Freelance Tax Deductions in Illinois

The number of freelancers in the United States is at an all-time high, with 60 million Americans performing freelance work. Last year, they contributed $1.35 trillion to the local economy, a massive rise from $50 billion in 2021. Whether you’re a full-time freelancer or one of the 40% of full-time employees with a side hustle, you’ll want to retain as much of your freelance earnings as you can. Here’s the lowdown on freelance tax deductions in Illinois.

20% Qualified Business Income Deduction

If your total income for the 2022-2023 filing year is less than $182,100, for single freelancers, or $364,200, for freelancers filing a joint return, you can claim the qualified business income deduction. This deduction is for freelancers, including sole traders and people in partnerships, who report their business income on their personal tax returns. This business income is sometimes called pass-through income.

This tax deduction amounts to up to 20% of your qualified business income, so it can be one of the most sizeable deductions on your tax return. Qualified business income is your business’ net profit. You can’t count capital gains or losses, dividends, income from interest, and income earned outside the United States in your qualified business income.

Employer Portion of Self-Employment Taxes

Regular employees pay 7.65% of their wages to cover Social Security and Medicare taxes in the 2022-2023 filing year, and their employers match these contributions. Freelancers are responsible for the entire amount of 15.3%, called a self-employment tax. However, in most cases, you don’t have to foot the bill for the entire 15.%. Instead, you can claim the employer portion of 7.65% of your net earnings. This deduction isn’t available to people with limited liability companies or C corporations.

Home Office Expenses

If you work as a freelancer from home, you may be able to deduct expenses related to running a home office. You can claim home office expenses for any whole room or part of a room in any type of dwelling, such as a free-standing house or apartment if it’s your principal place of business used regularly and exclusively for freelance work and you’re a homeowner or renter.

You may claim the full amount of expenses for your home office, such as painting its walls or buying new office furniture. You can also claim a percentage of indirect expenses, such as home insurance, rent, and utilities. Depreciation costs for items such as computers and office furniture are also covered. Calculating these costs involves the regular method of claiming home office expenses. Alternatively, you could use the simplified calculation method, which involves multiplying the area of your home office, up to 300 square feet, by the prescribed rate, which is currently $5, without having to show records.

Vehicle Expenses

If you use your vehicle for work-related tasks, such as meeting clients or attending industry events, you can deduct vehicle expenses from your gross business income. You can claim business-related miles at the standard rate of 65.5 cents per mile, but remember to keep a paper log or use an app to track your usage and prove you’re making a valid claim. Tolls, parking, and garage rentals associated with business travel are also valid deductions. If you use the vehicle exclusively for business, you can deduct ownership costs, such as car insurance, vehicle payments, and maintenance.

Business Meals

When meeting clients or traveling for business, you can claim the cost of your business meals. You can either claim the exact cost of business meals as shown on your receipts, which you should keep in case you’re audited, or you can claim a set rate. You might claim the Illinois standard rate for breakfast, lunch, dinner, or your first and last day of travel, or the location-specific rate if you ate in Chicago, Oak Brook Terrace, Bolingbrook/Romeoville/Lemont, or East St. Louis/O’Fallon/Fairview Heights.

Continuing Education Costs

You can also claim for any costs you incur honing your professional knowledge and skills. Any “ordinary and necessary” continuing education expenses are valid deductions, including fees for face-to-face and online courses, business workshops, certifications, and subscriptions to industry publications. Just make sure any expenses relate directly to your existing industry. You can’t claim education costs related to another sector, even if you intend on changing your career direction.

Medical Expenses

If you don’t have access to health insurance through an employer, including your spouse’s employer, you can claim medical expenses up to 7.5% of your adjusted gross income. Fees for seeing a doctor or dentist, medications, and health insurance premiums are all valid deductions from your taxable income. While there are no tax penalties for not having health insurance in Illinois, a policy can give you the financial protection many people get through their employers.

Wages for Children

If your children or grandchildren work in your business, you won’t pay tax on their wages up to the standard deduction of $13,850 for the 2022-2023 tax year. To deduct a child’s wage as a business expense, they must be a real employee doing legitimate work for a reasonable wage. They should also be at a suitable age for the work they’re performing. Hiring your toddler would be a red flag, but you could hire your child under 10 to do simple jobs, such as putting invoices in envelopes or stocking shelves.

As with all employees, you need to complete the standard paperwork to make hiring your child official. This includes a W-4, an Employment Eligibility Verification form, and a W-2 every year.

See Pasquesi Sheppard to Maximize Your Tax Return

To feel confident you’re claiming all the tax deductions you’re entitled to, see the experienced team at Pasquesi Sheppard. Based in Lake Forest, we understand the local tax laws pertaining to freelancers in Illinois. We can help you claim all relevant deductions and maximize your tax return. Contact us online or call us at 847-234-5000 to learn all about our accounting services for freelancers, including our tax preparation services.

Tax Deduction by Investment Zen is licensed with CC BY 2.0