Now that we are getting down to the wire for filing individual taxes and those for freelance businesses structured as LLCs and corporations, it’s key to know the basics so you can tackle your taxes in a timely manner. The following list of freelance tax FAQs can help you tame the most common points of confusion:
What taxes am I required to pay?
Like full-time employees, freelancers have to pay income, Social Security, and Medicare taxes. Unfortunately, if you make more than $400 a year from freelancing, you’re also required to pay self-employment tax.
Generally speaking, what deductions can I claim?
As a freelancer, the general rule of thumb is that you can deduct any expense that is used in the service of your business. This includes, but is not limited to:
• Office supplies
• Rental expense of an office space
• Travel expenses (airfare, hotel, taxis, parking, public transportation)
• Marketing materials (business cards, brochures, online ads)
• Computer software (i.e. Microsoft Office, Adobe Suite)
• Professional fees (lawyer, accountant, bookkeeper)
• Health insurance premiums (Use page 1 on your 1040 or Schedule A, not Schedule C)
• Meals (You can claim 50% of the expense for meals you eat when away from home for work purposes or when entertaining a client as long as a substantive business discussion is involved)
To claim these deductions, you must both allocate the expenses accordingly and have the documentation/receipts to substantiate them. For example, if you work at home and use an internet service for business and personal use, you need to determine the percentage you use for each. You can then deduct the percentage of the total cost used for your business.
When do I report income that was earned in a different year than it was paid?
Most freelancers use cash basis accounting, meaning that income is reported in the year it was paid, not the year it was earned. So if you finished a project for a client in December, 2016, but weren’t paid until January, 2017. You would report the income as 2017 income.
While waiting in line for a coffee at Starbucks I handed the person behind me in line a business card. Can I claim the coffee?
Yes! Since you conducted business in this space with a potential new client, you can claim the coffee. Just make sure you document it and keep the receipt.
How do I deduct mileage?
As of 2017, you’re eligible to deduct up to 53.5 cents per mile for business-related trips. The most efficient way to deduct this mileage is to keep a log of your total mileage, annotating each trip with the date, destination, and trip purpose. You can also deduct the cost of gas.
I took a few courses to improve my design skills (even though I’m not a designer) so I could update my own website. Can I claim the education expenses?
The cost of education that adds value to your business or improves your business skills is fully deductible. Education that isn’t related to your business is not a legitimate business expense.
I just bought a new laptop for business-related purposes (mostly)! Can I write off the full cost?
To the extent that your laptop is used for business you can write it off. Most freelancers get to depreciate their equipment over five years (computers, camera equipment, fax machines, etc.) or seven years, depending on the life of the item. Some qualifying businesses can also take an exception that allows them to write off the entire cost of the product in the first year.
What is the difference between depreciation and amortization for tax purposes?
Depreciation is a reduction in the value of a tangible asset (i.e. a computer) with the passage of time, due in particular to wear and tear. The IRS requires you to allocate cost of this equipment over a certain number of years; it can’t be expensed immediately. Small businesses can accelerate this writeoff, with some IRS-stipulated caveats.
Amortization is the paying off of debt for intangible assets (i.e. housing or auto loans, research and development) with a fixed repayment schedule in regular installments over a period of time.
Do I have to files taxes for “under-the-table” income?
The IRS requires you to self-report all income on Schedule C, regardless of payment the method. This includes cash payments from clients or a payments from a friend that you received via PayPal if it was in exchange for your professional services.
These freelance FAQs should have you well on your way to being able to file your taxes without getting tripped up by common areas of confusion. Keep in mind, if you do need to reach out to a tax professional for help on your return, don’t wait too long since many will already be at their capacity with high volumes of returns during the last few weeks of tax season.
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.