Tax Prep and Budgeting for Employees, Freelancers, and Contractors

Taxes aren’t known for being a party; or if they are, it’s the kind most people definitely don’t want to be invited to because no one’s having fun. That said, this is also a great time for individuals to review practices and expenses to set the foundations for better budgeting, consider their spending habits, and find areas of improvement. Here are five ways that individuals can set themselves up for better budgeting during tax season.
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#1: Recuperate Business Expenses

Especially for freelancers, deducting work expenses can be an arduous (but worthwhile!) process. While it may be tempting to skip the paperwork rather than meticulously document every trip or purchase, thinking of it not as savings gained but losses recuperated may help freelancers muster the energy to march through mountains of paperwork. Just because the money has been spent doesn’t mean it’s gone for good.
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One example: home offices. While employees are not eligible to claim the home office deduction, freelancers and contract workers are. This is notable as freelancers represent 35% of the workforce according to a 2019 study by Upwork and Freelancers Union.[1] One point that often causes confusion is what qualifies as a home office. Home offices can be part of a room, but that space must be exclusively used for business and must be the taxpayer’s actual office out of necessity; not just a convenient arrangement that benefits them. For those of us who haven’t put down masking tape to divide the office from the rest of the living room like college roommates on TV arguing over whose laundry is on whose side of the floor, the “office rug” method can help. That is to say, if you were to put an area rug on the floor that only covered the floor of the office space, how big would it be?
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#2: Check up on Retirement Savings

Budgeting and retirement are two sides of the same planning-for-the-future coin. If an individual’s financial situation has changed, they may want to revisit their retirement contributions, especially when it comes to employer matching that they may not have been taking advantage of. This is important especially for those who may have been withdrawing early from retirement funds, for those who simply haven’t checked up on their portfolio in a while, or who may need to reallocate funds as they get older and reach new and exciting life milestones.
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#3: Figure out Educational Funding

For employees thinking of going back to school, or who are saving for their children or dependents’ educational needs, tax season is a great time to review their employers’ continuing education and reimbursement policies, research education tax credit and deduction eligibility, and budget for educational expenses. Only certain courses and expenses qualify for tax credits, and of course there are similar limitations involved in employer continuing education programs, but if it’s a serious consideration, it’s time to think about how those studies are going to be funded. College expenses are no joke, and for parents, building a college fund is best started as soon as possible.
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#4: Consider HSA, HRA, and FSA contributions

Okay, perhaps tax season isn’t the best time to consider HSA and FSA contributions, since it’s mid-year, but it’s certainly the second-best time. Medical expenses are often non-negotiable and something that can’t be budgeted down. That said, a staggering number of goods and services qualify for HSA, HRA, and FSA use. Copays, deductibles, coinsurance, and long-term care are some of the big-ticket items, but these funds can also be used to pay for glasses, prescriptions, or even an emergency first aid kit for your car. While there are some obvious caveats, people who have regular appointments like behavioral therapy, PT/OT, who pay for prescription medications, all necessary medical expenses that must be paid regardless of budget, may want to consider upping HSA, HRA, or FSA contributions and save some money along the way because not only are these contributions made from pre-tax dollars, but they also help participants pre-budget for both one-time and recurring medical expenses.  
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#5: Pet Expenses: Work Smarter, Not Harder

Pets have only become more important to their humans over the last 50 years, to the point that many consider themselves their pets’ parents. But until we can claim them as dependents, there are few ways to decrease the financial impact of these cross-species relationships. However, while buying fewer toys, treats, and other related purchases can certainly contribute to budget slimming and is worth considering, purchasing pet insurance provides peace of mind and prevents the staggering hit from unexpected vet bills and can be offset by refraining from purchasing just one toy a month.
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Just like with people, you never know when a health emergency may happen, or when the vet discovers that Fido has an expensive-to-treat condition that is now suddenly pre-existing. It just takes one magnet, small toy, or other foreign object mistaken for a delicious snack to create a vet bill that costs thousands. Get insurance. Your wallet, and your pet, will thank you.
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Except for those running an exceptionally tight ship, there are almost always areas that need improvement in an individual’s expenses. While tax prep isn’t necessarily a joyride, it is a useful tool for reviewing habits and finding opportunities for budgetary improvement.

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[1] https://www.upwork.com/press/releases/freelancing-in-america-2019

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‍These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.