The Net Income Equation
Freelancers pay income tax on net profit, not gross revenue. The fundamental equation is:
\[ \text{Net Profit} = \text{Gross Revenue} - \text{Allowable Deductions} \]
Reducing your net profit reduces both your income tax liability and self-employment/social tax obligations.
Common Allowable Deductions for Tech Freelancers
1. **Software & Subscriptions**: IDEs, hosting, domain registration, SaaS tools (Sentry, GitHub, Figma).
2. **Hardware & Gear**: Computers, monitors, desks, chairs (deducted immediately or depreciated).
3. **Home Office**: Calculated proportionally by square footage or via a simplified flat-rate method.
4. **Professional Services**: CPA fees, subcontractor costs, legal fees.
The Self-Employment Tax Deduction Proof (US)
In the United States, you can deduct the employer-equivalent portion of your self-employment tax (7.65%) in calculating your adjusted gross income (AGI):
\[ \text{Net Earnings from Self-Employment} = \text{Net Profit} \times 0.9235 \]
\[ \text{SE Tax} = \text{Net Earnings} \times 0.153 \]
You then deduct 50% of the calculated SE Tax on Form 1040 before calculating your federal income tax bracket.