Written by Rosemary Bocian, MA, NIC (National Interpreter Certification), EA (Enrolled Agent admitted to practice before the IRS)
This article is an excerpt from the book “The Interpreter’s Quick Guide to Self-Employment.” Interested in reading more? Click here to purchase the book on Amazon.
Handling your business tax deductions correctly is just as important as the income you make as a freelance interpreter. In the end, money saved is money earned. Becoming educated on deductions that the IRS allows self-employed interpreters can save you from paying high amounts of taxes and put more money back in your pocket.
Independent Contractor vs. Employee
Let’s begin by exploring the difference between an independent contractor versus an employee. In simple terms, if you filled out a W-4 form prior to working with a company, you will receive a W-2 at the end of the year and are typically considered an employee. The form W-2 states your wages for the year along with the taxes that have already been deducted from your wages. If you filled out a W-9 form prior to working with a company, you will receive a 1099-NEC at the end of the year and are considered an independent contractor/self-employed. The form 1099-NEC states the amount paid to you for the year through that company and usually no taxes have been deducted from the amount.
Who can Deduct Business Expenses on their Taxes
It’s important to note that only interpreters with independent contractor/self-employment (1099) income can claim business expenses deductions on their taxes. If you only earn W-2 or wage income, you are not allowed to deduct business expenses. This is because business expenses are reserved for only those with business (1099) income. If you happen to have a mixture of both income types, you can claim business expenses only associated with your 1099 income producing work.
How do Business Expense Deductions Work
Let’s look at an overly simplified illustration showing you how business expense deductions work. Let’s say you earned $40,000 from freelance interpreting as a sole proprietor (which is what you are if you haven’t chosen an entity structure). During that same year let’s assume that you had $10,000 in business expenses (maybe you went to an interpreting conference, had some business-related travel expenses and bought a laptop to use solely for interpreting). If that $10,000 is tax deductible, you are allowed to subtract – or deduct – that amount from your $40,000 gross income and pay taxes only on the remaining (net) amount. When your net income is lower, you save on self-employment taxes, and you fall into a lower federal tax bracket; resulting in owing less on taxes at the end of the year. In a nutshell, the more legitimate business expenses you deduct on your taxes, the less taxes you will owe on your self-employment income. Let’s look at two examples to illustrate this concept.
EXAMPLE 1:
- You earned $40,000 gross self-employment income.
- You spent $10,000 on tax-deductible business expenses.
- You are only required to pay taxes on $30,000 (net income).
Now let’s consider what happens if you had fewer tax-deductible expenses.
EXAMPLE 2:
- You earned $40,000 gross self-employment income.
- You spent $4,000 on tax-deductible business expenses.
- You pay taxes on $36,000 (net income).
Notice how the results differ based on how many business expenses they claimed. Once again, when more business expenses are claimed you pay taxes on less of your self-employment income.
What are Business Expense Deductions
The IRS states that your deductible expenses must be “both ordinary and necessary” for business operations. These kinds of expenses are only deductible if and when the business is operating to make a profit. It is easy to get confused by what items can be deducted. For example, the IRS states that you cannot deduct personal, living, or family expenses. But if any given expense is partly used for your business and partly used for personal use, you can divide the total cost between the business and personal use. Simply put, you can only deduct the portion of any expense that went directly toward the maintenance of your business.
For example, many interpreters use the same phone for both personal and business use. If 50% of your phone use is for business, and 50% is for personal use, then you can divide the cost between legitimate business use and personal (nondeductible) use. In this case, if my phone bill is $100/month then I can deduct $50/month as a business expense.
There are many types of business expenses that interpreters encounter throughout their careers. For a list of examples, download our free “Interpreter Tax Deductions List” at www.QuickGuideTax.com/resources. In addition to claiming business expenses on your taxes, working with a tax professional who understands the interpreting field can also help you maximize all of the tax saving strategies available to you. At Quick Guide Tax, we offer tax services specifically created for interpreters. By working with us, you’ll have peace of mind knowing that your tax filing experience is tailored to meet the unique needs of your field. Visit www.QuickGuideTax.com to learn more about our services and resources.
Disclaimer: This material has been prepared for informational purposes only, and is not considered personalized tax advice. We encourage you to meet with your tax professional to review our suggestions and confirm that it fits within the scope of your unique tax/financial situation.
Want to know more? Join Rosemary Bocian’s Breakout Room at LEO’s 10th Virtual Conference in December, and ask any questions you have!