Freelancers often work hard for their earnings.
But if they keep good financial records (including all those 1099s), and prepare their tax returns correctly, freelancers can often tap into a number of deductions that can help lower their taxes and allow them to keep more of their hard-earned income.
Because taxes for people who are self-employed can get complicated (and tax laws can change from one year to the next), it can be helpful to enlist the help of a tax professional who specializes in freelance and small business taxes when preparing your return.
These professionals can inform you on which expenses you can deduct from your business income, and which ones you can not.
But whether you choose to work with a tax pro, or go it on your own, it can be very beneficial to know what self-employed tax deductions are generally allowed.
This can help you maintain better records, prepare for a meeting with a tax accountant, and even influence some of your business decisions throughout the year.
Here are things to consider when you do your taxes as a freelancer.
Table of Contents
- 1 Self-Employed Tax Deductions You Won’t Want to Miss
- 1.1 1. Home Office
- 1.2 2. Office Supplies
- 1.3 3. Hardware and Equipment
- 1.4 4. Web Hosting and Online Tools
- 1.5 5. Phone And Internet Service
- 1.6 6. Start-Up Costs
- 1.7 7. Employee Salaries
- 1.8 8. Self-Employment Tax
- 1.9 9. Your Car
- 1.10 10. Unpaid Invoices
- 1.11 11. Business License
- 1.12 12. Business Taxes
- 1.13 13. Product Supplies and Storage Units
- 1.14 14. Business Loan Interest
- 1.15 15. Breach of Contract
- 1.16 16. Transaction Fees
- 1.17 17. Attorney & Accountant Fees
- 1.18 18. Education Costs
- 1.19 19. Industry Events
- 1.20 20. Promotional Materials
- 1.21 21. Membership Fees
- 1.22 22.Business Travel Expenses
- 1.23 23. Business Gifts
- 1.24 24. Health Insurance
- 1.25 25. Retirement Plan Contributions
- 2 The Takeaway
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 would have 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.
1. Home Office
One of the most common deductions for freelancers, in order to claim a home office on your taxes, 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 five dollars a square foot for business use of the home, with a maximum deduction of $1,500, 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.
2. Office Supplies
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.
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
You may be able to deduct up to $5,000 of initial purchases and investments made to get your business up and running. 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
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).
Cars driven for both business and personal use can also be deducted, but only for costs incurred while conducting business.
10. Unpaid Invoices
Also known as bad debt, if your business is owed money that it has no hope of reclaiming, that debt may be deductible.
However, in order for the deduction to be allowed, it must be clear to both parties that the exchange was not a gift.
11. Business License
Depending on the industry, certain state and federal licenses may be required for a business to operate.
The fees paid annually to state or local governments for obtaining those licenses can generally be deducted.
12. Business Taxes
Depending on the business, there may be federal, state, local, and even foreign taxes that the business must pay. You can usually deduct those taxes as business expenses.
13. Product Supplies and Storage Units
For freelancers who sell products, the supplies purchased in order to make those products can usually be deducted.
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.
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.
15. Breach of Contract
Should a particular aspect of a client contract not be fulfilled, and fees or penalties are incurred because of this late or nonperformance, those costs are generally tax-deductible.
Government contracts, however, do not typically qualify for the deduction.
16. Transaction Fees
The processing costs a freelancer may incur by accepting credit card 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
The cost of education that helps you maintain or improve skills needed in your present work can be tax-deductible. This 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.
Any expenses incurred in order to influence legislation (such as lobbying), however, are not deductible.
21. 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 deductions, as long as they are ordinary and necessary.
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 the 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 $5,500 per year in pre-tax dollars if you’re under 50, and up to $6,500 if you’re older) and a SEP IRA (which allows you to contribute up to 25 percent of your income for a maximum of $54,000 per year).
As a freelancer, you can often lower your tax liability by deducting expenses that were incurred to operate your business.
There is a wide range of deductions you may be able to take, including a home office, supplies for that home office, your computer, your car expenses, and possibly even a portion of your monthly cell phone and internet bills.
Because freelancers are typically required to pay taxes four times a year (in the form of estimated taxes), it can be wise to set up a separate savings account and immediately deposit at least 25% of each paycheck as soon as you get paid.
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