Are you a freelancer? If so, you are in good company. Last year, almost 40% of the U.S. population did freelance work.
As the gig economy surges and more people participate, it’s important to be aware of the taxes you owe and the deductions you can take. Those deductions can help lower the amount of taxes you owe and help you keep more of your hard-earned money, so you’ll want to claim what’s due to you.
Taxes for those who are self-employed can get complex, and tax laws can change frequently. It’s therefore wise to do your research or hire a tax professional who focuses on freelance taxes.
But whether you choose to work with a tax pro, or go it on your own, it can be very helpful to know about the self-employed tax deductions that are usually allowed. To help you get up to speed, read on for 25 tax deductions that many freelancers can take.
Self-Employed Tax Deductions You Won’t Want to Miss
When considering whether an expense is deductible or not, you may want this rule of thumb in mind: The Internal Revenue Service (IRS) guideline for freelancer tax deductions is that expenses must be ordinary and necessary.
If you purchase an item or incur an expense even if you weren’t running your freelance business, it likely would not qualify for a deduction.
Below are some key deductions you may be able to qualify for. Knowing and noting them can help you with financial planning for freelancers.
1. Home Office
Are you earning money from home? If so, one of the most common deductions for freelancers is claiming a home office on your taxes. To take this deduction, the designated space must be used regularly and exclusively for business operations, and must be the principal location where business is conducted.
You can take this deduction whether your own or rent. You can use the simplified method, which has a rate of $5 per square foot for business use of the home, with a maximum deduction of $1,500 (or 300 square feet), according to the IRS .
Or, you can use the regular method, which divides expenses of operating the home (including mortgage/rent, real estate taxes, utilities, home insurance) between personal and business use.
Calculating Home Office Tax Deductions
To maximize your deduction for a home office you may want to calculate both the simplified and the regular techniques to see which is higher.
• As mentioned above, the simplified method involves calculating your home office’s square footage (up to a cap of 300 square feet), and multiplying that by five.
• For the regular method, you would use IRS Form 8829 to figure out the number. While this is a more involved calculation (yes, some basic math is involved), it might yield a higher number.
2. Office Supplies
Looking for more tax deductions for freelancers? The materials you purchase to work in your home office, such as paper, pens, pencils, pads, printer ink, staples, paper clips, etc, can typically be deducted at full cost as long as the items are used for business.
3. Hardware and Equipment
If you require specific hardware, such as a laptop, personal computer, tablet, or other types of equipment to run your business, these purchases may count as deductions.
Or maybe you earn money from a side hustle like photography or jewelry making, which requires specialized equipment.
You may want to talk to your accountant about the best way to deduct these expenses, as some bigger purchases that will be used beyond one year may need to be depreciated over a set number of years, rather than deducted in full.
4. Web Hosting and Online Tools
If you have a website and pay fees for web hosting, these expenses can likely be deducted from your taxes. If you use other online tools for your business (such as Dropbox or Zoom), fees you pay for these services can also usually be deducted.
5. Phone And Internet Service
If you use the internet, a landline phone, or a cell phone for business at least some of the time, these services may qualify for a deduction.
You may want to keep in mind, however, that you can generally only deduct a portion based on your business usage.
6. Start-Up Costs
Here’s another freelance tax deduction: You may be able to deduct up to $5,000 of initial purchases and investments made to get your business up and running in its first year. Purchases that exceed that amount can often be deducted over time.
7. Employee Salaries
The cost of paying employees to work within a business can usually be deducted. These costs generally include both wages and benefits.
8. Self-Employment Tax
Are you a 1099 worker? Self-employment taxes cover freelancer contributions toward Social Security and Medicare. You can generally deduct the employer-equivalent portion of your self-employment tax, which is half the total self-employment tax.
9. Your Car
The entire cost of ownership and maintenance of any vehicle used strictly for business purposes can typically be deducted from business income (subject to some limits). For 2023, the standard mileage rate per the IRS for business-related driving you do is $0.655 per mile.
Cars driven for both business and personal use can also be deducted, but only for costs incurred while conducting business. It’s wise to set up a system to keep track of when you are driving for personal vs. professional purposes.
10. Unpaid Invoices
Also known as bad debt, unpaid invoices (meaning your business is owed money that it has no hope of reclaiming) may be deductible.
However, in order for the deduction to be allowed, it must be clear to both parties that the transaction was not a gift.
11. Business License
Depending on the industry, certain state and federal licenses may be required for a business to operate. However, there may be an amortization schedule to be aware of, meaning you would deduct percentages of the cost over time.
The fees paid annually to state or local governments for obtaining those licenses can generally be deducted.
It’s wise to look further into the tax code to be sure you understand how to properly take these deductions.
12. Qualified Business Income
This is a newer self-employment deduction. If you earn $182,100 or less as a single filer (or $364,200 as a joint filer) in 2023, you may qualify for a 20% deduction on your taxable business income via the QBI, or qualified business income deduction.
13. Product Supplies and Storage Units
For freelancers who sell products, the supplies purchased in order to make those products can usually be a freelance tax deduction.
The costs of keeping business supplies and assets in a storage unit can generally also be deducted, since storage is an expense factored into the overall cost of the goods sold.
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14. Business Loan Interest
If you’ve taken out a loan to help fund your business, you may be able to deduct the interest you incur from it as a business expense.
For this to be deductible, however, a freelancer must be legally liable for that debt. In addition, both the freelancer and the lender must intend that the debt be repaid and have a true debtor-creditor relationship.
Sorry, buying takeout and eating it at your desk isn’t tax-deductible. But if you are traveling for business, at a conference, or dining with a client, then you can deduct 50% of the cost if you have the receipt. If you don’t have the receipt, you can take off 50% of the standard meal allowance.
16. Transaction Fees
If part of your business involves processing credit card orders, you may have an additional freelancer deduction. The processing costs a freelancer may incur by accepting credit cards payments is usually deductible as a qualified business expense.
17. Attorney & Accountant Fees
The fees charged by attorneys and accountants that are related to operating your business are typically considered tax-deductible business expenses.
That includes tax preparation fees, as well as any additional tax resolution expenses that pertain to your business.
18. Education Costs
Freelancer deductions can include the cost of education that helps you maintain or improve skills needed in your present work. This tax deduction also typically includes costs for books, supplies and even transportation.
19. Industry Events
Fees for attending conferences or conventions that are business related can typically be deducted.
Not only are the admission or registration fees often deductible, but all reasonable travel expenses accrued in order to attend the event may be deductible as well.
20. Promotional Materials
Tools used for marketing, advertising, and the general promotion of a business are considered deductible expenses. That includes advertising your product or service on social media or elsewhere.
Any expenses incurred in order to influence legislation (such as lobbying), however, are not deductible.
21. Business Membership Fees
While you generally can’t deduct dues or fees paid for memberships in clubs organized for recreational or social purposes, dues paid to join organizations that align with your specific business industry are usually considered deductible.
This includes organizations, such as boards of trade, chambers of commerce, and professional organizations (like bar associations and medical associations).
22. Business Travel Expenses
Travel costs that are associated with conducting business are considered valid income tax deductions, as long as they are ordinary and necessary and last more than one workday.
This can include flights, hotel stays, meals, getting around locally via bus/train/ride sharing services, even dry cleaning or laundry expenses while you’re away from home.
You may want to keep in mind that lavish and extravagant travel conditions generally do not qualify for deduction.
Also, day-to-day commuter expenses between home and business are not typically deductible.
23. Business Gifts
If you give a gift to a client or vendor as a thank you for conducting business with you, the cost of the gift is generally deductible up to $25 per person per year.
Extra costs such as engraving, packing, or shipping aren’t included in the $25 limit if they don’t add significant value to the gift.
24. Health Insurance
Self-employed individuals with qualifying policies are typically allowed to deduct premiums for health, dental, and long-term care for themselves and their families.
25. Retirement Plan Contributions
Just because you don’t work for a large company doesn’t mean you can’t benefit from a tax-advantaged retirement plan. Indeed, freelancers often have even more options for saving this way.
Two self-employed retirement options you may want to consider: a traditional IRA (which allows you to contribute up to $6,500 per year in pre-tax dollars if you’re under 50, and up to $7,500 if you’re older) and a SEP IRA (which allows you to contribute up to 25 percent of your income for a maximum of $66,000 per year as of 2023).
Claiming Tax Deductions
Why is it important to claim tax deductions? They will help lower how much you pay in taxes and increase how much you keep to spend and save.
If, say, you earn $120,000 in a given year and can claim $25,000 in tax deductions, then you would only be paying taxes on $95,000. That can make a big difference in your daily financial life as well as your ability to build wealth and hit your financial goals.
Tips for Freelancer Tax Deductions
If you are a freelancer, there are a couple of smart guidelines to follow as you move through the tax year.
Keeping Records of Everything
As you earn, spend, and save as a freelancer, it’s important to make a budget and track where your money is going. Keeping records of how much you are paid from different clients or customers, what you are spending on your business, and when and where those expenses are incurred (and even how they are paid) can make a big difference when tax preparation time rolls around.
Also, if you ever need that information if audited, you will be glad you have those files.
Managing Your Personal and Business Finances Separate
As you have learned, it’s important to keep your business and personal finances separate when you are self-employed. This means your workspace, your transportation and meal expenses, and the like.
This will have important implications at tax time. For instance, you may have to parse how much of your rent or mortgage and your utilities actually go towards your home-based business vs. personal use.
• Opening a Separate Bank Account for Your Business. It can be a smart move to keep your business finances separate from your personal to clarify your professional earning and spending. Many financial institutions offer business accounts to meet these needs, or, if you are just launching a side hustle or have a small, part-time gig, you might simply open up an additional checking and savings account to start.
Working With a Tax Professional
It’s not always easy to decipher the tax code as a freelancer or know which expenses qualify and to what expense.
Sometimes, working with a qualified tax professional can help. They are trained to know the ins and outs of the law and can guide you on correct tax filing.
The IRS offers guidelines for choosing a reputable tax professional that can be worth reading.
As a freelancer, you can often lower your tax liability by deducting expenses that were incurred to operate your business.
There are a wide range of deductions you may be able to take, including some or all of your expenses for a home office, supplies for that home office, business events, advertising, self-employment taxes, and more.
In addition to managing your business income, you’ll also want to consider the full breadth of financial services you need, and compare which banking partner is best for your needs, whether personal or professional.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Do freelancers need to declare income?
Yes, if you are a freelancer, you need to declare your income and pay taxes on it. It is wise to pay quarterly estimated taxes to avoid a large tax bill and potential penalties at tax time.
How is income tax calculated for freelancers?
To calculate income tax as a self-employed individual, you would first determine your income minus deductible expenses. You would then multiply that figure by 0.9235 (aka 92.35%), and then multiply that again by the year’s FICA tax rate. The number you get is your estimated self-employment tax.
What happens if you don’t file freelance taxes?
Not filing freelance taxes doesn’t mean you don’t owe them. Not paying taxes can mean you are still liable for the amount you owe, plus interest and penalties.
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