If you’re new to self-employment or still haven’t quite figured out the system, working out self-employment taxes can be a complex and confusing venture. Use this guide to demystify the process.
When you started your freelance business, you never thought you would have to be a Sales person, an accountant and a tax lawyer at the same time right? It is important to understand what can be deducted from our taxes, to make sure not to leave money on the table!
As freelancers, our tax situation can be more challenging than others. However, by inquiring about these tax deductions in advance, you are sure to be ready when April 15th comes back around. Here is what you should keep in mind for the upcoming months.
Be certain that you deduct any and all valid business expenses when completing your Schedule C. You only pay taxes on the profits from your business, and these profits are reduced by any applicable expenses, so don’t miss anything! Here are the major categories of expenses you should be tracking. This is not an exhaustive list. If you’re uncertain whether a specific expense is deductible, consult with a tax professional.
Equipment and Supplies
Any office equipment, supplies, tools, software and the like can be deducted come tax time. Just be certain this material is used solely for business purposes. You can deduct the cost of your laptop for instance, but not if it’s the family computer half the time.
Be sure to check with a tax professional about the proper way to classify certain equipment costs. Items like printer ink and copy paper can be deducted as a simple business expense. More expensive purchases, like office furniture and computers, may need to be depreciated. This means their cost is written off over a number of years, instead of just one.
If you travel to meet with clients, remember that business-related travel expenses are deductible. You can write off airfare, hotel costs, rental cars, allowable mileage amounts on your own vehicle, and meals (half their value).
Running a freelance business often involves hiring out business services from other providers. If you regularly hire proofreading or editing help or use other freelancers, you can deduct what you pay them. You can deduct any legal services you might require, any advertising costs you incur, as well as web hosting expenses, professional organization dues, phone and internet costs, and financial transaction fees. In a turn toward the meta, you can also deduct tax preparation services.
Keeping yourself up-to-date on the current state of your industry requires continuing education, and these expenses can be deducted. Conferences, courses, books, and seminars all qualify, as long as they specifically serve business purposes.
The Home Office Deduction
If you work out of your home, you can deduct a portion of your living expenses as a business write-off. This can be computed in one of two ways.
In the traditional method, you work out the exact percentage of your home’s total square footage that is being used for business purposes and then deduct that percentage of your home’s mortgage or rent payment, utilities, and insurance costs from your taxes.
In the simplified method, you only deduct a set dollar amount per square foot of space used for business purposes. Which method you use is determined by how hard you want to work and which method gets you the better deduction.
Remember that the portion of your house that you’re claiming as your home office must be set up for, and used specifically for that purpose. If your “office space” is the dining room table, you can’t take the deduction because ostensibly your office is also used for family meals.
The Self-Employment Tax Deduction
All the Muggles out there that work for someone else get half of their Social Security and Medicare taxes paid by their employers. We’re required to pay the full amount.
However, we can deduct from our taxes half of our total payment, which helps reduce our taxable income. It’s not quite the deal the other half gets, but then they have to wear pants to work every day, so it seems like a fair trade-off.
The Health Insurance Deduction
Another major expense that is often covered in part by an employer is health insurance. As a freelancer, you likely have your own health insurance policy, and you’re paying the full cost of the premiums on your own. You’ll be happy to know that you can deduct 100% of your premium expenses, even if the policy covers your entire family. Given the high cost of healthcare, this deduction ought to ensure that you never have to pay a dime in taxes again!
It’s worth noting that unless your freelance business has been profitable for at least three out of the last five years, the IRS will tax it as a hobby as opposed to a business. Hobby income cannot be offset by more than your earned amount. So if your expenses exceed your income you can only deduct until your hobby income reaches zero. You can’t deduct any expenses beyond that point. This means you can’t use any excess expenses to offset income from other sources.
However, if the IRS taxes your freelance efforts as a business, this restriction doesn’t apply. If your expenses exceed your income you can still deduct their full amount, which means you can claim a business loss.
Oh, and one last thing! Any articles dealing with taxes that aren’t written by a certified tax professional will always include a disclaimer pointing out that the author isn’t a certified tax professional and that the reader should consult with one before banking on the author’s advice.
This article wasn’t written by a certified tax professional. You know what you need to do.