How Lili helps freelancers save time and money on taxes
We keep telling you Lili can save you time and money on your taxes. Let us show you exactly what we mean.
If you’ve been following us for the past few months, you’ve heard us say many times that Lili is here to help you save time and money on your taxes. It does look great on an ad. But what looks even better is when we actually deliver on our promise. So, let us show you exactly what we mean.
Step 1. Sort and categorize all your transactions from 2019
All expenses you categorized as Work will be included in your business expenses on your Lili Tax Sheet.
Step 2. Download your 2019 Tax Sheet from the Lili app
Open your Lili app. Go to Statement & Documents in the menu and download your annual Tax Sheet.
Step 3. Determine your self-employment taxes
Calculate 15.3% of your gross income (circled in green). This rate consists of two parts: 12.4% for Social Security and 2.9% for Medicare. Your gross income is all the money you have received from clients this year for your work. Make sure not to count any funds you transferred from another account or money you received from friends and family.
For example, let’s say you made $85,000 this year, your self-employment taxes will be $13,005. You will also be able to deduct 50% of your self-employment taxes when calculating your taxable income at step 4.2
Step 4. Determine your income tax
Step 4.1 - Standard deduction or itemize?
Now you need to calculate your total business expenses for the year. It’s easy, just add up all the totals for each business category at the end of each row (highlighted in purple).
If that sum ends up being lower than the standard deduction that corresponds to your filing status, then you should use the standard deduction.
If it’s higher, you should itemize your deductions, which means you’ll use the total you just added up in the Lili app.
For example, as a single filer, if you have $15,000 of business expenses this year, you should itemize your deductions since the standard deduction is a lot less – $12,200.
Step 4.2 - Determine your taxable income
This is where making sure you’re including ALL your business expenses from the year can save you some real money. We can now easily calculate your taxable income:
Gross Income - (Business Expenses + 50% Self Employment taxes) = Taxable Income
85,000 - (15,000 + (50% x 13,005)) = $63,498
Step 4.3 - Determine your tax bracket
Including all the deductions you’re eligible for when you file, can make you go from one bracket to the next. With a gross income of $85,000, you might think you will end up in the 24% bracket. But once you deduct all your business expenses and 50% of your self-employment taxes, your taxable income is actually $63,498 so your maximum bracket is now 22%
Step 4.4 - Determine your income tax.
Now keep in mind the US tax system, the US tax system is progressive, meaning you won’t pay 22% on ALL your taxable income, only the top dollars. You always pay the tax percentage that corresponds to each portion of your income (as shown here).
With a $63,498 taxable income, you’ll calculate your income tax like this:
10% x 9,700 + 12% x (39,474-9,701) + 22% x (63,498-39,474)
= 970 + 3,573 + 5,285 = $9,828
So with a $63,498 in taxable income, you would owe $9,828 of income tax for 2019.
Now let’s say you didn’t keep very good track of your business expenses and forgot about a few purchases throughout the year, and you end up accounting for only $12,500 of business expenses.
Let’s calculate your taxable income in this scenario:
85,000 - (12,500 + (50% x 13,005)) = $65,997
Now let’s look at your income tax here:
10% x 9,700 + 12% x (39,474-9,701) + 22% x (65,997-39,474)
= 970 + 3,573 + 5,835 = $10,378
With a $65,997 taxable income, you would owe $10,378 of income tax for 2019 so $550 more.
And that’s how Lili can help you save money on your taxes. You’re welcome. 😉
This blog is for educational purposes only and some elements were simplified for the sake of the example. You should always refer to the IRS website and official forms to determine what you actually owe.