As a full-time employee, your relationship with your taxes is pretty simple. You fire up your trusty tax software once a year, plug in the numbers from your W-2, and hope for the fattest refund possible. Freelancers and contract workers are, unfortunately, not so lucky.
Once you start freelancing, that simplicity is gone forever. Suddenly, your taxes plague you all year, as you set aside money, make quarterly payments, and meticulously track your expenses. That last step can be the most challenging, but the more expenses you have, the lower your tax bill will be.
Not sure which write-offs apply to you? We consulted some tax experts to get the answers!
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What Counts as a Tax Write-Off?
First, let’s define the tax write-off concept. Also called “deductions,” tax write-offs reduce your annual tax burden. Basically, when you spend money on your business, you can then reduce your taxable income by the amount that you spent.
However, it can be tricky to find out what you can and can’t count as a write-off. Plus, if you exaggerate your expenses (or don’t calculate them correctly), you could face an audit.
As freelancers already get audited more than full-time employees, you want to make sure you do everything you can to avoid any scrutiny from the IRS. Of course, you also want to save as much money as possible.
According to Clarissa Wilson, a financial strategist, a write-off is “anything that is ordinary and necessary to run the business.” So, any cost included in developing, running, or maintaining your business qualifies as a write-off.
Some of those deductions are easy. For example, if you buy a new work laptop, that’s an obvious write-off. Unfortunately, others are a bit murkier.
Let’s look at the most common tax write-offs for freelancers—there are probably a few you didn’t know about.
The Home Office Deduction
If you have a dedicated section or room of your home that you use for work (and only work), you probably qualify for the home office deduction.
This deduction is pretty simple to calculate and can give you significant savings. However, many freelancers still get this deduction wrong, so we wrote a detailed guide on the subject to clear up many common misconceptions.
Vehicle Mileage and Maintenance
If you use your car for business, you might have a significant write-off. And according to Remington Trolli, owner of the accounting firm My Numbers Guy, it can really add up.
“Mileage is a very valuable and often overlooked or understated deduction,” Trolli said.
He also recommended using an app like Mile IQ to track the miles you drive for work. Whether you use an app or not, though, you have to document your work-related mileage somehow if you want to deduct it.
Wilson said you can also use gas receipts for your car-related deduction, instead of using the mileage deduction. However, the mileage deduction already accounts for the cost of things like gas and maintenance, and it can be much easier than itemizing all of your gas purchases.
So, which miles count?
“Miles to meet clients, investors, going to the bank, or driving to and from events all qualify,” Trolli said. Unfortunately, if you commute to an office outside your home, that mileage doesn’t count.
It doesn’t matter which method you use, but either way, you should diligently keep records of your work-related car usage.
Any classes, courses, or continuing education you take to help you improve at your job also count as deductible expenses. In addition to the cost of the course, textbooks, software, and any other supplies that are required for the course are usually deductible.
If you have to pay for any work-related class, program, or certification, that would also count. Keep records of all the invoices and expenses for any classes, so you can write them off later.
Office Supplies and Software
This is, perhaps, the most obvious tax write-off for freelancers. Office supplies and electronics that you use for work can all be deducted. This includes everything from laptops and tablets to printer paper and pens.
However, Wilson advised that you should pay attention to whether or not you use these supplies only for work, as that can change the deduction amount.
“If these purchases are not 100% used for business purposes,” Wilson said, “then the percentage that they are used for business purposes would be your deduction.”
You can also deduct the cost of any software you use for your work. This could include paying an email provider, buying a bookkeeping program, downloading an organizational app, or anything else you have to pay for out of pocket.
You might be surprised to learn you can deduct the cost of your health insurance. This is particularly helpful to freelance and contract workers, as most have to pay for it on their own.
“If you or your spouse were not eligible for health insurance from an employer, you may qualify to deduct not only your premiums, but those for your spouse and dependents, too,” Trolli said.
However, this is a personal deduction, not a business one, so it won’t apply to your self-employment taxes. It can still reduce your total income tax bill, though, and most freelancers qualify for this deduction.
Another surprising write-off is your self-employment tax costs. You can deduct these from your net income before you pay your taxes.
When you pay self-employment taxes, you pay a portion as an employer and an employee. In other words, you’re taxed twice, which is a major drawback of being your own boss. It helps a little that you can write off part of that total cost.
According to Riley Adams, CPA, though, you only end up paying the employee portion.
“The Federal government allows you to deduct the employer portion as a tax deduction,” Adams said, “thereby paying, in effect, 92.35 percent on your net business income, not gross income.”
So, thankfully, half of your self-employment tax costs can be written off.
What Doesn’t Qualify as a Write-Off?
While we’ve covered the basics here, you can also check out Investopedia’s list for less-common deductions that might apply to some freelancers, such as interest on a business loan.
However, while it’s important to deduct everything you can, it’s also important to know where to draw the line.
“Realize not everything that freelancers, contractors, and 1099 workers spend is deductible,” said Michael Law, a CPA at Canopy.
For example, required safety clothing or uniforms for a worksite can be deducted, but the cost of your everyday work clothes can’t. So, even if your industry’s standards require you to buy expensive suits, you can’t write them off.
According to Mike Scott, mortgage portfolio manager at Independent Bank, you should be careful about writing off entertainment or meals.
“Unless you take a potential or actual client with you, and discuss business during the breakfast, lunch, or dinner, those expenses will fail an audit,” Scott said.
That doesn’t mean you can’t ever write off these types of expenses, but you need to do so carefully and accurately.
Final Thoughts from the Experts
The most important thing freelancers can do for their taxes is always save their receipts.
“Scan them to a computer or take pictures,” Trolli said. “Whatever you need to do to save them.”
You can also use an accounting system or software to track your expenses. In addition to helping you remember all your deductions, this diligence will pay off if you’re ever audited.
Finally, hiring an accountant to do your taxes is the most surefire way to make sure you get all your write-offs and avoid an audit. While it’s totally possible for freelancers to do their own taxes, the cost of an accountant is sometimes well worth the peace of mind.
For more freelance tax tips, here’s what you need to know about paying quarterly taxes.