Tax Deductions for Freelancers: How to Set Yourself Up for a Big Refund in April
When I started freelancing, taxes mystified me. I suddenly had to figure out quarterly deadlines, whether to use an EIN or my SSN, and what deductions I could claim.
Deductions can be especially confusing because there are so many -- and so many rules for each one! Ignore them, though, and you can miss out on a big tax refund.
In my first year, for example, I didn’t set aside a separate home office space, and missed a chance to claim back a chunk of my rent.
Starting to track your deductions now means you’ll have the records you need in April to make the most of your savings potential. This guide will help you claim useful tax deductions for your freelance business, while keeping the IRS happy.
What Counts as a Home Office?
You may be able to claim part of your home expenses (think mortgage, interest, utility bills and repairs) for your business.
The most important requirement is you have to use your home office exclusively and regularly for work. You can’t claim that your dining room is your office by day, or deduct an office you use once a month.
A separate room you work in Monday to Friday, or even a section of a room reserved for your desk and laptop, is more likely to be a deductible home office.
What to Do Now
Mark out your office space. In rooms that share work and living space, try using an area rug or room divider to create boundaries.
In addition, learn about how to file your deduction. The IRS recently added a simplified set of rules for claiming a home office. You can choose to calculate your work space’s square-foot percentage, keep records of all your home-related expenses and calculate your house’s depreciation.
Or, you can claim up to 300 square feet of office space at $5 per square foot. If one method doesn’t work for you, you can switch next year.
Can I Deduct My Laptop?
Your work furniture, rug, printer and motivational poster are deductible parts of your office, too.
Again, you’ve got options. If you can prove you’ve used a new purchase for business more than 50% of the time, you may be able to deduct the full value immediately.
Fell short or haven’t kept usage records? No worries.
You can deduct a percentage of the price of most tech equipment and furniture based on a five- or seven-year depreciation scale (click here and scroll to Table 4 for details).
What to Do Now
Ask an accountant how to track your usage percentages if you want to claim the full amount of new business equipment.
I use RescueTime on my computer, which sends me a weekly productivity report. This may or may not be enough on its own to convince the government, but records will at least make it easier for a CPA to determine what further action to take.
Am I Traveling for Business or Pleasure?
A vacation is a chance to land a great assignment, but writing a magazine article while abroad doesn’t necessarily mean you’re on a business trip.
The rule of thumb is you need to have a business reason to travel before you book your trip. Selling photographs or articles later won’t retroactively make the trip business-related.
Plan a valid business trip by scheduling travel-related work assignments or conferences.
The business aspects will have to make up the primary reason for the trip. If you plan a two-week Paris vacation that includes a three-day conference, you probably won’t get to deduct airfare, although you can deduct the conference fees.
If your trip has a true business purpose, you can deduct your airfare, train tickets, lodging and meals, dry cleaning and any other normal expense. You can also deduct your mileage for travel to a temporary gig (one that you expect to run less than a year).
What to Do Now
Schedule your business trips for the rest of the year. If any take place in great locations, have fun!
Just be sure to keep firm boundaries on what’s business and what’s personal.
Your visit to MOMA for an art magazine assignment counts as a business expense. The Broadway show you attended with your family that night, not so much.
If you’re unsure, keep clear records and ask your accountant.
If It’s a Business Dinner, Can I Get the Lobster?
You’re doing a face-to-face interview over lunch. If this meal is on Uncle Sam’s dime, can you treat yourself to the priciest dish on the menu? Well, maybe.
The IRS typically allows you to deduct only 50% of a meal or other business-related entertainment expense. If you’re on a tight budget, the $95 prix fixe menu may still hurt.
You also can’t claim “lavish or extravagant” entertainment deductions. That doesn’t mean you can never deduct a fancy outing, but that the entertainment has to fit the business occasion. You probably won’t interview a stay-at-home dad in the same place as a senator.
What to Do Now
Keep those receipts! Note who you were with and what purpose the meeting served.
What’s a “Necessary” Expense?
Many freelancers struggle with imposter syndrome. When they read the IRS only allows “ordinary and necessary” business deductions, they may second-guess their way out of money they deserve.
The IRS defines “necessary” as “helpful and appropriate,” and states explicitly that “an expense does not have to be indispensable to be considered necessary.”
Your organization software, the monthly magazine subscription that inspires you, and your writer’s group membership dues can all be necessary parts of how you run your freelance business.
What to Do Now
Don’t sell yourself short! Find a records system that works for you and list everything that helps you get the work done.
If tax season rolls around and you’re still not sure whether a particular expense counts, ask a pro. Chances are, if you think something is a true business expense, the IRS will, too.
Your Turn: Freelancers, what do you do during the year to make it easier to claim your deductions during tax season?
This post does not constitute tax advice. For specific advice, please see a tax professional.
Jessica Sillers is a freelance writer living in the Washington, DC area. She’s written about taxes, small business and careers for various companies and websites.