Having a full-time career as a freelance professional can be a challenge. This is why many freelancers still maintain a traditional job, at least on a part-time basis. If you are looking for a new job that’s in your chosen field to supplement your freelance income, or if you are starting up your freelance business from scratch, it is possible to lighten your tax burden at the same time, thanks to tax deductions designed specifically to mitigate the costs of job-seeking.
Before you start incurring job search expenses thinking you’ll just write them off, it’s important to know the basics about eligible expenses and how you can deduct them on next year’s tax return. Here’s a quick overview:
- Keeping receipts and detailed documentation of your job search expenses is critical. Before you even begin incurring job search expenses, make sure you have a reliable way of tracking and documenting them. Use accounting software or a simple spreadsheet to capture amounts and pertinent details related to the expenses you are planning to write off. Keep all of your receipts in a safe, accessible place so that come tax time you’ll have the information you need to deduct them on your return (and the back-up documents in case you are ever audited).
- You can deduct your job-seeking expenses even if you don’t get a new job. That’s right, the IRS understands that sometimes you don’t get the job (Even if you’re perfect for it!). As long as your expenses are legitimate, as explained below, you can still deduct the costs of seeking different employment, regardless of whether you actually change your employment status.
- Job search deductions apply only for those seeking a new position in the same field. Thinking about starting a career in a brand new field? That’s great, but don’t expect the IRS to help you out with tax deductions related to your job search expenses. You can only deduct job search costs when the job search is in your current line of work.
- No deductions for newbies. If you are looking for your first job, or are trying to re-enter the workforce after a “significant” period of time, the IRS doesn’t offer any deductions related to your job-landing efforts. However, if you are going to set up a new freelance business and it is related to your current line of work, then you can deduct eligible start-up expenses.
- Résumé costs are deductible. If you are paying for resume writing services, paper, ink and postage to send out your resume or you need to create and send copies of your work samples, these costs will be tax deductible.
- Travel expenses for job hunters are deductible. If you are going out of town to look for a new job, your expenses for transportation, meals and accommodations are deductible—just be sure to keep all of your receipts and detailed notes about the interviews and meetings you had while you were away so that you have back-up documentation.
- Placement agency fees can be deducted, too. If you use a job placement or employment agency to land a new position, those fees are deductible, unless an employer or other party reimburses you for them.
- The costs of multi-purpose items cannot be deducted. Even if you think your sharp new suit helped you land a plum position, you can’t write off the cost of it, or other items that are likely to be used for other occasions or uses (i.e. a new computer, software or a new padfolio). Only qualifying expenses directly related to your job search can be deducted.
Respect the limits of job search tax deductions.
While you can write-off some of your job search expenses, be aware that the IRS is not giving you a free pass to deduct whatever you want on your tax return. Job search expenses are deducted as miscellaneous expenses on Schedule A of your personal tax return.
The total for all miscellaneous deductions cannot be more than two percent of your adjusted gross income (AGI). This is known in tax speak as, “The 2% Rule” referring to the limitation on certain types of miscellaneous deductions. You must also itemize your deductions to claim them on your tax return.
A side note for those who are seeking to set up their own business in a similar field to which they were employed. You may qualify for additional R & D tax credits and deductions. Check with a CPA about what is available to you federally and in the state in which your business will operate.
Seek your perfect position and track your job search expenses to ease your tax burden
Job searching or setting up a new freelance business may be taxing for you, but on the bright side, it can lower your taxable income, too. Just keep the above tips in mind and keep track of all of your receipts and related activities. In the meantime, may your job search be prosperous and if you’re entering the freelance community on a full- or part-time basis, congratulations!
Jonathan Medows is a New York City based CPA who specializes in taxes and business issues for freelancers and self-employed individuals across the country. He offers a free consultation to members of Freelancer’s Union and a monthly email newsletter covering tax, accounting and business issues to freelancers on his website, www.cpaforfreelancers.com which also features a new blog, how-to articles, and a comprehensive freelance tax guide.
Jonathan is happy to provide an initial consultation to freelancers. To qualify for a free consultation you must be a member of the Freelancers Union and mention this article upon contacting him. Please note that this offer is not available Jan. 1 through April 18 and covers a general conversation about tax responsibilities of a freelancer and potential deductions. These meetings do not include review of self-prepared documents, review of self-prepared tax returns, or the review of the work of other preparers. The free meeting does not include the preparation or review of quantitative calculations of any sort. He is happy to provide such services but would need to charge an hourly rate for his time.