Have you ever wondered that you may be miscalculating or overpaying your taxes? Well, there are a few surprising tax write-offs for freelancers that may help keep your taxable income low.
Among the many perks of being a freelancer is the perk of being able to take tax writers across a range of expenses including for your home office, transportation, food and more.
Over the years, the Internal Revenue Service (IRS) has established several regulations for freelancers and self-employed (i.e. content creators).
In this post about tax write-offs for freelancers, you'll learn about:
- surprising expenses that are deductible
- how to calculate the deductible amount (if applicable)
- guidelines and limitations to watch out for while calculating these tax deductions.
Disclaimer: This post does not contain financial advice and is purely for entertainment purposes. Reach out to your local CPA for specific tax information for your business.
Home Office Expense
If you are using a part of your home as your office, you may be eligible for the home office expense.
To calculate the figure, you can either use the standard method or the simplified method. Most taxpayers choose to go with the latter method, the reason being *Well, it’s simple.*
Formulated in 2013, the simplified options allow you to deduct $5 per square foot of your office space.
For instance, if you occupy 100 square feet for your job/business purposes, you can avail a tax deduction of $500. The current limit is up to 300 square feet, meaning the maximum amount you can deduct is $1500.
However, there are some limitations to using this method.
- First, the space should be only used for business purposes.
- Secondly, it should be your primary workplace and used regularly.
Unlike the standard method, you don’t need to list every expense to calculate the deductible amount. Making it one of the easiest tax write-offs for freelancers to take in Schedule C, Line 30.
As a self-employed freelancer, you can take tax deductions on your travel and vehicle expenses.
Even if your work requires you to travel using a personal vehicle, you are eligible for a tax deduction.
This may include going to a meeting, on a business trip or shopping for your business needs.
But how do you measure the actual deductible amount? Simple! By tracking your mileage.
When it comes to calculating the deductible tax amount, make sure you record and differentiate everything you spent on yourbusiness needs vs everything you spent for your leisure.
Here are 2 important expenses to note.
- Your Travel Distance: You can track the miles you’ve traveled and either apply for standard mileage rate, which is currently 56 cents/per mile (set by the IRS), or you can list down the cost of fuel, vehicle maintenance, and insurance.
- Parking and Toll fees: You can include parking and toll feesin your tax returns under, “Car and Truck Expenses” (IRS Schedule C).
To be ahead of everyone in this ever-competitive and dynamic market, freelancers have to constantly improve their skill set. In some cases, the resources needed for that may be free but most of the time to get quality information, you may have to take courses, attend seminars, hire a coach and so on.
In these situations, IRS tax regulations seem like a blessing. According to these, self-employed individuals are allowed to write-off expenses related to professional development.
Expenses you can include are:
- Enrollment fees of any offline/online course
- Attending fees of a seminar/workshop
- Resources needed like books, stationery, etc.
To further determine if your expenses are tax deductible or not, check if they oblige with the rules below:
- The skills are needed in the business or are required by the employer.
- They should either maintain or improve the required skill set.
If your professional development costs meet the requirements above, then this can be part of other tax deductions for freelancers written off on Line 27A of Schedule C.
Food And Drink Expense
One of the most surprising or best tax write-offs for freelancers is being able to write off 50% of your business meals.
Before 2018, self-employed freelancers could deduct 50% of their meals and entertainment expenses related to business.
However, in 2018, IRS ruled out Notice 2018-76 and said that meals and entertainment should be recorded under 2 separate categories. Moreover, no entertainment expenses will be deductible.
In summary, if you take someone out for business purposes, the cost of the meal is deductible. However, if the meeting accompanies some kind of entertainment activity, the cost of those entertainment activities are not eligible for deduction. That iswhy it’s recommended to maintain separate records for meals and entertainment.
Still not sure if you can expense your food and drink? Follow these guidelines.
- A meal that is necessary but not too fancy is considered a business meal by the IRS and is deductible.
- You can deduct 50% off of meals and snacks you provide to your clients. This is also applicable for your staff, meaning, if someone on your team isn’t able to obtain meals during work hours, the meals provided to them will be deductible.
- If you pay for your meals during work hours or while attending a meeting/conference, out of your pocket, then these costs are not eligible for deduction.
Another one of the most surprising tax write-offs for freelancers is to ability to write-off unpaid invoices as a bad debt. This will ensure that you don't have to pay taxes on an income you never received.
However, you can only take this expense if you had also reported this bad debt as income on your tax return (so it shows both in Income and Expenses).
Case 1: If you maintain your records on an accrual basis, meaning you record the income before you receive it, you can deduct that amount as bad debt on your tax return.
Case 2: If you maintain your bookkeeping using the cash-basis, wherein you only record income after you have received it, then you can’t deduct any amount from your tax return.
The reason being, the income was never received therefore not regarded as taxable income.
Were any of these 5 tax write-offs for freelancers surprising to you? Again, Claiming these expenses on your tax returns while carefully following the IRS’ guidelines, you may save yourself a lot of time and money.