As the end of the year 2021 approaches, there are several things on the minds of most freelancers, small business owners, and professional writers. However, one of the things that might be getting lost in the shuffle is the unfortunate reality that the 2021 tax year is quickly coming to a close.
I’m going to put together a series of freelancer taxes articles helpful to freelance writers and entrepreneurs in general. In the meantime, small business owners looking to avoid unpleasant tax surprises come 2022 should begin thinking about a few things.
Small business taxes for writers are never fun, but using every one of the 2021 tax tricks in the book can make them less painful.
Section 179 Tax Deduction for Small Business
First, if you have any business equipment needs in the near future, the time to buy is now, before the year ends. While Congress and the politicians have bickered over various small business tax relief, expanded Section 179 deductions are already in full effect.
Usually, when a business buys equipment like computers, monitors, printers, filing systems, and the like, the purchase price can only be partially deducted on business taxes. The remaining amount has to be depreciated over a certain number of years. For example, if you spend $2,500 on a new computer system for a writing business, you can’t just deduct $2,500 this year. Instead, the business could deduct part of the $2,500 this year, and another part next year, and more the year after that, and so on.
Theoretically, depreciation provides a way to deduct only the part that is “used up” each year. In reality, it is an accounting nightmare, and requires business owners to wait in order to deduct money that has already been spent long ago on business expenses.
Fortunately, something called the Section 179 business tax deduction allows a certain amount of business equipment, or capital expenses, to be deducted immediately, all at once, in the year it was purchased. Thanks to the Small Business Jobs Act, or SBJA, the Section 179 limit for 2021 is a whopping $1,040,000. That means that virtually everything you buy for your business during 2021 is fully deductible without depreciating it over years.
The Section 179 tax deduction limits for 2022 are also $1,040,000, which is a good news for next year’s taxes. However, if you buy office equipment in January, your business has to wait a full year before getting some of that money back from the IRS when you file your 2022 taxes sometime in 2023. If you buy in December 2021, then your small business deduction can be used right away when you file your business taxes for 2021 in first-quarter 2022.
Fourth Quarter Estimated Tax Payments
With all of the excitement of the holidays, don’t forget about estimated tax payments for the fourth-quarter of 2021. The IRS won’t forget.
If your freelancing business has relatively consistent income then you just need to remember to make the payment. If you are a freelancer with varying income you need to make a good estimate for your fourth-quarter payment. Look back at the estimated quarterly taxes you filed for 2021 and see how they stack up with your year end projections. Make sure your fourth quarter payment prevents you from coming up short and getting hit with underpayment penalties. Remember, you’ll be filing these taxes soon and getting a refund, if necessary, so it’s better to overshoot a little on your 4th quarter payments than to come up short.
There is a lot more to end of year tax planning for freelancers, but getting these tax tips right will get you moving in the right direction.