The money you’re handing back to the government 💰

Welcome to The Letter Home - my weekly newsletter about building financial confidence on the path to the life you want 🏡

Each week, we break down one meaningful money concept and leave you with an exercise that you can use to put it into practice.

This week, we’re looking at the tax dollars you might be leaving on the table if you work for yourself 👇️

A friend of mine started freelancing in 2022.

She was a graphic designer, working from a spare bedroom in her apartment.

That first year, she made about $85,000. Solid income, and she was proud of it.

Tax season arrived, and she found she owed $23,000.

She’d been so focused on landing clients and doing great work that she never stopped to learn how self-employment taxes actually work.

She paid every dollar the IRS asked for.

No deductions or strategy. Just a check and a sick feeling in her stomach.

The next year, she sat down with someone who understood self-employment tax law.

Same income, roughly the same expenses. Her tax bill dropped by over $8,000.

She didn’t earn less, and she didn’t hide anything. She just stopped overpaying for something she didn’t owe.

This is one of the biggest blind spots for people who work for themselves.

When you have an employer, taxes get handled for you. Your paycheck arrives with the math already done. You might not love what gets taken out, but at least you don’t have to think about it.

Self-employment flips that completely.

You’re responsible for both sides of the equation, the employee share and the employer share, and you’re responsible for knowing what you can legally reduce.

Most people focus on the earning side. How to get more clients, raise their rates, grow revenue.

That’s all important, but the money you keep matters just as much as the money you make.

And the tax code actually has built-in tools to help self-employed people keep more. You just have to know they exist.

Start with the home office deduction. If you work from home, a portion of your rent or mortgage, utilities, internet, and maintenance costs can be deducted.

There are two ways to calculate it:

A 150-square-foot office in a 1,200-square-foot apartment means 12.5% of your housing costs are deductible. That includes a portion of your rent, electricity, water, and insurance.

For someone paying $2,000 a month in rent plus $300 in utilities, that’s roughly $3,450 a year in deductions. Just from the space where you already work!

Then there’s your equipment. Your computer, your desk, your monitor, your printer. Office furniture. Even the software subscriptions you use to run your business.

These are all deductible.

A $2,500 computer purchase doesn’t just cost you $2,500. It reduces your taxable income by that amount, which means you pay less in taxes on every dollar of that deduction.

Phone and internet costs count too, at least the percentage used for business. If you use your phone 60% for work, 60% of that bill is a write-off.

Most freelancers and self-employed people know about some of these deductions in theory. But they don’t track them. They don’t document them.

At tax time, they either guess or skip them entirely.

That’s how you end up overpaying by thousands of dollars every single year.

Another piece people miss entirely: retirement contributions.

If you have a regular job, your employer might offer a 401(k). Self-employed people can open their own version, called a Solo 401(k) or a SEP IRA.

A SEP IRA lets you contribute up to 25% of your net self-employment income, with a cap around $69,000 for 2024. Every dollar you contribute reduces your taxable income for that year.

So you’re saving for retirement and cutting your tax bill at the same time. And it’s not a loophole, it’s the system working as designed.

A freelancer earning $100,000 who contributes $20,000 to a SEP IRA just dropped their taxable income to $80,000. At a 24% tax rate, that’s $4,800 back in their pocket.

And the $20,000 is still theirs, growing in a retirement account!

When you add it all up, a self-employed person tracking their home office, equipment, phone and internet, and retirement contributions can realistically reduce their taxable income by $15,000 to $30,000 a year.

At a 22% to 24% marginal rate, that’s $3,300 to $7,200 in actual tax savings. Every year.

The difference between people who capture these savings and people who don’t isn’t intelligence. It’s awareness and documentation.

You need a system. It doesn’t have to be complicated. A spreadsheet, a folder for receipts, and 15 minutes at the end of each month to log your expenses.

That’s it. Fifteen minutes a month to potentially save thousands of dollars a year.

If you’re self-employed, set aside 30 minutes this week and work through these four steps:

1. List every expense related to your work from the past month. Don’t filter yet, just write it all down. Rent or mortgage, internet, phone, software, equipment, office supplies, professional development, business meals. If money left your account and the expense had any connection to earning income, put it on the list.

2. Measure your home office space. If you work from a dedicated area, calculate the square footage and divide it by your total living space. That percentage is the portion of your housing costs you can deduct. Even a small desk area in a corner counts if you use it regularly and exclusively for work.

3. Look up a SEP IRA or Solo 401(k). If you don’t have a self-employed retirement account, spend ten minutes researching the contribution limits and tax benefits. Most major brokerages let you open one for free. Run the numbers on how much you could contribute and what it would save you in taxes this year.

4. Create a tracking system. This can be a simple spreadsheet with columns for date, expense, amount, and category. Take photos of receipts and drop them in a folder on your phone. The goal is to have everything documented before tax season so you’re not guessing or leaving money behind.

The point of this exercise isn’t to turn you into a tax expert. It’s to make sure you’re not paying more than you actually owe.

Every dollar you save on taxes is a dollar you can invest, save, or use to build the life you’re working toward.

That’s money you already earned. You might as well keep it!