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.
Unpaid invoices
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.
Niche research
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.
Job hunting
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.
PayPal fees
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.
Professional advice
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)
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Nice Overview Bram….. Now i also can save more by using some of the tricks.
DKumar M.
Nice to see a good amount of insight laid out in one place! Helps make tax season that much less stressful!
Thank you!
good info, thanks!
Excellent article… Anyone got any tips like this for Spain????
Very nice post. I was wondering about a few of those expenses and now I know.
I had no idea the paypal fees could be deducted. It makes perfect sense, I just never thought of it before. Thanks for the tips!
What about the miles you drive to the coffee shop or to a clients business?
Crazy question –
I’m new to freelancing (not new to coding in general) and I just collected the first half of a new project. How necessary is dealing with taxes when I’m really only dipping my toes in? Should I have to break a certain amount before I worry about it?
Thanks for the deduction information. It makes a tremendous difference in your viability and profitability if you understand how to leverage the simple tax advantages that are provided to any business owner. Here are 5 other suggestions to consider:
1. Mileage – keep a written log of beginning and ending odometer readings. Over the course of a year, it adds up.
2. Did you purchase a new computer or software? Did you add bookshelves or a desk for your home office? You can are depreciate those assets or, in many cases, take the full cost of those purchases in a single year. I use a simple rule-of-thumb and classify any expense over $100 as an asset so, for example, the $69 anti-virus software package would be expensed in a miscellaneous category of software or supplies under $100.
3. Did you purchase that computer on a credit card? Are you paying interest on it? Deduct it.
4. Get a CPA. It’s worth it.
5. Talk to your CPA and company that manages your IRA about setting up a Self-Employed IRA (a SEP)
Dan,
Worry about it from the get go. There are few things worse than having the gov’t after you because you didn’t pay your taxes. You won’t get the same treatment as the people recently appointed to Obama’s cabinet. Besides, keeping track of these things can help offset any income from a full-time job as well reducing your overall tax liability.
Also, I’d recommend thinking long and hard about taking a deduction for the space you use in your house. If you own the house, when it’s time to move and sell it, you may end up having to pay taxes on any earnings off the house because of it. http://preview.tinyurl.com/chg57b
I love articles with tax tips. This can be a difficult area to grasp for many of us (I know it is for me!) and the help is greatly appreciated!
You rock Thursday- I’m going to send some FAQ people to this list.
Dan- officially, in the U.S., you have to tell the IRS about ALL your income, cause they want part of ALL of it. Now, maybe I recall something about hobbyists and etc., but if you’re looking to freelance this often–start keeping track of both income AND expenditures.
Great article, thanks I was always wondering how many things I could write off for taxes.
Ah, I love tax season. Don’t forget to write off your trip to the accountant to prepare last years taxes
As well as all your software/hardware upgrades, technical books, training/tuition (if you were expanding your present skill sets), cell phones, internet, and if you deal with large format media, the 52″ LCD you may have bought on black Friday :p
Always use a good accountant, it’s tax deductible too, so you might as well get a good one.
First of all, any professional accountant or tax professional would refuse the tip. We are not allowed to accept tips per IRS tax codes and professional ethics. IRS considers those tips to be a bribe, and therefore CANNOT be claimed as an expense.
Uh Tanya… he said trip.
Didnt know about unpaid invoices. Thats always good to know
This could not have come at a better time!
What about internet access. I have a couple of servers sitting on my cable internet connection. These servers are for business purposes only. I feel like you should be able to write off your at least some of your internet connection. Also that brings me to power. Those servers need power to run??? How about that?
The internet fees are deductable as they are required for the business. The power is a bit more complex as you’ll need to allocate the cost based on calculations for only what the servers consume. This amount may not be worth the risk/trouble
Now this is a great article…tax deductions. I love it…great choice and good info.
This is really great advice. I was just at Starbucks today meeting a client, and you know what, you’re right… it does add up! The PayPal fees was something I NEVER thought about, so thank you for that little gem! Great post!
Unless you have a detached building to work in, trying to write off a portion of your home is (while legal) a good way to get audited. Check with your attorney.
Great post here–I feel April 15 looming over my head. It’s gonna be a rough one this year. Oh boy. This helps though. What do you know about travel expenses if you wrote something about somewhere you visited (or vacationed). And how about education expenses? I took a copywriting class–does this count as an expense?
I don’t have to do this yet as I’m still starting out but this is an excellent article that I’ll save for future use. Thanks Bram!
Good attempt to pull all this together, but I think you are wrong about two of these items:
1. The home office deduction is not available just because you use your home for business. You say you can take this deduction “If you work out of your house” but that’s not what the IRS says. The IRS says you have to use the space “exclusively” and “on a regular basis.” I don’t read “exclusively” as merely working out of your house. Exclusively is a pretty strong word compared with other places in the code that use language like “primary purpose.” “Exclusively” means a room of your house that you NEVER go into except when you are working and you NEVER store anything in there except for work items. This deduction will not be available to most freelancers unless they have a retail storefront or something similar.
2. You say only charitable deductions are not deductible as business expenses. This is wrong. Any expense of money is deductible as a business expense if it is “ordinary and necessary.” If you are attorney that needs to contribute to the little league team to show support for the community and all the other attorneys do it, that sure sounds “ordinary and necessary” regardless of whether the little league team is incorporated as a non-profit.
1. Regarding home office deductions – I was just going to say that, Dave! Such a common misconception. Thanks.
Another little tip when it comes to using meeting expenses. If you keep a good daily log you can go back to make sure you’re capturing all expenses for those days. Also I use a CC for all business expenses so it tracks itself. At the end of the year I get a categorized summary statement.. It’s awesome.
Quick question???? How do you get so many people to comment on your blog? Share your knowledge:)
Home Office deductions:
The home office deduction under IRS rules only applies if the use is 100% for business.
Something that often happens in an audit is that the Agent reviewing your information will ask for an estimate of the use of the space for work: 99%? 70%? Do you ever take personal calls in your home office?
Very tricky of them: ANYTHING less than 100% usage means that the deduction cannot be taken.
At all.
This is one example of an important reason to get a CPA to file your returns, and then if you are audited to have them go to your Audit review in your place: A CPA knows what a question means, and how to answer, so it is much safer for then to go and for you to stay home.
Studies show pretty strongly that returns processed by an accountant are far less likely to be audited, because a CPA can handle themselves more ffectively in an audit.
And also because people who do their own taxes are much less likely to keep their paperwork (receipts & such) in order year after year.
Coffee!
Just in time. Thanks!
Didn’t know about unpaid invoices! Thanks! Just like to reiterate what a few above have said in regards to getting a CPA. I got a hold of one last year and I would highly recommend contacting a good one. Tallying and reporting business receipts, calculating home office deductions etc. is daunting on your own and mistakes are likely.
On the topic of non-profits, if you offer a discount on services to non-profits, can you present the discounted percentage as a charitable contribution?
I know, ask a tax advisor, but I think a lot of us “do” go easy on the non-profits and I wondered if anyone had tried it.
Being an accountant with a masters degree in Taxation who happened to stumble upon this article & specializes in independent business’, I thought I would perhaps offer some additional tips & thoughts:
1. Expenses charged on a credit card can be deducted even if the credit card bill has not been paid. This applies to Cash & Accrual basis taxpayers.
2. Business equipment required to be depreciated (Peter’s $100 rule post is a sound strategy) must normally be written off over it’s useful life. However, you can elect a “Section 179″ deduction & write off up to $250,000 of new asset purchases
3. The “Home Office Deduction” DOES NOT require you to use your space 100% or “exclusively” for business. Form 8829 allows for direct & indirect expenses of your home. Direct expenses are for exclusively used areas, indirect expenses are for the entire house & the deductible portion is determined on a square footage % or # of rooms used in the house %.
4. Unless you are reimbursed, tax free, by your employer at the IRS mileage rate (55 cents/mile for ’09), you can take a mileage deduction. Simply enter the mileage deduction at the full rate on Form 2106 line 1 vehicle expenses, then subtract out the amount of reimbursements from your employer by entering them on line 7& completing the form.
5. There is also a NEW first time home buyers credit for homes purchased between 8/8/08 – 7/1/09 that can be taken on the 2008 tax return. The credit equals 10% of the purchase price, up to $7,500! The only caveat is that you must repay the credit by reducing your refund by $500/year for 15 years starting in 2012. However, if you sell your home at a loss during the repayment period, you can trigger a cancellation of the repayment.
Here’s a comprehensive example: For 2008, person X makes $30,000/ year. They purchase a $2,000 computer on 12/31 & puts it on their credit card. They also use 1 of the 5 rooms in their house as an office, work from home 50% of the time & had $12,000 in expenses such as utilities, homeowners insurance, etc. for the year. They drive 200 miles a week to meet with clients out of the office & are reimbursed 30 cents a mile by their employer.
- The computer is deductible because it was purchased on the credit card before year’s end & by electing a section 179 deduction, they can write off the entire $2,000 in 2008.
- They have a mileage deduction calculated as such: (200*52)(.55-.30) = $2,600
- The home office deduction is calculated as follows: (1/5)(12,000)=$2,400. Because they work at home 50% of the time, it only means their maximum home office deduction is limited to 50% of their salary, less other employee expenses. So the limit on their maximum home office deduction is: (.50*30,000)-2000-2600=$10,400 & they are well below that.
The total deductions Person X has by following this strategy is: 2000+2600+2400 = $7,000!
Even at a 15% tax rate, this increases your refund by $1,050 even without utilizing the first time home buyers credit. If we also assume Person X buys a 75,000 house in 2008, their total refund increase from this plan would equal $8,550!
I hope this helps a bit. It sounds more complicated than it really is, though any accountant worth giving the time of day to will know exactly how to utilize all of these strategies.
Most of these tips are definitely works, and it will certainly reduce the main concern of your expenses fees. Thanks for posting it Bram, appreciated
The unpaid invoices item is misleading. It only applies if you use the accrual method of accounting and if you included the amount of the bad debt on your tax form as income, which doesn’t apply to most freelancers. Most freelancers use the cash method of accounting and cannot do anything about unpaid invoices. Even if a freelancer uses the accrual method, the better strategy would be to not include the unpaid invoice in your income at all since it would greatly increase your chance of being audited. Recording $1000 of income only to zero it out with $1000 of bad debt write-offs wouldn’t save you any money and would actually cost you money if you end up having to pay for an IRS audit due to the unusual accounting. For the majority of freelancers there is no way to get any tax credit for an unpaid invoice.
Check out this link for more details.
http://www.taxmama.com/Articles/baddebt.html
are you kidding me? you can write off unpaid invoices? i didn’t have any in 2008, but i sure had one in 2007: a magazine that stiffed me for $1,200 worth of writing. bastards.
Nice job, Aaron. You should go write for the IRS. It would reduce the level of April stress across the country.
I was hoping that your discussion of non-profits would also touch on one significant item that I’m sure confronts most freelancers at one time or another: donation of professional services. What designer has never been asked to donate a poster for an event or some other design to a local charity? I know that you can take cash and the donation of physical items as a personal deduction, but my understanding is that you can not deduct the donation of professional services. Is this so? Are there any circumstances under which it is possible to do it legitimately, and if so, how?
Nice article. It’s all definitely worth the research for tax breaks!
Very nice information and tips. Thanks FS!
@PGpljoseph
Just had this discusson on a personal chef list i belong to, but it applies under any circumstance where you’re donating your time.
Take a look at http://www.irs.gov/pub/irs-pdf/p526.pdf On page 5 it says:
———————————
Although you cannot deduct the value of your services given to a qualified organization, you may be able to deduct some amounts you pay in giving services to a qualified organization. The amounts must be:
· Unreimbursed,
· Directly connected with the services,
· Expenses you had only because of the services you gave, and
· Not personal, living, or family expenses.
———————————
I’d like to see this, and other similar things, included in a list of what you CAN’T legally write off as a deduction. What do you say, Thursday?
This are really good informationen to save some money, I didn’t know some of these tax deductions. I would love to read here more about finances and accounting.
Great input…thanx
This was just incredibly helpful; thank you.
Also– freelancers can fill out the Schedule M form to get the $400 Making Work Pay tax credit.
Super duper helpful. It kinda blows that a freelancer pays into it all year and still will probably owe, but if you deduct like a maniac you can still make it out ok. My only question is – how much to pay in throughout the year? Most people have advised me to pay every quarter. I set aside a % of what I make all quarter and then pay it. As for how much, I usually paid 25-27% on every paycheck at my last job. And that was while claiming 0. On a .gov website discussing self employment and taxes I read that I should be paying 40% as a freelancer! The idea of paying that much of what I make into taxes and still owing come April is kinda scary.
Its really helpful article for me to work as a freelancer..i didnt know many of these points to save money..thanks for sharinng with us..
I often go to Starbucks or other places for internet access. Although I don’t see it stated anywhere, I’m assuming it’s probably against some “agreement of use” to go to the coffee shop and use their internet access without being a customer.
So how about the argument that the cup of joe is an internet access expense?
Just a heads up about getting the receipt at Starbucks for tax purposes. Starbucks and other coffee shop purchases are NOT tax deductible. I was working on a national tour of a musical in San Diego and Chicago and when my father – a CPA – went to do my taxes, i was informed that I don’t get that back. Reason: coffee shops, regardless of what brand, are not a necessity to business — even if you wake before the crack of dawn, discussing a new project with a potential investor or whatever the reason. So, please, do as I do at the gas pump and starbucks – say NO to the receipt and check your balance online instead. it’s a much greener way of tracking money.
I also thank you for the Paypal tidbit…i didnt know that,and since I use them 100% for payments, I can deduct hundreds more this year than I thought. Thanks!!!
YAY,
KAREN
I’m hoping to get some help on what to do in regards to the tax when invoicing. I set up my LLC in NJ but the all the work thus far is in NY. I need to invoice a client whose project I brokered out and was completed in NY. Do I invoice with the
NJ or NY tax on the invoice? I also need to get a Resale Certificate. Do I get one in NY or NJ? Can you shed some light? Thanks much!
re: Meetings at the coffee shop
I thought u can only claim business meals when u r traveling away from home and spend the night there?
You can claim business meals IF you’re away from home overnight ON BUSINESS, OR if you’re entertaining a client, prospect, vendor, etc AND you don’t trade off who pays. No matter what the business purpose is, you can only claim a MAXIMUM of 50% of the meal. The IRS also excludes anything “extravagant”, which means you might want to put the Dom Pérignon on a separate, non-deducted tab. (You can separate out on a single receipt, but that gives you, accountants, and auditors extra headaches.)
Keep all of this in mind and you’ll be fine. Or just say screw it and eat the $100 in extra taxes it’ll cost; what’s it worth to you to save 12% of whatever you spent on eligible dining while doubling your chance of an audit? Unless you constantly entertain clients or go to lots of trade shows and conventions, probably less than the savings.
All of this would be a completely moot point if we could get the FairTax implemented. One tax, no need for complicated rules, deductions, etc.
This is a great article with some really helpful tips, thanks for writing it! I was looking for a list of what I could deduct as a freelance programmer and this has a few things I hadn’t even thought of.
How about the fees that places like guru.com and elance charge? i.e. I bill a client 1000.00, but elance takes almost 75.00 of that. Is that 75.00 deductible?
Excellent description of when you can write off a bad debt. I was hoping to be able to do this for several clients who did not pay. However, we do use the cash method and therefore cannot. Thanks for the clear explanation.