Paying business taxes as a freelancer can be confusing, especially if it’s your first time filing as a self-employed person. For starters, you’ll have additional forms to fill out and income to keep track of.
And then, there are freelancer tax deductions that you can take. What can you deduct and where do you deduct it? This guide walks you through some of the deductions you might qualify for, why they’re so valuable, and some tips for how to keep track of them.
What Are Freelancer Tax Deductions?
If you’re freelancing, that means you’re self-employed and run your own business. The IRS knows that running a business can be an expensive endeavor. That’s why they allow you to deduct some of your expenses as business expenses. According to the IRS:
“Taxpayers can deduct expenses paid to run a business that are both ordinary and necessary. An ordinary expense is one that is common and accepted in the industry. A necessary expense is one that is helpful and proper for a trade or business.”
These deductions are valuable to a freelancer’s business and something you don’t want to ignore. A tax deduction lowers your net profit, which then decreases the amount you’ll need to pay in taxes.
How to Claim Your Freelancer Tax Deductions
The majority of people who are self-employed are sole proprietors. During tax time, sole proprietors recognize their self-employment income and most deductions as part of their personal tax return (Form 1040) by filing the additional Schedule C, Profit or Loss from Business.
However, there are some deductions that aren’t included on Schedule C but instead on other parts of your tax return, like health insurance deductions. And some freelancer tax deductions require another schedule to be filled out, like self-employment tax deductions.
Below, we’ll explore the specifics around 10 common freelancer tax deductions and how you’ll claim them.
10 Freelancer Tax Deductions
There are a number of tax deductions you can take as a freelancer, but here are 10 common deductions that can potentially save you a lot of money in running your freelance business:
1. Self-Employment Tax Deduction
A surprising tax that most freelancers aren’t aware of when they start their business is the self-employment tax. This consists of a required tax for Medicare and social security of 15.3%.
When you work as an employee for a company, you and your employer share the cost of these taxes. Generally, you pay half and your employer pays half.
As a self-employed person, you’re responsible for paying the entire tax. But the IRS allows you to take a deduction for the employer-equivalent portion of the tax that you paid. That is, whatever an employer would’ve paid, you can take that as a deduction when figuring out your adjustable gross income.
The IRS guides you through this somewhat confusing calculation with Schedule SE.
2. Business Startup and Organizational Costs Deduction
Before your freelance business is up and running, you’ll likely incur some startup costs, like filing for permits and business licenses or setting up a website. The IRS allows you to deduct up to $5,000 each for startup and organizational costs the year your business begins. If these costs exceed $50,000, the amount you can deduct will decrease, but for most small business owners, you won’t reach this $50,000 threshold.
3. Health Insurance Deduction
If you’re paying for your own health insurance, this could be a big deduction for you. If your business makes a profit, you can deduct health insurance premiums that you pay for yourself, your spouse, and any dependents.
You won’t take this deduction on Schedule C—instead, you’ll need to use Schedule 1 of Form 1040 to take this deduction.
4. Retirement Contributions Deduction
Saving for retirement is important. As a freelancer, you don’t have an employer-sponsored retirement plan to join, but you do still have options to stash away money for your golden years. One option for retirement is the Simplified Employee Pension (SEP) IRA.
The maximum contribution that you can make to a SEP IRA is the lesser of 25% of your employee compensation or $57,000. As a self-employed person, you can deduct contributions made to your SEP IRA. There is a deduction limit, so you’ll want to work with an accountant to help calculate your allowable deduction.
5. Home Office Deduction
If you work from home, you might be able to write off some of those related costs using the home office deduction. But the IRS has strict rules about who can and can’t take this deduction. To qualify for the home office deduction:
- Part of your home must be used regularly and exclusively for your business (not applicable to daycare facilities).
- It must be the principal place of your business or a place where you meet patients, clients, or customers.
You have a choice when it comes to calculating this deduction: The simplified option or the regular method. Under the simplified option, you’ll deduct $5 per square foot of your home office (up to 300 square feet). So a 200-square-foot office would mean a deduction of $1,000.
Under the regular method, you’ll need to keep track of all related home expenses and deduct a percentage of those expenses, based on the percentage of your home that is dedicated to your business. For example, if your home office is 10% of the total size of your home, you’d deduct 10% of the related home expenses as well as any that were made specifically to your home office.
For more information about claiming this deduction, IRS publication 587 walks you through everything you need to know.
6. Vehicle Expenses Deduction
If you drive for your business, the IRS allows you to deduct related expenses. Just like with a home office deduction, you have a simple method and a more detailed method.
The simplest way to take a deduction for vehicle expenses is by using a mileage calculation. In 2020, the IRS allows you to deduct 57.5 cents for every mile that you drive related to your business. If you drive 1,000 miles for your business in a year, you’ll have a deduction of $575. Keep a log each time you drive as a record for the IRS.
The other way you can take a deduction for your vehicle expenses is to allocate the actual expenses between business and personal use. If 10% of the miles that you drive are for business, you can deduct 10% of the expenses that you incur for your car.
7. Advertising Expenses Deduction
You need customers to keep your freelance business afloat, and often this means advertising to find them. Good news: The IRS allows you to deduct reasonable advertising expenses that directly relate to your business.
8. Office Supplies Deduction
Office supplies can add up over the course of a year—especially if you’re printing reports and presentations for clients. You can deduct any office supplies that you purchase and use during the tax year for which you’re filing.
9. Business Travel Deduction
If your freelance business takes you on the road, you may be able to deduct travel expenses. If your travel is ordinary and necessary, takes you away from your tax home longer than an ordinary day’s work, and you need to sleep away from home, you can qualify to deduct your travel expenses.
You can deduct expenses like airfare, train fare, taxis, baggage costs, hotel costs, and up to 50% of the cost of your meals.
10. Internet Expenses Deduction
Any internet expenses that you incur in your business are tax-deductible. For example, hosting fees for your website or costs related to an email service provider.
Tips for Freelancer Tax Deductions
Because deductions are so valuable for your freelance business, you don’t want to miss them. Here are a few tips for making sure you keep track of these valuable items.
Keep Personal and Business Finances Separate
It may be tempting to keep your business and personal income in the same bank account. After all, it’s all your income, right? But keeping money together can become a confusing mess when it comes to finding your business expenses. And if you miss some of your business-related expenses, that could translate to missed deductions and a higher tax bill.
It’s a good idea to separate your business and personal finances as soon as you launch your freelance business. Start with a separate business bank account and have all of your business income deposited into that account, as well as pay all of your expenses from there. You may also want to look into a business credit card as well.
Keep Accurate and Up-to-Date Records
While bookkeeping isn’t the most fun part of running your own freelance business, it is important. It’s a core part of running—and hopefully growing—your business.
There are plenty of easy-to-use self-employed accounting systems that can help you keep track of income and expenses and important documents and receipts. When tax time rolls around, you’ll be happy that you’ve spent the time during the year to keep track of everything all in one place.
A lot of these deductions that you take require receipts to prove that it was a real and necessary business expense. You can keep most of these documents electronically with your bookkeeping system. That way, when you need them, they’ll be easy to access.
Get Professional Help
There are a lot of things that get more complex when you’re self-employed. If you find yourself getting confused with the rules or wondering if you’re doing things right, it might be time to hire an accountant that can help you keep accurate books, claim the right freelancer tax deductions, and file your taxes.
An accountant might also be able to find more money-saving deductions that weren’t on your radar and help you plan to make smart money moves as your business grows.