As a freelancer, tax filing and reporting can be more complicated but one of the benefits of being self-employed is the potential to file tax deductions.
Shockingly, 73% of freelancers don't take advantage of them at all even though they can save thousands of dollars in tax payments a year.
This can largely be attributed to the confusion or inconvenience around tax deductions, which is the primary pain point that Bonsai's Tax add-on is working to solve.
How does it work?
Tax deductions (or write-offs) are business expenses that you can use to lower your total taxable income.
In other words, you can use your business expenses as a way to reduce the taxes you owe by lowering the reported profit of your freelance business. For example, if you have $100,000 in freelance income and $20,000 in deductible expenses, your taxes for the year will only be based on $80,000 in profit.
So, by keeping clear records of your business expenses and filing it with your annual tax return, you can easily save yourself money in tax payments.
What classifies as a business expense?
These expenses must be ordinary and necessary to your business, otherwise they classify as personal expenses that aren't tax deductible. There are a number of categories that these business expenses can fall under, but typically they are things such as office expenditures, advertising, airline tickets, lodging and business meals. Depending on the category, the amount that is deductible may vary.
More details about tax deduction categories here.
In order to clearly separate your business expenses from your personal, it's often a recommended practice to have a separate bank account for each. That, along with having clear records of the expenses with information such as Merchant Name, Date and Amount, which can be tracked in Bonsai's expense tracking software and mobile apps. If you'd like to get rid of paper receipts, having an email copy or image saved within Bonsai is a good practice in case you are ever audited.
Bonsai's Tax add-on will also help automate the process of importing your expenses from your bank accounts, as well as identifying the tax category and deductible amounts for each, so that when tax time comes around you can simply download your Schedule C with all your expense deductions accounted for.