As a freelancer, you can lower the amount you owe in taxes and save significant amounts of money through what are called 'deductions.' Deductions are nothing more than business expenses that you can subtract from your total (aka gross) income to arrive at your taxable net income.
How do deductions work?
Taxes, both income and self-employed, are calculated from your net income. For example, let's say you made $50,000 (gross income) last year from your freelance gig as a videographer. Last year you also spent $5,000 on new cameras, lighting equipment, and transportation to your photoshoots. These expenses all qualify as business expenses and can therefore be used as deductions. After deducting your business expenses from your gross income, your net income - the amount that is taxable - is $45,000 ($50,000 - $5,000). Assuming a tax rate of 30%, your total in taxes comes to $13,500 ($45,000 *30%). If you hadn't applied your deductions your tax rate would have been $15,000 ($50,000 * 30%), $1,500 more! As you can see from this example, deductions can save you a lot of money!
What expenses exactly can I deduct?
As a freelancer, you can deduct all "ordinary and necessary" According to the IRS, an "ordinary" expense is one that's commonly incurred in your business. "Necessary" means that it's helpful and appropriate to earning that income.
Here are some common expenses that can be deducted:
1. Travel and Hotel
If you travel to visit clients or attend trade shows, you may be able to deduct these expenses. Business travel expenses can include transportation and accommodation costs, and the IRS allows a 50% deduction for business meal expenses. It’s important to note that you shouldn’t attempt to write off any expenses associated with sightseeing and leisure travel, which can trigger an audit.
2. Home Office
Many freelancers work out of their homes in the early days, especially when their businesses are first getting off the ground. As a result, the IRS allows self-employed persons to deduct the portion of their mortgage or rent going to a home office.
To qualify for this write-off, you must have a specific area in your home designated for working, and you must refrain from using it for other purposes. When claiming this deduction, you can calculate the deduction’s value using either the regular or simplified home office deduction option.
While business owners with offices outside their homes can deduct 100% of their utilities, freelancers who work inside the home can still write off a portion of this cost. To determine how much of your utility costs are tax-deductible, calculate the percentage of your home occupied by the office.
Along with gas and electricity, freelancers can deduct the costs of heating, air conditioning, wifi and phone service. Be aware, however, that you cannot deduct the cost of utilities if you claim the simplified home office deduction.
4. Professional Development
As a freelancer, it’s important that you find ways to stand out from your competitors in the industry. To keep ahead of the pack, many freelancers attend classes and educational seminars.
Understanding that the cost of these expenses can add up, the IRS allows freelancers to deduct expenses related to professional development on their tax returns. Additionally, self-employed persons can write off dues for professional organizations and membership fees.
5. Advertising and Marketing
In our increasingly connected society, self-employed persons have to engage in marketing and advertising if they hope to stay competitive. The IRS permits freelancers to write off the cost of flyers, web advertising, business cards and print ads among other marketing expenses.
With a majority of consumers using the internet to research purchases, creating a mobile-friendly, responsive website is crucial for a freelancer’s success. Luckily, self-employed persons can deduct costs related to their business websites, including domain fees, design, building costs and maintenance.
These days, most freelancers spend their days staring at computer screens. From sophisticated video editing programs to basic options like Microsoft Office and Adobe Acrobat, software can be expensive and hence makes a useful deduction for small business owners and freelancers.
8. Mileage and Gas
Do you regularly drive to meet clients or suppliers? If so, you should take advantage of the tax deductions available for costs related to vehicle mileage or normal vehicle wear and tear. You can choose between two types vehicle-related deductions: the standard mileage option or the actual expense option.
The standard mileage option allows you to make a deduction based on how many miles you’ve used for business purposes. The actual expense option allows you to figure out the cost of maintaining your car with respect to the actual cost of keeping it maintained for business use.
9. Unpaid Invoices
It’s no secret that clients are sometimes late in paying their invoices, but some never pay at all. Fortunately, the IRS allows self-employed persons to deduct unpaid invoices as a loss for their businesses. Keeping a detailed list of unpaid invoices along with each invoice number will help you properly take the deduction.
If your freelance business is successful, you may be thinking about incorporating in the near future. The IRS permits new businesses to deduct expenditures associated with incorporation including state fees and legal costs during the business’ first year of operation.
11. Office Supplies, Equipment, and Furnishings
You can also deduct expenses related to the purchase of home office supplies and computer equipment. This includes office furniture like a new stand/sit desk. Besides a new desk, other big-ticket office items may include an ergonomic chair, a printer, or a new laptop. And, don’t forget about smaller everyday office supplies like printer paper, notebooks, paper clips or anything else you need to run your business. These are all typically deductible too.
This is an expense that is often overlooked, especially if you’re a newly minted freelancer. Yet, if you have any type of insurance that extends to your business, it may be tax deductible. This can include insurance paid for liability, theft, worker’s compensation, malpractice, disability, and maybe even health insurance premiums.
13. Professional Service Fees
Did you hire a lawyer to help you incorporate or an accountant to handle your bookkeeping? If so, you can usually deduct these professional fees. You can also normally deduct fees for other professionals you hire for your business, including an SEO expert or graphic designer.
Interest on a business loan from a bank is a tax-deductible business expense. Credit card interest is not tax deductible when you incur the interest for personal purchases, but when the interest applies to business purchases, it is tax deductible.
15. Self-employed tax deduction
You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.
16. Retirement Plan Contributions
One deduction you can take going into business for yourself that is especially worthwhile: the deduction for self-employed retirement plan contributions. Contributions to SEP-IRAs, SIMPLE IRAs, and solo 401(k)s reduce your tax bill now and help you rack up tax-deferred investment gains for later. All workers younger than age 50 can deduct up to $6,000 in contributions made to a traditional IRA in 2019. For workers age 50 and older, up to $7,000 is deductible. However, self-employed individuals can use a SEP IRA which lets them contribute – and deduct – as much as 25% of their net earnings, up to $56,000 in 2019.
Filing taxes as a freelancer can be very stressful and costly. However, by taking advantage of all possible deductions, you can minimize your tax burden and give your business the chance it needs to grow. With Maverick, you can maximize your deductions by using their automatic business expense detection tools.