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Working as a full-time employee usually meant that I filed my taxes in the middle of the season, somewhere in mid-February to mid-March. But this past year I was a full-time freelancer and didn’t get around to filing until April 11th. Waiting that long was a huge mistake!
This mad dash at the end of tax season is something a lot of freelancers are familiar with. To avoid this in the future, I’ve compiled a list of nearly everything you’ll possibly need to track to get organized and get a better deduction at the end of the 2015 financial year.
Home Office Deduction
If you use a separate space in your home consistently and exclusively for running and operating your freelance business, then you’re entitled to the home office tax deduction. The IRS recently added a simplified option to streamline the process for claiming this deduction. Using this method, you can create a standardized deduction of $5 per square foot of your home that’s used for business, up to a maximum of 300 square feet.
The best way to prove you use a space exclusively for business throughout the year is by taking pictures, and keeping these images with your tax return folder for filing. The home office deduction is often the first tax deduction that’s contested, so be prepared.
Advertising and Marketing
Most freelancers don’t spend money on traditional advertising outlets, although we do use business cards and the occasional promo or printed flyer. These days we rely on social media marketing and advertising campaigns on Facebook or email newsletters. Those expenses all count towards the cost of doing business, so start tracking this expenditure now.
Contract Labor and Wages
As a freelancer, you probably don’t have employees who are paid a regular salary or wage, but you may work with independent contractors. The amount you pay them throughout the year is considered contract labor and can be deducted as a business expense at the end of the year. And remember, if you paid a contractor over $600, you’re required to have them fill out a 1099 form, and submit a copy of that form to the IRS. Click here for step-by-step instructions on how to file a 1099.
This expense category includes things like office equipment, internet charges, paper, pens, office supplies, software to run your business more efficiently, and subscriptions for services and other business related expenses. If you pay for a coworking space, or a cell phone provider for the use of business conference calls, these all qualify under the cost of doing business category.
If you pay premiums for any insurance that’s not related to health coverage, like business insurance or rental insurance to cover your home office, you’ll qualify for a tax deduction. This also includes liability insurance and workers’ compensation insurance costs.
Interest on Loans
Did you take out any business loans this year? Track the interest you paid towards the loan balance and list this amount on your tax return. You can also include the interest you paid on a credit card for business related expenses.
Most freelancers likely won’t have a business property but if you do have a storefront for your small business or rent an office space, then you’ll want to track the amount you paid to a landlord.
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Travel and Mileage
Any travel expenses you incur while away from your primary residence, for networking or meeting clients, can be deducted on your tax return. Think of things like airfare, lodging, parking fees, and paying a cab driver. Even if you stay an extra few days for pleasure related activities, you can still track the costs of the days when you were conducting business.
If you drive a vehicle for business purposes, keep track of all those miles as they can add up to a good mileage deduction at the end of the year. Instead of using a cumbersome logbook, get MileIQ. The app helps you easily track the miles you’ve driven that are related to freelance expenses without the headache of tracking and journaling mileage manually.
Taxes and Licenses
Any real estate taxes you pay for business property, state and local taxes paid on physical goods sold, or unemployment tax, can all be deducted on your tax return. If you paid real estate taxes on your home and qualify for the home office deduction, you can take a portion of this expense and list it in this category on your tax return.
Legal and Professional Services
Any fees you incur from legal or professional services directly related to running your business are tax deductible. These include fees charged by lawyers, accountants, and bookkeepers. Note that this deduction includes what you pay out to a lawyer to set up your business as a separate entity, filing fees, litigation costs.
You don’t have to worry about calculating depreciation (that’s something your accountant or CPA will do for you) but there are a few key things you have to track now to be prepared come tax time. You’ll want to make note of the total price you paid for a piece of equipment (like a printer, camera, or laptop), the date purchased, and how it’s used in your business.
Health Insurance Premiums
Because self-employed freelancers are responsible for their own health insurance, you can deduct the entire cost of your health care insurance premiums, as an above-the-line deduction on your taxes. This only counts if you’re not participating in an employee plan with your spouse.
Did you know that any unpaid invoices, that you counted as income throughout the year, can be taken as a Unpaid Invoices deduction on your tax return? The IRS classifies unpaid invoices as ‘bad debts,’ and this lesser-known deduction is a big deal for us freelancers who have to spend a lot of time and resources chasing down payments we’re owed.
The catch is that you can only claim the unpaid invoices tax deduction if you use the accrual method of accounting, meaning you claim income when you earn it, not when you’re actually paid. If you use the cash method of accounting (i.e. you claim income only when you receive payment), you can’t write off bad debt as you would never claim that unreceived income on your taxes.
Education Classes and Courses
Throughout the year, I record purchases I make related to running my online blogging business like financial courses, marketing ebooks, business books and DIY design products. Keep track of expenses for any classes, courses, or materials you participate in during the year.The cost of education that adds value to your business or increases your expertise can be deducted on your taxes.
Meals and Entertainment
If you meet clients in person for work related projects, the meals, drinks, coffee, and other entertainment expenses you incur while networking with clients, are all deductible expenses. Keep track of the entire purchase amount because the IRS only allows a 50% deduction to be taken.
Other Business Expenses
Everything else from PayPal fees, to yearly website hosting expenses, will go in the Other category on your tax return. Anything that’s considered a cost of doing business should be tracked now so you aren’t scrambling when tax season rolls around.
If you’re serious about avoiding tax season stress, do away with the shoebox full of receipts. The best way to start tracking all of these deductions is with self-serve accounting software, or outsource the process to an online bookkeeping service like Bench.
The goal is to organize your expenses into categories, track and reconcile your financials on a monthly basis, and ensure your financials are tax ready by the end of the financial year. This will ensure you don’t miss any important tax deductions, file your return well before deadline, and reward yourself with a much lower tax bill.
Freelancers Union members get 20% off their first six months with Bench. Click here to claim your discount and start your free trial today.
Carrie Smith writes for Bench, the online bookkeeping service that pairs you with a dedicated bookkeeping team and uses simple, elegant software to do your bookkeeping for you. Carrie is also the founder of CarefulCents.com, a blog that helps solopreneurs tackle financial mountains related to running a business.