12 Tax Deductions Every Freelancer Should Know About
The freedom and flexibility of being your own boss can be an enviable lifestyle. But when it comes to taxes, independent professionals don’t have it so easy. Many not only have to file quarterly tax payments, but there’s also the additional burden of paying the approximately 15.3% of Medicare and Social Security typically covered by an employer. And by (Monday) April 18th, freelancers have the daunting task of reconciling a year’s worth of cash flow, on top of daily deadlines and hustling for new clients. For the millions of Americans who freelance, tax season can be messy and complicated.
The good news is that there’s also a substantial number of tax deductions to offset taxable income for those who perform freelance work. The bad news is that most independents don’t do enough strategic planning. Those on the conservative side tend to overlook legitimate expenses, while more aggressive types can go too far with deductions. According to the United States Accountability Office, independent workers are collectively overpaying approximately $7.4 billion every year.
With tax season in full swing, you can’t afford to miss out on any breaks. Here are 12 deductions to help you maximize your deductible expenses and lessen your tax bill to Uncle Sam.
1. Car Expenses
If you use your car for anything work related (other than commuting from home to work), car expenses can mean substantial deductions. You can claim all mileage if you drive from your usual place of work to another job-related site, including meetings with clients and suppliers, trade shows, picking-up office supplies, and business travel.
The standard mileage rate for business for the 2015 tax year is 54 cents per mile, which is unfortunately down from 57.5 cents for the 2014 tax year. This means that claiming your actual costs may be more beneficial than the standard mileage deduction.
Using the standard mileage rate means you only have to record the miles you drive for business. But with this year’s reduced rate, claiming your actual costs may be more beneficial. You’ll have to consider costs related to vehicle mileage and maintenance, including repairs, gas, oil changes, a new car purchase, car payments, tires, licenses, parking fees, highway tolls.
2. Travel Expenses
As long as the primary purpose of your trip is business (if you need to be away longer than a normal day’s work and/or sleep at a hotel because of work), you can deduct your lodging and transportation costs. The deduction for business meals is 50% of the cost.
Consider all deductible travel expenses including plane fares, bus and train tickets, car rental fees, your own car expenses, parking and toll fees, cab fares, meals, board and lodging, tips, laundry and dry cleaning, and shipping of promotional materials. And remember that careful record keeping is key to successfully claiming business travel deductions.
3. Meals and Entertainment
Contrary to popular belief, stopping for a morning coffee at Starbucks is not actually a business expense, unless you’re meeting with a client or traveling for business. You can claim 50 percent of business meal and entertainment expenses. Expenses for meals or entertainment while networking can also count if there’s a clear business purpose. Along with itemized receipts, keep notes of who you met and your business relationships. You can also keep track through apps like Expensify or Bench.
4. Health Insurance
The cost of health insurance can be one of a freelancer’s biggest expenses. Thankfully, you can deduct up to 100% of the cost of your health insurance premiums (on your Schedule C). This can include yourself and your family (as long as the plans are under your name and not your spouse’s) for health, dental, and long-term care insurance premiums. Stride Health is a great resource for independents looking for health coverage.
5. Retirement Contributions
One of the most effective ways to save money before April 18th is to invest in your retirement. The income you contribute to an Individual Retirement Account (IRA) is an effective way to not only plan for your future, but to reduce your taxable income for the year. Just make sure that the yearly amount you contribute to an IRA doesn’t exceed your total earned yearly income. You can contribute up to the $5,500 limit for the 2015 tax year and save over $1,000 on your taxes.
6. Continuing Education and Professional Development
Freelancers always need to stay on top of the latest skills, technologies, and innovations in their fields, as well as network with other entrepreneurs and industry leaders. You can write off any online or offline courses, classes, workshops, seminars, webinars, conferences, or materials related to helping you grow your freelance business, from building a website from scratch to attracting more clients.
Also consider any costs for educational books, eBooks, audio, research, periodicals, and professional or trade subscriptions, as well as dues for professional organizations and membership fees.
7. Home Office
About 26 million American households have a home office, but only 3.4 million taxpayers claim the home office tax deduction (according to a 2010 survey, the most recent year for which figures are available). The home office deduction has often gotten a bad rap for being a red flag for a tax audit. But with the growing trend of working from home, that no longer seems to be the case. To qualify for the home office deduction, your home office area has to be your primary place of business, used regularly and exclusively for business.
In recent years the IRS introduced a Simplified Method for calculating the home office deduction without the paperwork or record-keeping of calculating actual expenses or depreciation values. You can simply deduct $5 for every square foot of your home office space up to a maximum of 300 square feet. But if you have a large home office, you may prefer to use the Traditional Method and calculate the actual expenses you incur in your home (Form 8829).
You’ll also be able to deduct your home’s depreciation value, utilities, property taxes, mortgage interest, repairs, maintenance, and cleaning, as well as renter’s or homeowner’s insurance.
And with a home office, you can deduct car mileage for any trips from your home to other business locations.
8. Internet, Telephone and Utilities
Freelancers who work from home can also write off a portion of their gas, electricity, heating, and air conditioning costs. Your tax-deductible utility costs should be based on the percentage of your home that’s occupied by your office.
Internet and phone bills are also deductible as utility expenses. If you use these for both personal and business, you can deduct a percentage of the costs based on your usage for business purposes. Take note that if you claim the simplified home office deduction, you won’t be able to deduct utility costs.
9. Advertising and Marketing
In our increasingly interconnected world, freelancers have to promote their personal brand and services across a variety of channels. Whether you use traditional advertising methods or spread the word online with Twitter, Facebook, LinkedIn, and other social media or blogging platforms, advertising and marketing are fully deductible expenses.
You can claim all expenses related to promoting your business (Schedule C, Form 1040), from business cards, flyers, brochures and ads, to Google AdWords and improving your SEO through a marketing firm.
10. Website, Software, and Online Services
A website is both your storefront and business card. Having a user and mobile-friendly site is crucial to a freelancer’s success. You can fully deduct business website expenses (as “other expenses”) including web hosting and domain fees, as well as design, development, and maintenance costs.
Also integral to a freelancer’s business are project management, accounting, and marketing software and online subscriptions. You can fully claim the cost of any online tools for running your business (Schedule C, Form 1040), from video editing tools to subscriptions like Adobe Creative Cloud, Evernote, or Dropbox, or fundamental programs like Microsoft Office, Adobe Acrobat, Bitdefender Antivirus, MailChimp, ZenDesk, or Contactually.
11. Technology and Electronic Gadgets
Independents can deduct the partial or total costs of tablets, laptops, cameras, iPhones, or other electronic devices used for business. For some devices, you can choose to deduct the entire cost in one tax year (section 179 deduction) or else the depreciation over a number of years. Either way, you’ll be able to cut your tax bill. If your gadgets are used for both business and personal use, you’ll need to calculate the percentage you use them for work.
12. Unpaid Invoices and Debt
While clients can sometimes be late paying invoices, sadly some don’t even pay by the end of a tax year. Fortunately, freelancers can claim unpaid invoices as a loss due to bad business debt. You’ll just have to show that you’ve taken the appropriate steps to collect the debt with your records of attempting to recover payment. You can also claim interest paid on your business credit card or business loans.
So, before April 18th rolls around, be sure to capitalize on these 12 tax deductions (provided you qualify) to take full advantage of the perks of being a freelancer and being your own boss.