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Freelancing isn’t free. You know this, I know this, and most of all, the IRS knows this.
The best part about freelancing is having the ability to take charge of your day. When you work, you work for yourself and on your own terms, but that does bring a downside all solopreneurs and freelancers would rather avoid – managing your finances.
As an independent contractor, you are responsible for your own taxes and yes, unfortunately, that means you’ll have to pay Uncle Sam.
Fortunately, there are a ton of resources online that will help you determine what deductions you can take like 99Deductions.com.
Here are 7 tax deductions you must track in 2016 to maximize your income.
1. Education and Training
If you take classes or training courses to further your professional education, you may be eligible to deduct your tuition, related course materials, and certain travel costs.
There are a number of requirements you must meet to be able to deduct your education expenses. However, the most important points for sole proprietors to take note of are that your training and education cannot qualify you for a different trade or business; they cannot be for the purpose of meeting minimum educational requirements; and they must maintain or improve the skills required in your field.
Sole proprietors can deduct qualifying education expenses on their Schedule C or E. Employees may be eligible to deduct unreimbursed training and education expenses on their Schedule A, subject to the 2% limit.
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2. Software and Online Service Subscription
Many freelancers subscribe to online services or purchase software to support project management, accounting, and marketing activities, to name a few.
Microsoft Office, Hurdlr, Podio, HelloSign, Contactually, and Adobe CS all could be considered software or online service subscriptions. Since these platforms are often critical to operations, they are generally fully deductible.
3. Home Office
You may be eligible to deduct the portion of your home expenses related to your business through the home office deduction.
However, there are a few things you need to know:
- Your home office needs to be used exclusively for business. This means your couch, exercise room, and kitchen table don’t count.
- Your home office needs to be a fully dedicated work space.
- Further, it needs to be used regularly for management and administrative functions.
4. Website Expenses
Across all industries, website costs to acquire, design, maintain, and market your site are common business expenses.
Web costs are broad and can include but are not limited to development, programming, domain fees, hosting, and analytics.
While many of these costs are deductible, the IRS treats certain website expenses differently. Generally, the money you spend on development may need to be capitalized and deducted over many years, while the money you spend on operating and maintenance can be deducted in the year incurred.
5. Member Dues
Being a successful entrepreneur often times requires that you participate in some extracurricular activities to help further your business goals.
If you are a sole proprietor or business owner, professional or otherwise, and you incur costs throughout the year to be part of a trade group, professional organization, business league, public service organization, board, etc., these could all be considered deductible business expenses.
For example, Ross is an English teacher who moonlights as a freelance writer on nights and weekends. For the past five years since starting his business, Ross has deducted his annual $70 dues for his Association of Writers and Writing Programs (AWP) membership. Since this organization provides him access to guides, community events, and ideas, it is a key component of his business operations and is fully deductible.
6. State Sales Tax
Did you know you can deduct most of the state sales taxes you pay on your everyday transactions?
State sales tax is a common deduction that many taxpayers easily miss. Sales taxes you incur operating your business are deductible on your Schedule C, while sales taxes you personally incur may be deductible on Schedule A, if you itemize your deductions and choose not to deduct state income taxes paid.
7. Hobby Vs. Business Expenses
It is important to determine whether your activity is a hobby or a business. This can be a complicated matter, as often sole proprietors slowly build their businesses over an extended period of time or pursue a longstanding passion that has brought in some money.
The distinction between business and hobby is generally made based on how much profit your activity generates and is important to consider because business expenses are generally fully deductible, while deductions for hobby expenses will usually be limited.
Now that you’ve gotten a list of some tax deductions you can take advantage of to maximize your income, you can get started by making sure you’re keeping tabs on your receipts for tax purposes.
Curious to know what else you can deduct on your taxes? Check out 99Deductions, a site for independent workers, freelancers, and solopreneurs where you can learn how to maximize your take-home pay and minimize your taxes.
Disclaimer: The information contained in this document is provided for informational purposes only and should not be construed as financial or tax advice. It is not intended to be a substitute for obtaining accounting or other financial advice from an appropriate financial advisor or for the purpose of avoiding U.S. Federal, state or local tax payments and penalties.
Sajad Ghanizada heads marketing for Hurdlr, a mobile finance app for freelancers. He started out in freelance as a startup marketer, helping companies grow their products. To reach out to Sajad contact him via Twitter @TheRealSajad