Don't leave money on the table. Here are the tax write-offs you should be aware of for when tax season rolls back around again.
Want to send a freelancer running for the hills? Easy—just tell them it’s tax time.
In many ways, living the self-employed lifestyle is enviable: you get to choose when you work and whom you work with and in most cases, the harder you work, the greater your financial rewards will be.
However, one aspect that few people enjoy is dealing with taxes. Not only are freelancers required to pay quarterly income taxes, but they are also required to pay self-employment taxes—the portion of Medicare and Social Security taxes typically covered by an employer. With so much at stake, self-employed people need to take advantage of every possible tax write-off to remain profitable.
The rules for tax deductions can be complicated. If your freelance career doesn’t involve dealing with numbers regularly and you’re not one of those people who enjoys reading up on the latest changes to tax laws, then this guide to write-offs is for you.
Tax Write-Off #1: Home Office Expenses
If you have space in your home that you use solely for work, you can claim the home office deduction. There are two ways to calculate your deduction:
- Simplified method. Take the square footage of your home office (up to 300 square feet) and multiply it by $5 per square foot.
- Regular method. Calculate the percentage of your home’s square footage dedicated to the home office. Then multiply that percentage by the actual expenses of maintaining your home, such as mortgage interest, property taxes, maintenance and repairs, insurance and utilities.
Tax Write-Off #2: Travel and Transportation
If you travel to visit clients, attend conferences or pick up office supplies, you can deduct the cost of getting to and from your destination and the cost of accommodations if your trip involves an overnight stay.
To deduct the cost of using your personal vehicle for work, make sure you keep meticulous records of your mileage as well as receipts for gas, oil changes, other repairs and maintenance and insurance.
For travel expenses such as hotels and airfare, don’t try to write-off any trips that are purely for leisure. If a trip is primarily for business, but you stay a couple of extra days for sightseeing, you can only deduct the expenses that are attributable to the business part of the trip.
Tax Write-Off #3: Dues
Many freelancers network with peers and potential clients by joining business associations, chambers of commerce and other organizations. But are the annual dues deductible? It depends on the purpose of the organization.
To be deductible, membership in the organization must actually help you conduct business and the association may not be organized primarily for pleasure or social purposes. For example, a graphic designer who joins the local trade association for advertising professionals would be able to deduct their dues, as the purpose of the group is to help members in that field advance in their career and build connections.
However, the same graphic designer would not be able to deduct dues paid to a local country club, even if he or she met clients there, because the primary purpose of a country club is recreational and social.
Tax Write-Off #4: Health Insurance
If you purchase your own health, vision, dental insurance and long-term care, you may be able to deduct the premiums you pay for you and your family.
There are two caveats to this deduction. First, you can only take a deduction if neither you nor your spouse (if married) are eligible to participate in an employer-sponsored plan.
So if you are a freelancer and your spouse has access to health insurance through their full-time job, you cannot claim the deduction.
Second, the deduction can’t exceed the income you collect from your business. For example, if your freelance work generated a loss for the year, you cannot claim a deduction because the business didn’t generate positive income.
If you do qualify, keep in mind this deduction isn’t claimed on the same form as your other business expenses. It goes on Line 29 of Schedule 1 attached to your Form 1040.
Tax Write-Off #5: Payments to Subcontractors
Are you one of the lucky freelancers who have more work than you can handle on your own? You might consider subcontracting out some of your work or other time-consuming tasks such as social media posting, email management, producing graphics for your website or video editing.
Outsourcing is an excellent way to free up time to take on new clients. Plus, you can write-off the fees paid to the independent contractors you hire. Just make sure you have a formal agreement in place to ensure it’s truly an independent contractor relationship and not employment. Otherwise, you could wind up responsible for payroll taxes.
Tax Write-Off #6: Phone Expenses
If you’re like most freelancers, you probably use your personal cell phone to take client calls, send and receive work emails and perform other business-related tasks. If so, you can deduct some of your annual cell phone bill based on the percentage used for business.
Of course, it can be challenging to determine just how much of your cell phone usage is for work and how much is personal. After all, you’re probably not keeping a time log every time you play Candy Crush or watch Instagram stories. They key is, it must be reasonable.
Get an itemized statement from your cell phone company or track your usage on an average day to figure out a reasonable percentage, then deduct that percentage of your phone bill every month.
Just don’t try to get away with deducting 100% of your cell phone costs unless you use that phone solely for business and have another phone you use for personal reasons.
Tax Write-Off #7: Professional Development
Freelancers have a lot of competition these days, so it’s essential to continue learning and developing your knowledge and skill set. If you take courses—either online or in person—you can write off those costs.
Again, the course needs to be work-related to be deductible. So unless you have an Etsy shop selling handmade scarves, taking a knitting class isn’t deductible.
Also, keep in mind the training must be to maintain or improve your skills in your present career. You can’t deduct expenses to train or qualify you for a new profession.
Tax Write-Off #8: Advertising and Marketing
To promote your business and generate new clients, you might order business cards, maintain a website, email a monthly newsletter or pay for SEO services.
Advertising and marketing costs are deductible as long as they have a business purpose. Just steer clear of trying to write off personal expenses that may have some promotional value. For example, putting an ad on your personal vehicle won’t make all of your driving around town for personal errands deductible.
Tax Write-Off #9: Interest
Do you use a credit card for business expenses? If you carry a balance from month to month, you can write off the interest paid to the credit card company.
Again, you’ll need to separate business and personal expenses, so it’s a good idea to have one credit card that is used exclusively for business. Otherwise, separating the interest charged on personal versus business transactions could get complicated.
Taxes are just one of the many important jobs you’ll take on as a freelancer and business owner. Nobody wants to pay more than necessary, so make sure you track and deduct all of your eligible business expenses to reduce your tax bill.
This is an optimized post and was originally published on the FreshBooks blog in April 2011.