If you’re a freelancer, you’re used to doing everything yourself. While clients can be a challenge at times, you run your work by yourself and never have to rely on anyone else.
Of course, doing everything by yourself can become a problem when tax season comes around, and you have to work on your return. Not every freelancer understands effective bookkeeping either, making preparing for tax season even more difficult. Careful bookkeeping for freelancers is essential for saving money on your freelance taxes.
One big problem that occurs, as a result, is that you miss tax deductions. Essentially you don’t know how the rules work, so you pay more than you’re supposed to. But it doesn’t have to be that way! We’ve compiled 8 freelancer tax deductions that you may have missed. Plus, we have tax tips you can use when you file your taxes the next time tax season is upon us. Take the time to learn more about tax deductions and ensure you’re not paying more than you have to.
How Do Tax Deductions Work for Freelancers?
Every freelancer is also a small business owner. You’re an independent contractor without an employer, so you have all the responsibilities that would otherwise fall to your employer.
Even if you don’t have any other employees working for you, your independent work is a business. It doesn’t exist apart from you and your name, but you are running a small business.
For purposes of tax deductions, then, freelancers can claim eligible business expenses as deductions from their taxable income. Tax deductions work by directly lowering your taxable income. They represent regular business expenses you have to make to support your business. Those are required business costs, and therefore the money used to pay them should be factored out of your taxes.
Commonly Missed Deductions for Freelancers
There are a lot of tax deductions available, and it’s easy to skip over some of them and accidentally leave some money behind. Make sure you take the time to claim every deduction you’re eligible for.
1. Self-Employment Tax Deduction
Everyone has to pay into Social Security and Medicare from their income. With an employer, the company will pay for half while you pay the other half. For the self-employed individual, you have to make those full payments yourself.
This is called the self-employment tax. The self employment tax rate is 15.3%—12.4% for Social Security tax and 2.9% for Medicare. An additional 0.9% Medicare tax rate is added if the income exceeds the threshold.
The self employment tax threshold figures apply to the following:
- Married joint filing: $250,000
- Married but separate filings: $125,000
- Single: $200,000
- Head of household: (with qualifying person): $200,000
- Qualifying widow(er) with dependent child: $200,000
The good news is that half of that tax payment – the half normally covered by the employer – is a tax-deductible business expense.
2. Health Insurance Deduction
Many individuals get health insurance coverage through their employers. However, suppose you’re self-employed, and you’re ineligible to get health insurance through an employer or a spouse’s employer. In that case, you can effectively count your independent health insurance as a business-sponsored care plan. Whatever premiums you pay can be covered by your business and not you, which means it can be deducted.
3. Home Office Deduction
The space you do the work of your business in is also important. If you have a regular and established workplace, the costs associated with it can be deducted from your taxes. For freelancers, this often means using the home office deduction.
If you work from home, you may be able to deduct some of the costs associated with maintaining your home. However, to be eligible, you must have a clearly designated area in your home that is used solely and consistently for your work. You can deduct allowable expenses like rent, mortgage, utilities, and other related costs for that office based on its size relative to the rest of your home. For example, if your home office only takes up about 10% of your total home space, you can only deduct 10% of your annual electric bill, not the actual expense.
However, you should be able to defend your itemized deduction in the event of an IRS audit. You can prepare for this by making a diagram and accurately measuring your designated office space. Deductions like mortgage interest and home depreciation only apply to those who own their own home.
4. Office Supplies Deduction
Any tools or supplies you buy for business purposes can be claimed as deductions. How often do you buy pens, ink, or printer paper to restock your home office? Keep track of all of these office supplies so that you can deduct them from your personal tax return as well.
5. Retirement Contributions Deduction
Another critical deduction for tax season is your retirement contributions. Just like your employer could withhold some of your income before taxes to save in a retirement account, so too can you put money in a retirement account and deduct that money from your taxable income.
However, there’s a cap each year on the amount of retirement contributions you can deduct, so be sure to maximize your retirement savings before the end of each fiscal year.
6. Subscriptions or Professional Dues
Do you do any kind of continuing education for your work? How do you build new skills and stay on top of developments in the field? Anything you spend keeping yourself sharp and improving your business is a business expense.
This includes subscriptions for any relevant publications and dues for any professional organizations you may be a part of. For example, a newspaper cannot be considered a business expense since it’s too broad and not specific enough to use as a write-off. But a food industry publication like Nation’s Restaurant News can be considered a write-off if you are a freelance chef.
You can write off graphics industry publications and software subscriptions like Adobe Creative Cloud or website hosting if you’re a freelance graphic designer.
Networking with others in your field is a legitimate and important business activity and is therefore worthy of claiming as a business expense.
7. Marketing and Advertising
Do you spend any money on just getting your name out there or advertising for new clients? Even if you don’t have anything as formal as an official marketing budget, you should still keep track of all the money you spend on marketing yourself and making connections. Those expenses likely also qualify as deductible business expenses.
8. Legal and Professional Services
It’s also a tax-deductible business expense if you hire other freelancers or businesses! Any time you contract the services of a lawyer or hire an accountant to help you with your finances, those costs can be deducted. Acquiring legal and professional services is a regular cost of doing business.
How Do Freelancers Claim Tax Deductions?
Small businesses and self-employed individuals filing taxes will generally use Schedule C with their IRS 1040 to report their business finances and Form 2106 to report their deductible business expenses.
There are many different steps and requirements involved in this process, however. An accountant can guide you through establishing your deductions and ensuring you have provided the proper records and details for the IRS.
An Accountant Can Help You Maximize Your Freelancer Deductions
The tax code is not simple, and it changes all the time. It would be a full-time job to stay up-to-date on the latest changes and track down all the possible tax deductions for every expense. Fortunately, you have professional accountants to do that for you.
Investing in professional help with your bookkeeping and tax returns gives you a direct return in the form of increased savings on your taxes and increased efficiency. Having an expert on your side will make all the difference.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.