It’s just about that time of year: tax time.
Although you don’t have to file your 2013 taxes until April, many freelancers like to get a head start. I’m one of them. (Not the least because I leave all my recordkeeping until the last minute, and don’t want to wait until April to figure out this year’s total income and expenses!)
As you’re preparing to file your taxes as a freelancer (the technical tax term is “sole proprietor”), you may not be aware that you’re allowed to take many small-business-related tax deductions. (Tweet this thought.) So gather up that paperwork, and see if any of these small business deductions apply to you:
1. Basic Business Expenses
Many freelancers — particularly the writing type — run relatively lightweight businesses, as far as expenses go. Give us a laptop, a bit of stationary and the ubiquitous cup of coffee, and we’re good to go.
But even if you don’t spend hundreds of dollars a month on your business, chances are you have some business expenses.
If you buy filing cabinets, printer paper, postage stamps, pens, letterhead or other business-related items, all these things can be written off on your taxes as a business expense. However, you do need to earmark those items that you write off as “business use only,” so make sure the kids don’t use your business printer paper as paper airplane fodder.
Also, be sure you’re keeping accurate records of these expenses, as it can be difficult to remember just how much you spend on them over the year.
2. Your Work Equipment
One of the most common business expenses for freelancers is probably the laptop or computer. If you’re in the design field, you may have other very expensive equipment that you use for your business.
These types of items are considered capital expenses. They’re basically investments in your business. As long as this equipment is necessary and normal for your line of work, you’re good to go.
There are a couple of different ways to write off the expense of equipment like computers. You can either write off the total expense in the year you buy the equipment, or you can deduct a depreciation amount over five years.
I’ve always done the latter because the laptop I use for work, unfortunately, predates my writing business. Since I already owned it when it started filing taxes as a freelancer, I had to take the depreciation deduction. You’ll need to do the same if you already owned your equipment going into business.
However, one of these days when I actually buy a new laptop (or a tablet!), I’ll write off that entire expense in one year.
Note that you can only write off the entire cost of this equipment if it’s only ever used for work. If you use your laptop to work and cruise Facebook or play games or catch up on your favorite shows on Netflix, you’ll only be able to write off a percentage of the equipment.
It’s OK to use a rough estimate here, but try to be as accurate as you can. If 80% of the time you’re on your tablet, you’re working, you can write off 80% of the cost/depreciation. If you only use it 40% of the time for work, you can only write of 40% of the cost/depreciation.
3. Business Services
If you use certain business services, you can write off those expenses, too.
My biggest expense each year is actually in money transfer fees. Since much of my business is conducted through PayPal (and, formerly, Elance), it costs me money out of what my clients pay me to get my income to my bank account.
In my line of work, these services are quite reasonable, but they add up to a really big expense each year. So if you’re using services like these, be sure to deduct their fees as a business expense.
Other services to consider writing off include your Internet service and an extra phone line for your business.
For the Internet, write off the percentage of your bill that matches the percentage of your Internet that you use for business. In other words, if your Internet use is 50% work-related, you can write off 50% of the bill for the months you were freelancing.
4. A Home Office
The home office deduction is a tricky one, because to qualify as a home office, your office needs to be just that — a work space, and a work space only. So if you work from the dining room table on a regular basis, you can’t write off your dining room as a home office, since it gets used for other, personal purposes as well.
However, if you’re lucky enough to have a separate room that you use regularly and exclusively as a home office, you may qualify for the home office deduction.
As a freelancer, here’s what you need to qualify for this deduction:
- You must use your office space just for business. (So a “home office” in the guest room that still gets used as a guest room occasionally doesn’t count.)
- You must use the office regularly, and it must be your principle place of business. Even if you work from your local coffee shop sometimes, you must be able to prove that you work mainly from the office.
If you have a space in your home that meets these qualifications, congratulations! You can write off part of your rent or mortgage — as well as part of your utilities — on your taxes.
The typical way to take the home office deduction is to calculate the square footage of your office as a percentage of the overall square footage of your home. So if you have a 2,000 square foot home with a 10’x10’ office room, your office is 5% of your home. That means you could write off 5% of your mortgage/rent and certain utilities.
This is a tricky deduction, so check out the actual IRS publication on it here.
5. Travel Expenses
Even if you didn’t make it to any swanky conferences this year, you may be able to write off some travel expenses on your taxes. For instance, if you drive somewhere to conduct an interview for an assignment or to meet a client in person, you can take mileage for the trip.
(Here are the mileage rates for this year, in case you were wondering.)
Also, if you’re wining and dining new clients (or just grabbing them a cup of coffee on you), take that out of your business. The IRS understands that certain forms of entertainment are business-related, so you can deduct those meals as business expenses.
Again, these are tricky deductions, so you’ll want to check out the IRS publication on these business-related expenses, as well.
6. Health Insurance
If you’re a small business owner or sole proprietor and you were unable to participate in an employer-subsidized health insurance plan through a spouse or a day job, you can probably write off your health insurance premiums. If no one else in your family could participate in an employer-sponsored health plan, then you can write off premiums for everyone’s healthcare.
7. Retirement
One excellent way to reduce your tax liability as a sole proprietor is to contribute to a tax-advantaged retirement fund, like a SEP IRA or a Solo 401(k). As long as you set up a plan by December 31st of 2013, you can make 2013 contributions to the plan up to April 15th, 2014.
So if you get to filing your taxes and find that you owe a ton of money, consider kicking some extra money into your retirement account. (You can contribute up to $17,500 yourself, plus an extra employer match of up to 20% of your salary.)
You’ll take money out of your bank account either way, but at least when you contribute to your retirement account, you’re not giving it all away to the IRS!
Be Smart
Many business owners try to cheat the system by taking tax deductions they shouldn’t, but this will only set you up for trouble in the long run. Instead, take the deductions you’re allowed to take, and no more.
As long as you keep good records, you’ll find that you can get some serious tax write-offs for your freelance business!
Freelancers, have you made full use of your tax deductions?
Abby Hayes is a full-time freelance blogger, copywriter and journalist. She’s also the founder of FinanceforFreelance, a blog dedicated to helping freelancers make the most of their money. Check out her freelance tax guide, 42 Money Saving Tax Deductions for Freelancers, if you’re ready to make the most of your freelancing income at tax time!
Image: Flickr
