Did you know that as a freelancer you are entitled to certain tax breaks? You can claim almost all the same deductions as those large businesses. These include the costs of running the business, which a broader category than you might assume!
Is the expense both necessary and ordinary? Is the expense accepted and common within your field? Is it appropriate and helpful for your business?
If so, it’s deductible!
Those terms might seem a little vague, so let’s clear up any confusion. Learn more about freelance tax deductions you might not know about in this blog.
Contents
Tax Deductible Expenses for Freelancers
You’re entitled to certain deductions as a freelancer. Which deductions you can take depends on the structure of your business. Check these out.
Sole Proprietorships
In a sole proprietorship, you individually own, as well as manage, the business. This is a popular way for freelancers to structure their business because as the owner, taxes and any business income are paid by you and are included in your personal income tax.
Limited Liability Company (LLC)
If you want more flexibility in your management structure then an LLC might be the choice for you. You’re protected from personal liability and you can decide how you’d like to be taxed. These choices include sole proprietorship, C corporation, or S corporation.
S Corps and C Corps
The S Corp structure isn’t very popular (or even necessary) for freelancers. It’s the most complicated and most expensive form of business. But, you can make more money than you would as a traditional employee doing the same job.
This is possible in a C Corp because you can divide your profits among your distributions of company profits and your employee wage. The latter is taxed at a higher rate (self-employment), but the rest is considered to be business profits and is taxed as such.
Common Freelance Tax Deductions
You might not believe it, but 70% of freelancers in the US don’t file any expense deductions on their taxes. This is pretty shocking. Make sure you’re maximizing your deductions.
Startup Expenses
Some common startup expenses include marketing, research, and equipment purchases. Tax-deductible professional fees include an accountant, attorney, marketing professional, etc. These costs can only be deducted if you started your business within the calendar year of your filing taxes.
If you’re taking care of marketing on your own, you can deduct those costs as well. If you didn’t happen to start your business in that year, you can deduct the above costs if you were still in the middle of buying or starting the business.
Research efforts on which type of business to start and organizational expenses don’t count, unless you are setting up an S Corp or an LLC.
Home-Based Business Deductions
In a home office scenario, you have to follow 2 general rules:
First, a specific area of your home must be used only for running your business. Second, it must be the principal place of your business.
So, if you do meet the above 2 criteria, take the following 2 steps to figure out your deduction:
- Calculate what percentage of the home’s square footage you use for your business.
- Calculate what percentage of your mortgage or rent, utilities, etc. you use for your business.
Tax deductions for freelance designers, for example, would include studio space, computers, software, art supplies, and anything else following the deduction rules. Freelance graphic designer tax deductions also include website assistance, creative assistance costs, software, and more.
Another way to find your office or studio space deduction is to take $5 for each square foot of the home you use for your business. But, you can only do this for spaces up to 300 square feet. For specifics, talk to a tax expert or take a look at IRS Publication 587.
Self-Employment Health Insurance Tax Deduction
To see if you’re eligible to take the self-employed health insurance deduction, consider whether you have a net profit for the year. Adjust for premiums you paid out for your health insurance policy.
This includes medical care coverage and certain long-term care insurance policies for yourself, your dependents, and your spouse. The policy covers any kids under 27, even if they aren’t dependants. Any premiums left unused will be an itemized deduction on your Schedule A (Form 1040 or 1040-SR).
Car and Travel Expenses
Running from meeting to meeting? Running errands to grab supplies? Maybe you had to travel for a seminar and you’re wondering if you can deduct the gas expense?
The answer is yes! Keep a detailed log and all receipts associated with your vehicle’s business use. Fuel, repairs, mileage, and even maintenance are all deductible expenses for freelancers.
The IRS allows a certain amount of money to be deducted per mile, and this changes every year. Ask your accountant for the updated amount. According to NerdWallet, the 2021 rate is 56 cents per mile.
If you travel for the sales and marketing of your business, you can deduct this. Also included are train fares, plane tickets, rental cars, hotels, and meals. You can even deduct phone bills, tips, and dry cleaning!
What About Entertainment and Gifts?
In 2017, these deductions were eliminated via the Tax Cuts and Jobs Act (TCJA). These are no longer allowed. Learn more about freelance tax deductions if you have any confusion.
What About Charity?
Yes, but only those charitable donations approved by the IRS are included. Note that these will have to be done on your personal tax return.
Education and Class Supplies
Yes, you can deduct these as long as it for “qualifying work-related education.” Tuition and fees, as well as supplies and rides to and from your place of learning, can be deducted. This will lower your income from which income tax and self-employment tax are taken.
Loans and Business Insurance
Freelancer tax deductions include the interest you paid on a business-related bank loan. This is considered a business expense.
Business Insurance
You can deduct any premiums on your business insurance. These include fire insurance, liability, and more.
You’re Part of The Gig Economy
According to the IRS, if you’re earning income by providing on-demand goods, services, or work, you’re part of the “gig economy” and thus a freelancer.
The IRS has set up a website for those who fit this description called the Gig Economy Tax Center. This can help you find the correct tax forms and learn how to keep accurate records. Get advice on paying taxes and taking freelance tax deductions.
It’s so important for freelancers to take advantage of any savings they can get in order to be paid fairly. Large corporations take their share, so why shouldn’t you deduct all your necessary business expenses? Take the time to keep good logs and think about hiring someone to help with your finances.
If you found this article helpful, check out more in our Finance and Law section!
