10 Tax Deductions Freelancers Can Make
Tax time can be especially stressful for freelancers: despite paying estimated tax payments throughout the year, it’s rare that a freelancer doesn’t still have to come up with some money for April 15 — or come up with a long enough list of deductions.
There are quite a few deductions available to freelancers that may not seem obvious when you first sit down with all those 1099s and receipts. But as long as you have the right documentation, you can write off plenty of deductions you may never have thought of.
Did one of your clients disappear over the course of last year, leaving you with an unpaid invoice or two? The IRS allows you to write off those invoices as bad debts. Writing them off as a freelancer is a little more complicated than for other types of businesses: that invoice must be included in your gross income, which means that you must use the accrual method of accounting (reporting income as you earn it). If you use the cash method, you didn’t need to report an unpaid invoice to the IRS at all. For more information, look at IRS Publication 535.
If most of your business comes from a specific industry — like a website designer who primarily creates websites for real estate agents — you can write off research into that area. Conferences, books and other research-related expenses are deductible. You’ll want to hang on to receipts for your research expenses.
Meetings at the coffee shop
Do you head to the local Starbucks whenever you want to discuss a project in person? If you buy coffee for the pleasure of meeting with a client, partner or other business contact, you can write off half of your expenses. It may seem like a small amount, but if you’re a freelancer who routinely uses a coffee shop as a work space, coffee costs can add up. Keep your coffee receipts and, to make things easier if you have to go back through your receipts later on, make a note directly on the receipt of who you had coffee with and why.
Any payments you make to access job boards and other lists — even if they aren’t for permanent jobs — are deductible. The same goes for any costs associated with joining a website that lets you bid on projects or other methods of buying leads on new opportunities. You’ll want to hold on to your receipts for any such expenses. If they’re online, either save them as PDFs or print them out.
Businesses are able to deduct credit card convenience fees because they’re a necessary cost of doing business. You can write off PayPal’s fees if you accept payment through that website, no matter how much or how little business you’ve transacted over the site in the course of the year. The easiest way to document those fees is to wait until the end of the year and print out your account history.
Virtual assistants and other freelancers
Subcontracting part of a project to another freelancer or hiring a virtual assistant can be an easy way for a freelancer to take on more work and make more money — and the expense to do so is tax deductible. You’ll want to document any such transactions carefully so that you can prove that your use of freelancers and virtual assistants is purely a contract arrangement, rather than employment — which you would have to pay extra taxes for. You’ll want an invoice from whoever you work with, as well as a record of when you paid the invoice.
Your home expenses
If you work out of your house, you can deduct part of what you pay towards utilities, insurance and mortgage interest. The home office deduction is one of the more complicated deductions you can take, but it’s worth it. You’ll need to use IRS Form 8829 in most cases to document your use, and you’ll need to know the exact area of your home as well as of the space you use as an office — you’ll figure the percentage of your expenses you can claim based on the percentage of your home you use as office space.
Cellphone and Skype
According to the IRS, you can’t deduct the expense of the first telephone line in your home, regardless of your use your home for business. However, in addition to any second phone line you might have, you can deduct your expenses for your cellphone (assuming you use it primarily for business) and applications like Skype.
If you find yourself in a situation where you need to consult with a lawyer or an accountant, for any reason related to your freelancing, you can write off those professional fees. Documenting such expenses is just a matter of having an invoice or receipt.
Payments to non-profits
While charitable donations are not deductible as business expenses, you can write off payments you make to non-profit organizations. The IRS’ favorite example is paying for an ad in a local church’s directory, but the cost to attend networking events held by non-profits and similar expenses are all deductible as well. You’ll need receipts. And, by the way, just because you can’t write off donations as business expenses doesn’t mean that you can’t write them off at all — they’re personal deductions instead.
Not all of the deductions listed above will be available to every freelancer, of course. Because it’s impossible to give universal tax advice, you’ll want to double check to make sure that you qualify for a particular deduction. Better yet, consult with an accountant or tax professional who can go over your specific situation with you. You can often write off the expense of hiring an accountant as another business expense, by the way.
It’s also worth noting that that these deductions meet the U.S. requirements — other countries have different tax laws. The following sites can at least give you a starting point on your taxes if you’re based in another country:
- Australian Taxation Office (Business Deductions)
- UK Revenue and Customs (Small Business Topics)
- Canada Revenue Agency (Small Business Topics)