Smart Tax Strategies for Freelancers to Maximize Deductions Before Year End

As the year draws to a close, freelancers, sole proprietors, and LLC owners using the cash accounting method have a valuable opportunity to reduce their tax bills. Taking a few smart, legal steps before December 31 can lower your taxable income and save you money when tax season arrives. These strategies are especially important if you’ve had a strong year and want to keep your tax burden manageable.

This post outlines practical year-end tax moves you can make to keep more of your hard-earned money. Whether you want to defer income, invest in equipment, or contribute to retirement, these tips will help you plan effectively.

Defer Income to Lower Your Tax Bracket

If your freelance business has been thriving, consider delaying sending invoices or payment reminders until January. Since you’re using the cash accounting method, income is recognized when you receive payment, not when you bill clients. By postponing income, you push taxable earnings into the next year.

For example, if you expect to earn $80,000 this year and $20,000 next year, but you delay invoicing $10,000 until January, your 2025 income drops to $70,000. This could keep you in a lower tax bracket, reducing your overall tax rate.

Keep in mind: Don’t delay income if you expect your earnings to increase significantly next year, as this could push you into a higher bracket then.

Use Section 179 to Deduct Equipment Costs Immediately

Planning to buy new business equipment? Section 179 of the tax code lets you deduct the full cost of qualifying purchases in the year you place them in service, rather than spreading the deduction over several years through depreciation.

This includes items like:

• Computers and laptops

• Office furniture

• Machinery and tools

  
  

For example, if you buy a $3,000 computer before December 31 and start using it for your business, you can deduct the entire $3,000 on your 2025 taxes. This reduces your taxable income right away.

Tip: Make sure the equipment is purchased and ready for use before year-end to qualify.

Prepay Ordinary Business Expenses

Another way to reduce your taxable income is to prepay expenses you know you will incur next year. This can include:

• Office supplies

• Annual software subscriptions

• Insurance premiums

  
  

By paying these expenses before December 31, you can deduct them on your current year’s taxes. For example, if you pay a $600 annual software subscription in December, you get the full deduction for 2025 instead of spreading it over the next year.

This strategy works well if you expect your income to be similar or higher next year, as it shifts deductions into the current tax year.

Freelancer preparing year-end tax documents

Preparing tax documents at a freelancer’s desk before year-end

Hire Family Members to Shift Income

If family members help with your business, you can pay them a reasonable wage and deduct it as a business expense. This strategy can reduce your taxable income while providing income or work experience to your family.

For example, if your teenager helps with social media or administrative tasks, paying them $5,000 a year shifts income to their tax return, which may be taxed at a lower rate or not at all if they have little other income.

Important: The pay must be reasonable for the work done, and you should keep proper records to support the deduction.

Host a Holiday Party for Employees

Throwing a holiday party for your employees is more than just a festive gesture. The IRS allows you to deduct 100% of the cost of an office holiday party, as long as all employees are invited.

This includes expenses like:

• Food and drinks

• Venue rental

• Entertainment

  
  

For example, if you spend $1,000 on a holiday party, you can deduct the full amount, reducing your taxable income. This is a rare exception to the usual 50% limit on business entertainment expenses.

Contribute to a Retirement Plan

Setting up or funding a retirement plan before year-end can reduce your taxable income and help you save for the future. Options include:

• SEP IRA

• Solo 401(k)

• SIMPLE IRA

  
  

For instance, contributing $6,000 to a Solo 401(k) lowers your taxable income by that amount. Plus, these plans allow higher contribution limits than traditional IRAs, which can be especially beneficial for freelancers with fluctuating income.

Note: Contribution deadlines vary by plan type, so check the rules to ensure your contributions count for the current tax year.

Make Charitable Contributions

Donating to qualified charities before December 31 can provide immediate tax deductions. You can give cash, goods, or use a donor-advised fund to spread out your giving while taking a deduction now.

For example, donating $1,000 to a local food bank reduces your taxable income by that amount. Keep receipts and acknowledgment letters for your records.

Final Thoughts

Taking action before December 31 can make a big difference in your tax bill. Deferring income, accelerating deductions, hiring family members, and contributing to retirement plans are all effective ways to reduce taxable income. Hosting a holiday party and making charitable donations add extra opportunities to save.