Work as a freelancer brings both extra opportunities and extra challenges. It’s appealing for many because you can be independent. You’re a small business owner with the freedom to decide what to do on your own. You don’t have to worry about any other shareholders or employees.
For most freelancers being your own boss and business owner is a plus, but it does carry some obligations. You don’t have a boss to file or pay any taxes for you, so it’s up to you. As a self-employed person, you’re effectively responsible for the tax preparation for your business.
That means paying estimated taxes on your income in advance and doing a lot of extra paperwork. However, on the bright side, there are many additional credits and tax deductions available for small business taxes. You can use these to keep your tax burden lower!
Here is a helpful freelancer tax guide to help you keep your tax burden low and take advantage of all of the tax deductions available:
How Do Tax Deductions Work?
When you’re an employee of a business, you only see a fraction of the money that goes through that business. There’s also the money you’re paid as income, and then there’s the money that pays for your workplace, office supplies, the money used to buy inventory, and much, much, more.
As a freelancer running your own small business, you see all of the money that runs through the business. However, that doesn’t mean that all of that money counts as income. Business tax deductions work by removing all of those other overhead costs from your taxable income. They are reducing your tax burden by making your taxable income more honestly reflect the reality.
There are many possible deductions to use, some meant explicitly for those who are self-employed as freelancers. They help you sort out what is considered taxable income and what is a business expense that you would never see as a traditional employee.
How Do I Maximize My Self-employed Tax Deductions?
When it’s time to file your tax return, you don’t want to leave any deductions on the table. You shouldn’t be taxed for the money you spent on business costs.
That means keeping good records during the year of your running costs and all the money you spend while working. Then you’ll want to figure out what deductions you might qualify for. An accounting professional or a reliable tax filing program can help you work through this.
Personal or Business Expenses
It’s crucial as you go through the process and start claiming deductions to be aware of the split between personal and business expenses.
For personal expenses like legal expenses, charitable contributions, and home mortgage costs unrelated to your business, you have the choice of using itemized deductions for each individual expense or claiming the standard deduction. Consider your choice carefully, as the standard deduction might amount to more than all of your itemized deductions together.
On the business side of things, however, there is no standard deduction. Even if you claim the standard deduction for your personal income, you can claim further tax deductions on business-related expenses.
What Are Common Tax Deductions for Freelancers?
There many different deductions you can use to trim your freelance taxes by a significant amount. Here are some of the most common business tax deductions you should be sure to use if you have eligible expenses.
1. Office Space
If you rent a workspace, whether it’s a full office or merely a space in a shared working environment, all of that cost is tax-deductible. Anything you spend on a working environment, whether you rent or own it, is eligible.
That includes phone and internet costs! If your phone or internet is necessary for your work, at least some portion of it should be eligible to be counted as a business expense.
2. Home Office
If you use a specific space of your home residence for work, you can write that off on your taxes as a business expense! A home office has to be an area of your home that is used exclusively for your work.
You can claim the home office deduction in one of two ways. Both are based on the office’s precise square footage in relation to the home as a whole. The IRS allows for a simplified rate of $5 per square foot for your home’s business use if your office is less than 300 square feet.
Otherwise, you can add up all of your home-related costs, including rent, utilities, property taxes, mortgage interest, and more, and deduct a percentage of it according to your office’s relative size.
3. Office Supplies
Whether you use it in your home office or on the road, any office supplies you buy for work also count as fully deductible business expenses. Paper, pens, printers, and more could be deductible. This deduction includes the sales taxes you pay on the items.
4. Hardware and Software
Do you have any devices or programs that you bought or used exclusively for your business? The purchase costs and upkeep for these may also count as deductible business expenses. You can deduct the money you spend on accounting software or a work computer from your taxable income.
5. Travel Expenses
You should be able to deduct any costs associated with travel required for your work. Transportation, lodging, and meals are all deductible for overnight travel for established business purposes. You’ll need to keep detailed records if you’re going to claim this deduction.
6. Using Your Own Vehicle
If you use your own vehicle for work, then you should be able to deduct car expenses on your tax return for that use as well, even if you’re not using it for overnight work trips.
You can claim some percentage of the cost of fuel, maintenance, and more based on your use of the car or document and report the miles you drive for work. The IRS sets a standard mileage rate to allow for a simplified vehicle deduction.
7. Memberships and Subscriptions
Are there any organizations you’re a part of or publications you subscribe to for business purposes? Membership dues for a professional organization and fees for trade publications also count as business expenses. Remember that these have to be specifically business-related to be deductible.
8. Self-employment Tax Deduction
As a business owner, you have to pay more each tax year into Medicare and Social Security than if you were an employee. Self-employed people pay a higher rate because they are functioning both as employer and employee.
Fortunately, the money you spend on this increased tax rate can be deducted from your income. The higher rate is part of the cost of owning your own business, which means it’s a deductible business expense. This is one of the tax benefits for the self-employed you should be sure not to miss.
9. Health Insurance Premiums
While your medical expenses will usually count as personal costs, you can deduct all of your health insurance premiums from your income. As an employee of another business, your employer could have paid for you and your family’s health care premiums, so you can effectively do the same as a self-employed business owner.
To qualify, you must not be eligible for insurance through your spouse’s employer. You can deduct any premiums you paid for you and your family, including children below the age of 27.
10. Retirement Savings
You can also deduct from your income any money you put into a qualifying retirement plan. However, the maximum contributions allowed vary by year and depend on the type of plan.
If you don’t have a retirement plan already, let this deduction inspire you to consider some retirement options for the self-employed.
Don’t Be Afraid to Seek Help
Filing your personal and business taxes together can be complicated and intimidating. The stakes are high, and you don’t want to pay too little or too much. When you and your family’s financial future could be affected, it’s worth taking your time.
If you’re not confident or want to ensure you claim every possible deduction, consult with a tax accounting professional. Help from someone who knows what they’re doing can save you money and keep the whole process quick and easy.