Freelancing is an attractive way to earning a living. You get to work from home, set your own rates, pick your own clients, and even set your own hours. But, there’s a cruel downside to running your own business…one that often shocks new freelancers and makes seasoned ones raise their tiny fists, and that’s taxes.
If you gave dirty looks to your FICA and income tax withholding on your old pay stubs, wait until you try to do your taxes after your first year of successful freelancing. Freelancers have to pay the dreaded self-employment tax, and it’s not cheap. If you’re employed, your employer pays that extra tax (and gets the right to treat you like an employee). Once you’re on your own, you’re on the hook for it, and if you haven’t been paying quarterly taxes or saving up it can land you in tax debt fast.
Fortunately, if you’re self-employed, you have access to a broad range of tax deductions, including business meals, office supplies, and certain parts of your home. While we don’t expect you to study tax laws and codes (leave that up to your CO), you should at least be aware of some of the major tax deductions that you can take.
If you don’t claim the deductions, you’ll have to pay more in taxes. No one wants to pay more taxes than necessary, especially people trying to get a business off the ground. You may know the common ones like claiming a portion of your home as office space, but there are a lot of smaller ones that can add up to big savings if you track them all. Here then are a list of ten common deductions that most freelancers can take to reduce their tax burden.
Domain and Web Hosting Costs
You’re worldwide and you need a website that’s worldwide. Websites aren’t simply an option anymore, they’re a necessity. Domain costs and web hosting services usually run between $120-$140 per year for a single domain. These fees are business expenses that can be deducted in the ‘Other expenses’ line on your 1040. Even if you have a personal site that you’re hosting under the same account, it still counts. If you have a small army of websites or run high-end web hosting, you can save quite a lot of cash on your taxes by claiming this.
If you have domains and web hosting, you’re going to have net access too. Most modern freelancers do all their business through the internet. You can deduct the bill from your taxes, but there is a caveat. Legally, you’re only supposed to claim just the time you use the internet for work purposes. If you keep a strict time for working that’s easy enough to calculate. But most freelancers are on the clock all the time. You never know when a client will come in or when you’ll have to work late, or when it’ll be dead and you’ll spend the whole day watching YouTube.
If your freelancing time is very loose like this, you could try claiming the whole amount or take a guess. Have a conversation with your operator to see what the best strategy for your situation. Deductions for internet fees are listed under the utility portion of your return.
Depending on the type of freelancing business you have, you’ll have the opportunity to go to conferences, trade shows, and networking meetings. What better way to drum up business than to take your potential client out to your favorite restaurant? Many meals are deductible, even ones where you didn’t land the job.
However, it’s not so easy to prove that your meals were for business. Thus, you should always keep meal receipts you plan to deduct. If you can write down the name of the people you’re with on the back, that will help you keep track of the meals in case you ever do get audited.
Apps and Online Services
Do you use apps and online services like Skype, Dropbox, or Buzzsumo? Do you pay for them? The fees for these can really add up. These can be deducted if they’re integral to your business. The cost of any app or online service that you use in the day-to-day functioning of your business can be deducted completely from your taxes under the ‘Other Expenses’ part of your return. Even if you’re only paying a few bucks a month for a service like Evernote, it all adds up. Every little bit helps.
Yes, even the costs of your computer and computer upgrades can be claimed for tax deductions. If you use your computer for your business, then this is a great reason to keep your system current. Freelance writers should definitely take note of this deduction because it is easy to justify the purchase of your computer as a business expense. If you have a lot of computers or a very expensive one, you may want to have a conversation about depreciation with the one who handles your taxes. It doesn’t hurt to ask.
The trend in business software is to move completely to subscription-based models. Office 365, anyone? There are some pieces of business software that still come on DVDs and sit in a box, or are installed from a secure download. Adobe products are a prime example. If the software is used solely for business purposes, you can deduct the purchase cost of the software. Keep any receipts you have for the purchase of the software for your records. Just this deduction alone can justify the cost of buying expensive business software for a tax deduction later in the year.
This is another deduction that’s often missed. Any payment you make for advertising your business can be deducted. This is often missed by online advertisers. PPC ads and other forms of online advertising count just as much as television, radio, or sign advertising do. It all gets lumped into the deduction line for advertising on your 1040. The investment that you make in PPC won’t be a fixed cost, so it needs to be carefully tracked.
Do you do a lot of copying or printing? Did you buy a printer? Office supplies like these are also tax deductible. Yes, even those expensive printer ink cartridges! Technically, these office supplies must only be used for business purposes. Office supply deductions also apply to office furniture like chairs and desks. Even if you don’t have a dedicated area for your office, it’s highly likely that you’ll be able to deduct the cost of certain office furniture.
Freelance drivers like Uber and Lyft will definitely want to take this deduction. Costs related to the use of your vehicle can be claimed if it was done for business reasons. If you do a lot of driving as part of your business, the mileage can be deducted. You can use apps like Shoeboxed and MileIQ to keep track of the distance you’ve traveled for each trip for your records. You may also be able to deduct vehicle repair and gas payments as well but you’ll want to talk with your operator about that.
Finally, continuing education is another thing that can be deducted. If you take any sort of class or course that’s aimed at improving your business or skills related to it, the tuition can be deducted. If the skills are tangentially related they can also be deducted. For instance, if you learn HTML and CSS to spruce up your website for a freelance writing business, that can be deducted. Certification courses are a great deduction for programmers.
The reason deductions exist is because the government believes people shouldn’t be punished for paying for things that improve the economy. It is your responsibility to keep track of these expenses so you can deduct them from your taxes. A missed deduction leaves money on the table and hurts you in the long run.
Many people are afraid of taking deductions because they’re afraid of an audit. Most small businesses don’t have to worry about this unless business losses exceed business profits and they try to claim a really big return. This is a huge red flag to the IRS.
If you are worried about ever getting an audit, the key to surviving one is documentation. You should keep tax records and the documentation related to them for seven years. And yes, it might be an added expense, but having someone to keep track of the back-end office activities is also tax deductible. They will make sure that everything is in order, including the home office exemption.
Don’t be afraid to take advantage of small deductions. When taken together, they can save you thousands on your final tax bill, and can also give you the peace of mind you need to go ahead and make new business purchases. So don’t let the self-employment tax scare you. Claim all the deductions you can.