Freelancing is not a job, it’s a passion. While freelancers do take on contract work for companies and organizations, they are ultimately self-employed and must report as such to the IRS. There are complete freedom and total responsibility that falls upon the freelancer when it comes to self-employment to understanding the proper IRS write-offs, deductions and claims allowed.
Why did you choose to freelance?
· Flexible hours
· Being in control of your work and success
· Being your own boss
· No commute
What comes with being your own boss?
· Irregular income
· Paying your own retirement
· Little or no structure to your day
But we know that the advantages heavily outweigh the cons. So here we have broken down important tax deduction information as well as a list of IRS tax deductions that every freelancer should take advantage of each year to reduce the amount of taxes owed or increase the tax refund.
If you’re a freelancer, deductions and write-offs are the name of the IRS tax game.
Unlike W2 employees who pay taxes in on each paycheck, Freelancers are responsible for paying their own taxes to the IRS and their corresponding state. These taxes are mostly paid quarterly or in a lump-sum at the end of the year.
It is crucial that Freelancers record their expenses in order to reduce the amount of IRS and state taxes owed through deductions and write-offs. These expenses can include software, utilities, mileage, and supplies and are known as claims on tax forms.
Without tracking expenses, taxation will be due on the full amount of income rather than on the income after expenses are paid. As a self-employed individual, you will want to claim all of the deductions available to reduce your tax bill. It is important to keep in mind throughout the year that you will be responsible for paying your own income, Medicare and Social Security taxes.
What counts as a freelance deduction or write-off?
Although there are big tax responsibilities for freelancers, the good news is there are also many tax breaks and write-offs for them as well. The key is to use your income strategically throughout the year for the items that create the best tax deductions and the largest claims.
It is important to track the mileage of your vehicle, the cost of office supplies, software expenses, advertising fees paid, labor or commissions paid out, monthly bills related to the business, and equipment bought throughout the year. These are items that you can claim to help reduce tax liability, and some may even carry over to help with future years as well, depending on the percentage of depreciation you take.
Keep in mind as you file your taxes, that you do not have to claim all of your expenses or write-offs. If you want to reduce your tax liability as much as possible over multiple years, there are other options available, such as not claiming all of the depreciation of your items so that you still have remaining tax deduction for years to come.
Here are 7 tax deductions to be aware of—and how to take full advantage of them.
1. Accounting Software
Start with an accounting software, our favorite is QuickBooks, because they are affordable and user-friendly. Using QuickBooks, or any other vetted accounting software, will help keep track of costs such as bills, outsourced labor to other subcontractors, or office supplies. You can claim a monthly expense for the software or the annual cost of the program as well as any costs for software updates or add-ons.
Take an extra step by writing off your depreciable items if you still need a reduction of your taxes. Freelancers Union recently reported that the 2018 tax reform helps freelancers depreciate the price of items such as vehicles, computers, cell phones, and equipment. Each of these items depreciates at a different rate or percentage. Write-off the minimum of each depreciation and increase it later if needed.
3. Common Business Expenses
Remember to claim these common business expenses that are often forgotten: the portion of your cell phone bill used for business, the portion of your home internet or cable bill if you have a home office or are completely home-based, and your interest being paid for loans on equipment, vehicles, or other business items.
4. Home Office Deductions
Claiming your home office is a major deduction that can help in reducing tax liability. You will need the square footage of the area that is used as your office or the portion of the rent you pay for a home office, the portion of utilities used by your home office, renter’s insurance, repairs or office improvement expenses.
Vehicles are an important tax write-off. Not only can you depreciate your vehicles if you need additional tax reduction, but you can claim all miles driven for business purposes on a vehicle. The information needed for this deduction includes business mileage, commuting mileage, personal mileage, fuel costs, repairs and maintenance, the original cost of the vehicle, parking fees and tolls paid, interest paid, taxes, registration, licensing, and date of purchase.
As a Freelancer, it is common that you would have some sort of travel, meals or conference fees. This deduction is for any expense that was due to business including meals during meetings, hotel costs or costs accrued while researching or developing a project for a client. You may write-off up to 100% of business travel, however, you can no longer write-off entertainment expenses. This specific area is not so cut and dry, and the lines are often blurred as to what can and can’t be written off, so contact us or contact your accountant for specific guidance to ensure you are writing off and maximizing your travel deductions.
7. Business Licenses & Permits
Taxes and licensing is always a deduction that every Freelancer can and should claim. If you pay for any business license or permit annually, this is where you get to reduce your tax liability by writing off that expense at the end of the year. The other common expense in this category is your annual taxation to keep up with any Federal Employer Identification Number (EIN), Fictitious Business Name Licensing fees, or registrations with your state or county. Keep copies of these receipts to write-off the amount spent.
All of these are simple ways to reduce your tax liability, just be sure that you have receipts and bank statements to prove the amounts claimed as many self-employed individuals find themselves under scrutiny of IRS audits for proof of statements made on their tax returns.
With proper documentation and knowledge, this is nothing to fear. If you are self-employed, it is heavily recommended that to have professional help or complete your tax return for verified accuracy, especially when claiming your tax deductions with the IRS.
Are the tax rates lower?
As a W2 employee, an employer shares the tax liability for Social Security and Medicare taxes paid and reported to the IRS but as a self-employed freelancer, you have full responsibility for filing and paying those taxes.
As compared to a W2 employee, self-employed tax rates are higher. Self-employment tax is 15.3%, which account for both Social Security and Medicare.
It is important to keep the tax rates in mind when budgeting your business finances throughout the year. This is because tax brackets are released by the IRS annually. A thorough breakdown of the 2018 tax brackets can be found online. If you choose to pay IRS taxes quarterly, keep all payment receipts and proof of mailings in order to prove these payments on your tax return.
As a self-employed freelancer, the most common way to avoid an end of the year surprise is to continuously calculate, file and pay payroll taxes. Online, there are tons of tools available that will help you calculate your employment taxes.
Increase in business expense tax deduction
If you’ve made a significant income this year keep in mind that there are options to increase your business expenses by making strategic business purchases. The most beneficial purchases that many Freelancers can make are vehicles, software purchases, advertising fees, and supplies or equipment.
When making purchases to reduce IRS tax liability, find items that will add value to your company especially if you can purchase an item that qualifies for a depreciation too.
What else do I need to know about this tax deduction?
Another key strategy to reduce your IRS tax liability is to file an itemized deduction when it comes to your personal expenses. These include medical expenses, donations to charity, and mortgage expenses among others. The combination of your business expenses and personal expenses should help to reduce your tax bill at the end of the year.
Tracking your expenses can become very mundane and itemizing deductions and depreciation should always be done with the help of a professional. A good way to ensure you’re tracking all your business expenses and maximizing your deductions is by using a bookkeeping service to do it all for you.
Are you taking full advantage of your deductions? Let our bookkeeping services cater to your freelancing needs and make taxes a breeze.
What deduction are you going to claim this year?