Tax deductions

5 Overlooked Tax Deductions for Freelancers | by Citizen Upgrade | March 2022

Save money on your taxes with these business deductions!

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Citizen Upgrade is not a registered investment, legal or tax advisor, or broker/dealer. All investment/financial opinions expressed by Citizen Upgrade are derived from the author’s personal research and experience and are intended to serve as educational material for informational purposes only.

It’s that time of year again, when the air starts to warm up and the flowers start to bloom…you guessed it, it’s tax season! For “9 to 5” workers who receive a W-2 form from their employer, filing a tax return is usually straightforward. Your taxes are usually deducted from your paycheck, and if you selected your “deductions” correctly, your tax bill or refund should be nominal.

However, for freelancers, tax season is a time to reflect on the previous year and the “costs” associated with doing business. Properly accounting for business costs maximizes the “deductions” you are allowed to take from your annual income before calculating your final tax liability. Think of it like this: you’ve spent money to make money (delivery costs, wear and tear on your car, appointments with clients, business cards, etc.), so you need to take that into account when calculating your annual “profit”. Not including all of these expenses would result in paying more tax than you actually owe, which we can all agree is something to avoid.

Whether you file your taxes on your own or through an accounting firm, it pays to get organized and track your expenses throughout the year. If you weren’t tracking your spending like this in 2021, you can dive into your receipt drawer or, better yet, check out your annual credit card spending summary. While this type of “forensic” accounting isn’t the most efficient, time will be well spent if you can find a few additional expenses to deduct from your tax bill. Below are five oft-overlooked deductions that freelancers should consider when filing their paperwork. If in doubt, consult your tax specialist to determine if these deductions apply to your particular situation!

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“If you use part of your home exclusively and regularly to do business, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation for that area. You must determine the percentage of your home spent on business, utilities, repairs and depreciation.

-Source: IRS.gov

Although the home office deduction can be a bit complicated, it’s worth exploring the details to see if you can use it as it can significantly offset your tax liability. The deduction will be calculated based on a percentage of your home office square footage expenses, including rent, utilities, depreciation, and property taxes. Using a housekeeping log will help you track expenses throughout the year.

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A wide variety of office supplies and productivity tools qualify as deductible expenses if used in your business activities. This may include paper, pens, printer ink, online subscription tools (eg Grammarly and Shutterstock) and software.

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Professional development activities related to your independent business may also be deductible. This includes conferences, courses, and professional training, especially if these are necessary to maintain your business licenses or certifications.

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Freelancers often use a variety of methods to market their business to potential clients. This may include business cards, direct mail and advertising costs on Facebook, Youtube, Twitter, Amazon, etc. These should all be considered business expenses and deducted from your bottom line at the end of the year.

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If you completed a $10,000 project, but spent $5,000 hiring subcontractors (e.g., researchers, graphic designers, or editors), your taxable “profit” should only be considered as $5,000. If you hired these contractors directly and paid them more than a certain cash threshold ($600 for the 2021 tax year), you will also need to issue your contractor a “Form 1099.” If you hired them through a platform like Fiverr (referral link) or Upwork, you don’t need to fill out this form.