Are you part of the 36 percent of Americans who work at least some of the time as a freelancer? Are you dreading filing your tax returns?
Tax season is stressful for everyone, but it can be particularly difficult for freelancers. How do you avoid writing a massive check to the IRS? What kind of deductions can you make when filing your return?
If you’ve been wondering what you can and cannot deduct from your freelance taxes, keep reading.
Listed below are seven surprising tax deductions about which every freelancer needs to know.
1. Office Space
One of the biggest deductions a freelancer can claim is their home office space. Whether you rent or own your home, this deduction applies to you.
Deducting the cost of your home office space used to be quite challenging. Now, though, the IRS has simplified the process and allows you to deduct $5 for every square foot of home office space up to 300 square feet.
2. Health Insurance and Insurance Premiums
Your insurance costs are also tax deductible.
The IRS allows self-employed individuals (that’s you!) to deduct the cost of your health insurance premiums. This includes medical, dental, and long-term care coverage. You can claim deductions of contributions made to a health savings account, too.
In addition to health insurance, you can also deduct your other insurance premiums. This includes liability insurance, malpractice insurance, flood and fire protection insurance, and workers’ compensations insurance.
3. Online Tools
Do you use any online tools or apps to help you manage your business?
The cost of apps and tools like Evernote and Adobe Creative Cloud are considered business expenses and can be deducted from your tax return.
You can also deduct the cost of other software programs and even services like Netflix. The caveat, of course, is that you need to be able to prove that you need them to stay relevant within your specific industry.
4. Retirement Contributions
Many freelancers are unaware that they can deduct their retirement contributions from their end-of-the-year taxes.
If you have an IRA (independent retirement account), you can deduct all of your contributions up to a certain limit. The current limits set by the IRS are $5,500 for 2018 and $6,000 for 2019.
If you’re over the age of 50, the IRS allows contributions up to $6,500 for 2018 and $7,000 for 2019.
5. Contract Labor
Did you hire another independent contractor to help you out this year? Maybe you hired someone to design a new logo or help you with bookkeeping.
Whatever you paid these people for their services, you can deduct that payment from your taxes.
6. Membership Fees
It doesn’t matter if you freelance full-time or just as a side business. If you have to be part of an organization for your job, you can deduct the membership fees from your tax return.
For example, if you run your own real estate business and pay a fee to be a member of the National Association of Realtors, you can deduct the cost of that membership.
7. Transactional Fees
Do you run an online store? If you accept online payments, you likely have to pay a processing fee for every transaction.
These processing fees can certainly be a pain. The good news, though, is that the IRS allows you to deduct them.
You can also deduct fees associated with selling on a third-party platform such as Etsy.
Common Tax Mistakes Freelancers Make
One of the biggest mistakes freelancers make is neglecting to take advantage of all the tax deductions available to them.
There are some other common mistakes you ought to do your best to avoid, though. Some of these mistakes include:
Poor Record Keeping
Poor record keeping is a highly common mistake among freelancers, especially those who are just starting out.
One of the easiest ways to avoid this mistake is to invest in some kind of bookkeeping software or service.
These services are relatively inexpensive, and they make it easier for you to monitor transactions and categorize them appropriately.
Remember, you can also deduct the cost of these services at the end of the year!
Mixing Accounts
It might seem like a hassle to open up a separate bank account just for your business expenses.
You know what’s an even bigger hassle, though? Sifting through thousands of receipts and bank statements at the end of the year to try and categorize your purchases.
Do yourself a favor and separate your money now. You’ll thank yourself when tax season arrives.
Neglecting Retirement Savings
Forgetting to deduct your retirement contributions is a big mistake among freelancers.
An even bigger mistake, though? Not contributing anything to your retirement at all!
Remember, as a freelancer, you don’t have the luxury of a 401(k). You have to be intentional about setting up your own account and thinking about your future.
Your accountant can help you with this, and there are lots of online platforms that make it easy for you to set up an IRA or Roth IRA.
Double Counting Expenses
Finally, many freelancers also make the mistake of double counting certain expenses. This happens most often with auto expenses.
The Standard Mileage Rate allows you to write off 54 cents per every mile driven. This deduction also includes the cost of other auto-related expenses like gas, repairs, lease payments, and insurance.
If you choose the Standard Mileage Rate, you cannot also write off the cost of gas, repairs, or other expenses. You have to pick one approach and stick to it.
Looking for More Advice on Freelance Taxes?
You’ve got the basics down when it comes to freelance taxes and tax deductions. But, tax filing is about more than just figuring out what you can and cannot deduct.
Are you still feeling a bit nervous about filing your taxes? Do you need a professional to help guide you through the process? If so, we can help.
Contact us today to learn about our tax preparation and filing services or to set up a free consultation.
