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Being self-employed full-time or part-time can give you job flexibility and an extra stream of income, but taxes can be a hassle. When you earn income without withholding tax, you are responsible for estimating and paying taxes on your own.
If you underestimate what you should be paying throughout the year, you could end up with a huge tax bill come tax time. But if this happens, several tax deductions are available to self-employed people that can reduce your tax burden.
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What are freelance tax deductions?
Freelancers and independent contractors can deduct certain business-related expenses from their income to reduce their tax liability. And you don’t have to be running a full-fledged business to qualify for the deductions.
“It’s common for food delivery apps like Uber to use the independent contractor structure for their drivers,” says Eric Bronnenkant, accountant and tax expert at robo-advisor Betterment.
This means that even part-time drivers and others who work in the gig economy may be able to deduct expenses for gas, car maintenance, phone service, and more.
Better tax deductions for the self-employed
A business expense must be a “necessary and ordinary cost” to qualify for a deduction, meaning there are no personal expenses. The best write-offs for you will depend on the type of business you run.
Here is a breakdown of the main deductible expenses for freelancers.
1. Advertising, Marketing and Internet Related Expenses
The cost of serving ads, designing your website, and maintaining it may be tax deductible as long as the expense is essential to your business.
2. Office and work supplies
The cost of supplies and equipment, such as laptops, printers, books, and other items, may also be deductible. You can either deduct the cost of the equipment all at once, or write off a larger asset, such as a computer, and claim those costs over time.
3. Car expenses
Freelancers may be able to deduct expenses for a vehicle used for business, including depreciation, lease payments, gas, tires, insurance, and license fees.
But there’s a caveat: If you use your car for both personal and business use, you’ll need to calculate the number of miles you drive strictly for business and use that mileage to determine your deduction.
4. Company and health insurance
Premiums for liability, malpractice, and other types of insurance for your business may be deductible. If you are self-employed and meet certain conditions, you can also deduct health insurance premiums for yourself, your spouse, and your dependents.
5. Commercial Memberships
You cannot deduct dues for country clubs or recreation centers, even if these memberships help you grow your business. But memberships in the local chamber of commerce, professional organizations or trade associations may qualify for a deduction.
6. Tuition fees
Courses and other training costs related to your business may be deductible, and if you are traveling to take classes or attend a conference, travel expenses may also be deductible. But you must be able to show that education helps you maintain or improve your skills.
7. Legal and Professional Fees
Say you hire a legal professional to help you file a trademark or draft your freelance contract. Fees, as well as the cost of accounting and bookkeeping services, may be deductible.
8. Home office expenses
If you have a dedicated space in your home where you regularly and exclusively conduct business, you may be eligible for the home office deduction. It could be a boon if you have chosen a home with an extra room or two to accommodate your business.
9. Pension contributions
Contributing to a Traditional IRA, SEP IRA, or SIMPLE IRA can provide tax relief while helping you save for your years to come. Remember that the exact amount of the deduction may depend on your income and whether you or your spouse are covered by an employment-based pension plan.
For example, say you file your taxes as a single person, have a full-time job that offers a 401(k) plan, and are self-employed on the side. Because you have a work-based retirement plan, the amount you can deduct for IRA contributions may be reduced if your modified adjusted gross income is between $68,000 and $78,000, and it may not be be no deduction if your modified AGI is greater than $78,000.
Can freelancers benefit from the standard deduction?
Freelancers can benefit from deductions for business expenses while choosing to take advantage of the standard deduction. This is because some business expenses are eligible for so-called “over the line” deductions, which are available regardless of the choice to itemize.
Business expenses that can be claimed as top deductions include health insurance premiums if you are self-employed, certain student loan interest, and contributions to certain retirement plans.
Itemized and standard deductions are reported “below the line” after business income and expenses are taken into account and adjusted gross income is calculated.
How to claim tax deductions
Freelancers who do not have a formal business structure, such as a corporation or partnership, must report business income and taxes on a Schedule C attached to Form 1040. In Parts II through IV From Schedule C, you can list business expenses and information about your car.
If you contribute to a SEP IRA, SIMPLE IRA, or other qualified retirement plan, you will report those contributions on Schedule 1, Part II: Income Adjustments.
The best tax software for freelancers can help you complete tax paperwork through a question-and-answer format, making it easier to report self-employed income and expenses.
Tips for freelance tax deductions
If you’re writing off a freelancer’s expenses for the first time or just want to make sure all your bases are covered, follow these tax tips.
Keep good records
Keep expense receipts in a safe place to ensure you have a backup copy for each deduction you claim. “If a business expense cannot be supported due to a lack of documentation during an audit, this can result in an unnecessary additional tax burden,” says Bronnenkant of Betterment.
Open separate bank and credit card accounts
Setting up different financial accounts for business and personal activities can make it easier to track transactions. Otherwise, mixing up expenses can create headaches as it can be difficult to justify which expenses are not personal.
Get help when you need it
Tax assistance may cost a few hundred dollars, but you may be able to deduct the cost of tax preparation services on your next tax return to recoup the expense.
Let’s face it, chances are you’ll have enough on your plate while juggling customers and gigs. Hiring a tax professional can help you navigate each tax form for freelancers with less hassle.
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