for the contributions you make to retirement accounts okay um the first way to do this is through an IR which is an individual retirement account anybody can do that you don't have to be self-employed or the second way to do it is through what's called a simple um I'm going to look at the IRA first and then we will take a look at the simple the simple is something you'll do if you own an S corporation or an LLC being taxed as an S corporation and you've structured your freelance business that way so let's start by looking at another one of my less than attractive slides if you have an IRA which is an individual retirement account and I really recommend a book that I'll talk about here in a second but let's say you have an individual retirement account for 2020 the 2021 tax year you could contribute $6,000 to your IRA in other words you could put $6,000 into your personal uh individual retirement account that $6,000 is tax deductible meaning if you made $100,000 during the year and then you uh you know uh made $6,000 worth of retirement contributions you would only pay taxes on $94,000 okay so since your taxable income goes down the amount in taxes you pay goes down so what you see here is that if somebody's in the 22% tax bracket and they made $6,000 in Ira contributions during 2021 they will reduce their annual tax obligations by $1,320 meaning that when you at subtract the tax savings from what they paid into the individual retirement account they wound up with $4,680 costs for $6,000 in uh retirement Savings in other words they got $6,000 in a retirement account but after you factor their tax savings it really only cost them $4,680 okay and if you keep doing that every year and that money keeps growing you really get a huge compounding effect on that and your tax savings are helping fund your retirement okay an even bigger version of this would be if you start what's called a simple and I'm putting up the slide for that now and what a simple is is It's Kind works it's an IRA that works similarly to a 401k and you can do this if you're the owner of an S corporation so as we talked about earlier if you own an S corporation you own the company but you're also an employee of the company so what happens with a simple is the individual which is you the employee can contribute for 2021 $113,000 into the retirement plan the company which you own can match up to 3% of the dollar for dooll can match up to 3% of the employee savings so you are the employee you're contributing $113,000 you own the company which is contributing $1,800 the individual where I got $1,800 from it like I said you can do 3% of the salary so I'm assuming a $60,000 salary here which is where I get the $1800 from so someone making paying themselves a salary of $65 000 before all their profit can contribute $113,000 to the retirement plan which they will deduct from their taxes keep in mind they have to pay taxes on the company profits but the company profits are going to be reduced by $1,800 so you're saving $113,000 on the personal side and $1,800 on the business side from your taxes if you're in the 22% tax bracket that's $14,800 less that you're going to report an income at at the 22% tax bracket that means you save $3,177 in federal income tax so you contributed $14,800 to your retirement accounts but it really only cost you $1,623 again you received retirement Savings of $14,800 and when you factor into tax savings it only cost you $1,623 now imagine if you keep doing that year after year after year after year okay and again that is in contributions from the individual side where you are the employee and it's contributions from the company side where you are the company owner and this assumes a salary of $60,000 a year that you're paying yourself before um The Profit that you would also pay taxes on so a simple if you have an LLC that is taxed as an escort but simple can be a very powerful way to save on taxes and be Building Wealth for yourself simultaneously okay and being aware of things like this is how you can really improve you know your standing financially so in terms of deductions understand that deductions are subtracted from your revenue or income to arrive at your taxable income okay on the business side of things you get your obvious ones like office rent things of that nature that are going to be deducted before you figure out what your profit SL business income is you have your less obvious ones like reimbursing your mileage for an escort person or business usage of your cell phone so on so forth those can be deducted from the business also if you do it correctly um also understand that proper retirement savings can greatly and I do mean greatly uh save you money on taxes and these are all things what to be deducting uh retirement planning Etc that you need to sit down and talk with an accountant accountant about because you can really get into some complicated topics here but the thing to take from this video is go talk to an accountant and make sure you're capturing all these tax savings because it will really help you get ahead financially okay so deductions are very important and make sure you are getting all the deductions you possibly can and that's how you keep more of what you earn all right so now that we've had that discussion let's talk about how self-employed people will make their tax payments during the year okay let's talk and I do mean briefly about U making your tax payments during the year as a freelance developer this is something where a lot of freelance workers and self-employed people get themselves in a lot of trouble because when you're an employee employee paying your taxes during the year is not something you have to worry about you get a paycheck your employer does your withholding for you and at the end of the year you've been paying into your taxes as the year's gone on right well when you're a self-employed person it's your responsibility to make sure those tax payments get remitted to the IRS and if you fail to uh make them properly you're actually going to get hit with penalty at the end of the year and unfortunately I have had the unfortunate pleasure of talking to many self-employees people over the years who didn't understand how to manage their tax payments during the year and now they have a multi-year debt to the IRS that they may never get out of I've talked to multiple people in that kind of sad situation so when you're working for yourself understand that you need to be making your tax payments during the year your employer is not doing it for you okay um if you are running in uh if you're a 1099 worker uh running a sole proprietorship or uh running a LLC without the escorp election you need to make quarterly payments um through form 1040 we're going to link to that in the uh description below and that's form 1040 and there's an instruction sheet attached to it showing how to calculate your quarterly payments um and you can also uh fill out a virtual form of 1040 es by uh directly through the IRS website we'll include a link to that below as well where you would go to make those what are called estimated tax payments um for a year the calculation of your estimated tax payments can get pretty complicated it's something you need to be talking to an accountant about the thing to understand is that if you don't pay in enough tax during the year at the end of the year you will get hit with a penalty okay that is something you really want to avoid so talk to an accountant if you're self-employed and make sure that you are paying uh an appropriate amount of taxes during the year if you are being taxed as an S corporation in other words you're an LLC and you've chosen to be taxed as an S corporation which is what we do in our business as we've said throughout this video you own the business but you're also an employee of the business and you get a paycheck from the company so we have a payroll service that manages that for us in our business and federal taxes and uh various taxes get held out of that paycheck just like they would uh any other W2 job the problem with that however is you have to pay yourself a reasonable salary through the escort but then you have profits on top of that so I get my reasonable salary taxes are only withheld on that salary I at the end of the year I still have to pay taxes on those profits meaning that I on top of the taxes that get held out of my paycheck I still make quarterly payments to the IRS to cover the taxes that are going to be uh doe on business profits so um we do it by making uh estimated payments every quarter some people do this by uh cover the taxes on their uh profits by having extra money held out of their paychecks either way is acceptable it's just important that you talk with an accountant and have a tax plan in place so that you do not get hit with a big uh tax obligation at the end of the year you know you don't want to find out that you weigh underpaid during the year and not only do you owe the IRS a really substantial amount of money in short order but now you've also been hit with a PTY on top of that that is something you want to avoid so discuss how much to be paying with an accountant and understand you do it either through form 1040 es or through the IRS website one other thing I'll say on this note it's something to talk to your accountant about is I am not a fan of substantially overpaying taxes during the year um as we talked about earlier in this video there's a difference between what you pay in during the year and what your taxes are you pay in taxes during the year think of that as for example the withholdings from a paycheck at the end of the year you fill out your 1040 form and it says what your tax due is what you paid in during the year from withholding or estimated tax payments is uh offset against your tax obligation if you paid in more than the obligation you get a refund if you paid in less than the obligation you have a balance to what this means is that if you are getting a big tax refund at the end of the year you weigh overpaid your taxes during the year which means for 12 months you've been loaning money to the government interest free okay in other words you've been giving the government more money than you needed to to prepay your taxes for the year they're holding that money at the end of the year they're going to give you back the balance with no interest on it as we've been talking about through this video managing your taxes is one of the important ways of getting ahead financially in this world and the last time I checked loaning PE money to people interest free is not a good way to get a head financially so anytime you come across somebody who gets excited about getting a big tax refund it's important to understand what that person is excited about is that they've loaned money to the government interest free all year and now they're just getting the money back I mean to me that's not something to get excited about okay so talk to your accountant again I'm not offering this as personal financial advice but I'm just saying talk to your accountant make sure you're uh at least paying in enough to not get hit with a penalty at the end of the year and be mindful of the fact that it may not necessarily be a good idea to loan money to uh the government interest free and when you talk to your accountant you'll come up with the best vehicle for making sure your taxes get paid during this year whether it's through uh withholding from uh your escort paycheck or whether it is uh from making quarterly payments through form 1040 es which again is for estimated payments but the bottom line to take from from this is that one of the things about being a freelancer is that you don't have the benefit of your employer just sending in your taxes for you every paycheck now it's something you need to be managing yourself so make sure you do it correctly and that's something to talk to an accountant about and again quarterly payments or paycheck withholding if you are uh an escorp owner okay so let's close out this video by talking about why where you live is so important okay you have made it to the end of this video and I know taxes aren't the most exciting Topic in the world to talk about but they are really important to getting ahead financially on that note the whole point of this video has been about getting ahead financially and the importance of taxes in that endeavor okay where you live matters a whole lot for or how much you pay in taxes you'll always hear people say they move somewhere else because of a cheaper cost of living like for example I live in Ohio because it is way cheaper than living in a place like California but what a lot of people don't fact tend to factor in is what they might be paying in taxes if they live somewhere else before my wife and I moved to Ohio we actually looked into moving to San Francisco and it wasn't the high rent and everything that caused us to say we're not going to move there it was well I considered to be an outrageous tax structure in California and San Francisco that kept us from moving there so in addition to cost of living your tax obligation will be greatly impacted and why is this well like as we talked about earlier in the video there are levels of Taxation right you pay federal income tax you pay employment tax like uh Social Security Medicare Medicaid but you also pay state income tax and local income tax well those things differ depending on where you are in the United States some places have high state income tax some places have no state income tax and then some places fall in the Middle where uh maybe there is a state income tax that's not too high it's not too low and maybe you pay it and uh maybe you don't and some places have local taxes and some don't so in California for example it's a state that's notorious for having a very high state income tax so if you live in California even after you've paid the federal government all your taxes that you have to pay to them you have to pay a big state income tax to the state of California and you're probably going to pay a local income tax to whatever City you live in Nevada is on the other end of that Spectrum Nevada has zero state income tax none if you live in Nevada you do not pay state income tax they also don't have local income tax okay so you're not paying those taxes at all in Nevada in Ohio where I live there is state income tax but for the most part self-employed people don't have to pay it the state credits you back um quite a bit of uh anything you paid in if you're self-employed you have to make quite a bit of money to pay any state income tax if you are self-employed in the state of Ohio so that's an so Ohio is an example of a place where going the freelance route not only saves you money on your uh federal income taxes it saves you quite a bit of money on your uh state income taxes you know as well so when you're figuring out you know how to get ahead financially you know a lot of people do look at hey maybe moving to another place will help them because of lower cost of living you also need to think of tax consequences in there as well so again getting ahead financially if you're thinking of the tax system it's going to help you quite a bit and if you're living in a place that really uh provides advantages to self-employed people it makes going the freelance route even all that more you know attractive so the one thing I would hope that you really take from this video is that a proper tax planning can really help you uh get ahead a lot of people fail to consider the fact that their taxes if they're not their biggest expense they're their second biggest expense and for most people they are the biggest expense okay you cannot get ahead financially unless you're getting your taxes under control it is just very very hard to do remember people who are well off tend to be well off in part because they think about their taxes I know this video as long as it was really only touched a lot of these topics on like a very surface kind of level it's because taxes can get very complicated so that is why it's really important that you discuss these things with a professional if you are uh going the freelance route the self-employment route and you are working hard at it and making good money at it it is well worth the cost of a accountant to make sure you are saving on your taxes so I hope you found this video helpful um if there are any topics you'd like to see discussed in the future please drop them in uh the comment section below and make sure you support free code Camp all right thank you