These are Ten Tax Deductions Every Freelancer Should Know About
From a tax perspective, working as a freelancer is akin to owning a business in which you are the only employee. On one hand, this can be a negative thing, as your income will likely be taxed more than if you were receiving the same amount as an employee for another company, and filing your taxes will likely be more complicated as well. However, it also comes with a big benefit – deductions.
Like any other business, freelancers are able to deduct expenses that are related to their business, and the more deductions that you can find to take, the more of your hard-earned money that you get to keep.
With that in mind, here are ten tax deductions that every freelancer should know about. While these may not apply to every situation, they are certainly common deductions for freelancers and are things you should be on the lookout for in order to save money when tax season rolls around.
The majority of freelancers work out of their home, especially when they are first starting out. For individuals working out of their home, the IRS allows them to take a deduction known as the home office deduction, in which they can deduct a portion of their mortgage or rent.
To qualify for this deduction, you must have a space in your home that is solely dedicated to your work, and you can’t use it for any other purposes. Moving a desk into your bedroom won’t qualify you for the home office deduction, but having a room that is used solely as your office will.
If you do qualify for this deduction, you can take $5 per square foot of your home office or you can calculate your rent, utilities, and other expenditures and multiply them by the fraction of your home that your office takes up.
Working as a freelancer will require you to continuously market yourself to new clients, and sometimes this marketing will come with an expense. If you take out ads on social media or Google AdWords, print business cards, or engage in any other form of paid marketing, you can deduct these expenses from your income. Just make sure to keep good records of the marketing expenses that you have.
Training and Development
Successful freelancers are constantly honing their craft. Sometimes, you may even wish to pay for professional development by attending online classes, purchasing resources, and more.
Any expenses that you have in regards to training yourself or furthering your education in your field can be deducted from your income.
Having a client who refuses to pay an invoice is one of the banes of a freelancer’s career. While it thankfully doesn’t happen very often, it can be a real blow to your morale when it does.
The good news is that the IRS is willing to help take a little of the sting out of an unpaid invoice by allowing you to take the amount that was unpaid as a tax write-off for your business. To qualify for this deduction, you will want to make sure that you keep a detailed list of each unpaid invoice that includes the invoice number.
While it’s a good idea to set up a system that discourages unpaid invoices as much as possible (such as having a client put money in escrow or only doing large amounts of work upfront for clients that you already trust) it’s good to know that there is a way to get some form of compensation for invoices that are not paid.
If you succeed as a freelancer, you may wish to incorporate your business into an S-Corp. Doing this allows you to take a portion of your income as dividends from the corporation and a portion of your income as a salary. On the portion of your income that you take as dividends, you will not be required to pay the 15.3% social security and Medicare tax. If you’re doing well, this structure can save you a lot of money.
However, the fees and costs associated with incorporating a business can be several hundred dollars or more. You will have to pay a fee to the state, and you will likely have to pay a CPA to help you through the process. All of these expenses, though, can be deducted.
After you’ve been working as a freelancer for a while, you may wish to create a website for your services. While the cost of creating a great-looking website has gone down in recent years, there are still a few expenses associated with owning your own website. These expenses include buying a domain name, paying a hosting fee, and potentially hiring a web developer to help you build the site. If you do decide to create your own website, keep track of these expenses as they are all deductible.
Mileage and Gas
Depending on what field of freelancing you are in, you may have to drive to meet clients, suppliers, or others. Of course, driving comes with expenses, both in the form of gasoline and wear and tear on your vehicle.
The IRS allows you to deduct these expenses either by taking a standard deduction based on how many miles you drive for business purposes or calculating the cost of maintaining your vehicle and the cost of gasoline that you buy for business related travel.
Mileage and gasoline are not the only expenses associated with travel. If you are traveling to a conference or other business event, you can also deduct your hotel accommodations and even a portion of your meals.
The IRS allows you to deduct the cost of your lodging and 50% of the cost of your meals. It’s important, though, not to try and deduct any expenses associated with site-seeing or entertainment while you are on a business trip. Doing this is one of the most surefire ways to trigger an audit, which is something everyone – especially freelancers – should avoid at all costs.
The vast majority of freelancing work is done from a computer. In order to do your job, therefore, you may be required to purchase certain software such as Microsoft Office, video editing software, web development software, and more. All of these expenses can be deducted from your income.
Most of the time, working as a freelancer is a one-man or one-woman operation. Sometimes, though, you may need to contract out certain portions of a project to a third party. For example, if you are designing a website for a client and need help with a more complex software application, you may wish to hire a software developer to help you build it. While it would be good to factor in these kinds of expenses into your initial bid for the project, you can still deduct them from your income as well.
Hiring contract labor is quite a bit different from hiring an actual employee, and the process of paying them and deducting the expense is much simpler. Just keep a record of how much you paid them and what you paid them for and your accountant will be able to help you take the appropriate deduction for these expenses.