There are new tax rules that you need to be aware of as a coach. The 2022 tax implications for freelance coaches and small business owners can make a big difference in your wallet. In this article, we’ll share the tax deductions you can apply and help you to plan ahead for next year’s federal income tax return, so you can max out your tax deductions.
Tax deductions are an important part of tax planning for freelancers and small business owners. In 2021, the American Rescue Plan Act (ARPA) extended certain tax deductions that were set to expire in 2022. Knowing which standard deductions you qualify for can help lower your taxable income and potentially save you money come tax time.
Common tax deductions for freelancers and small business owners include home office expenses, medical expenses such as health insurance premiums, travel expenses, advertising costs, vehicle expenses, professional fees such as legal or accounting services, and donations to qualified charities. When itemizing your tax deductions, make sure to keep track of all relevant receipts so that you can prove your claims if audited by the IRS.
It’s also important to be aware of the latest updates from the IRS before filing taxes each year — this could mean taking advantage of new deductions or avoiding penalties due to changes in the law. Keep track of any changes in tax deductions or credits you may qualify for by staying up to date on IRS publications throughout the year.
Tax deductions can be a great way to reduce your taxable income, but it’s important to stay up to date on IRS regulations and keep track of your receipts. Now let’s take a closer look at itemized deductions, which may help you save even more money.
Itemized Tax Deductions (Write-Offs)
Itemized tax deductions are another way small business owners and freelancers can save money on taxes. These tax deductions can include:
- home office expenses,
- health insurance premiums,
- travel expenses,
- advertising costs,
- vehicle expenses,
- professional fees and
- donations to qualified charities,
allow you to subtract specific items from your taxable income.
In the end, this means less money owed by you because your taxable income is lowered before taxes are applied.
Pass-Through Income Tax Deduction for Coaches
One of the most beneficial tax write-offs for coaches is the pass-through income tax deduction. This deduction allows you to deduct up to 20% of qualified business income from your taxable income. To qualify for this tax deduction, you must meet certain criteria set by the IRS, including:
* You must be a sole proprietor or an owner in a partnership, LLC, S Corporation, or other pass-through entity (filing with your own social security number)
* Your taxable income must be less than $157,500 for single filers and $315,000 for married couples filing jointly
* Your business must be considered a “qualified trade or business” as defined by the IRS.
The pass-through income deduction is an excellent way to reduce your taxable income and make sure you’re making the most of your tax deductions.
In 2022, the American Rescue Plan changes the rules for self-employed and small business owners when it comes to tax deductions. Specifically, Self-Employed Individuals can now deduct up to 100% of health insurance premiums paid. This change substantially reduces the amount of taxable income earned by these individuals. Additionally, qualifying Small Business Owners are now eligible for a full tax write-off on up to $20,000 worth of business-related expenses such as office supplies, advertising materials, and more. These changes provide greater incentives for self-employed and small business owners to pursue their entrepreneurial endeavors in 2021 and beyond.
What follows are the standard deductions that coaches can use — whether they run a small business with employees or work independently as freelancers, or are self-employed.
With many life coaches and those who specialize in other fields being self-employed or freelancers, the self-employment tax is vital to understand. You are responsible for paying the Social Security and Medicare taxes, which add up to ~15.3% each year. Keep in mind that self-employment tax is not the same as income tax.
To calculate the tax you owe for 2022, start with the net earnings you have received from profits generated by your business. You calculate net earnings starting with your gross earnings minus any business expenses that you can deduct. The self-employment tax covers 92.35% of your earnings, so make the calculations and then apply what you owe at the 15.3% tax rate.
For 2022, the first $142,800 you have earned is subject to the Social Security portion of the self-employment tax. All income earned above that level is only subject to the Medicare portion, which is 2.9%. Other deductions include but are not limited to the following.
Although covering an extensive range of areas, each type of deduction has its limitations. Most of the deductions are straightforward. For monthly bills such as internet, phone, insurance, office supplies, and the like, receipts are enough to demonstrate that such costs were paid and part of your business. In addition, what you purchase for use in your business, such as hardware, software, online tools, advertising, marketing, and more, can be deducted as well.
However, there are other expenses that you may not be aware of that qualify for deductions. By taking advantage, you can reduce the income that is taxed to a greater degree.
Tax-Deductible 2020 Startup Costs for Your Coaching Business
As of January 1, 2022, you can deduct up to $20,000 in startup costs from the cost of goods or services you purchase for your business during that tax year. This can include the cost of a business coach ( or our business clinic), books, web design services, etc. This deduction should help many entrepreneurs looking to start a business as it will reduce their out-of-pocket costs and allow them to reinvest that money into growing their businesses.
Startup costs include items directly related to your business’s setup and any indirect costs associated, such as finding a location for your home office and the like. You may need to consult with a qualified tax accountant to ensure the expense falls under startup cost deductions.
Do you hire other freelancers to do some of the work for your business? If so, what you pay them is deductible as well. For example, if you have someone write the content for your blog you can deduct those costs. Such expenses associated with hiring freelancers (and not employees) fall under this deduction.
For life coaches, one of the more overlooked tax credits available is qualified education expenses. Anyone in the coaching profession must keep up with the latest trends and information. This means that if you take classes directly related to coaching or in support of your coaching business, the expenses may be tax-deductible. This includes the following costs:
Keep in mind that it must directly relate to your coaching business, including education, on expanding your business knowledge. All unrelated fields do not count.
Traveling as a Coach
Travel, mileage, and meals are not as straightforward as they might seem for 2022 tax deductions. Keep in mind that travel does not include the trip to the office. However, with many life coaches and coaches in other areas, travel may be an important part of your profession. If you travel to your clients, that qualifies as a deduction for your coaching business. But if you are just traveling to your office, that does not.
During business with clients, meals can be deducted at a 50% rate, but only if you show receipts and evidence that they are part of your coaching business expenses.
Home Office Expenses
You may also write off taxes on your return, such as the taxes earned on real estate if you own an office separate from your home or one that is on another property. The home office deduction assumes that you have dedicated space in your home strictly for office use. If so, you can write off any rent, utilities, or other payments directly related to the home office. However, if you are sharing a room in your home with other purposes once you have finished with your work, then the deduction does not apply.
If you receive payments through PayPal and other qualified sites as part of your coaching services, all third-party fees that you paid for the use of that site can be deducted from your taxes. This is one of the more overlooked areas for coaches since it is assumed by many to apply to selling products. But if you accept payments for your services on PayPal and similar third-party sites, then you may qualify for a tax deduction.
Internet & Phone
Tread carefully here. If you have one phone line for business and personal use, deducting it 100% as a business expense is not reflective of reality and will likely cause you trouble. If you want an IRS audit, this is a way to increase your chances. The same goes for internet expenses. Most freelancers and virtual coaches use the internet for both business and personal use (Netflix-and-chill, anyone?).
To make your accounting life easier for these items, use tools like QuickBooks Online (QBO) for the self-employed. QuickBooks automatically tracks all your expenses and automates your accounting over time as it learns from you how you classify certain expenses.
If you tag an expense for Canva as Marketing or from your ISP as an internet expense that is to be split 50%-50%, QBO will remember it and do it automatically for you. All you have to do then is to attach your receipts, which you can simply do at the end of the month by forwarding all your receipts per email to QBO, which automatically assigns it to the right charge. Come tax time; you can add your CPA to your QBO account to do your taxes. No more shoeboxes loaded with receipts!
Another phenomenal platform is Bonsai, which lets you handle many aspects of your business including business finances: send invoices, track expenses, calculate profit and loss, and estimate taxes owed so you’re not caught by surprise. You get a great all-in-one tool that can run most of your business for you.
Keep in mind that these cover the basics of your 2022 federal income tax returns. Your state may have its own unique set of requirements and deductions for income taxes, which apply as well. Whether you run a coaching business or freelance, it is crucial to be aware of the tax implications.
To take advantage of income tax deductions, you’ll need to keep detailed receipts that document your business-related activities. Without that evidence, you’ll not have the proof you need. Most coaches who start a business don’t think strategically about the key expenses they can claim tax credits for as part of their startup expenses. This includes hiring web designers, education expenses for coach certifications and books, or ongoing costs such as medical expenses.
Remember: not all tax deductions are eligible for itemization — it’s important to check with the IRS for a list of eligible items before filing taxes each year. You can also use accounting tools like Quickbooks or work with a CPA to get your taxes prepared and have peace of mind that you are deducting what is permitted by the IRS. The advantage of using a tool like Quickbooks is that it takes huge chunks of work off your hands by automatically matching your receipts to your expenses! Try it out and thank us later.
Here’s to a large tax refund!