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When you decide to step away from a stable 9-5 as a freelancer, life starts moving at warp speed. In addition to performing your daily responsibilities, you’re also saddled with enormous administrative and strategic planning responsibilities. Often, this leads to tax-saving opportunities passing you by before you realize it. If you’re serious about optimizing your finances, here are a few less-talked-about tax deductions for freelancers worth researching and discussing with your tax professional. Implementing these deductions into your tax plan strategically could save you thousands on taxes and future expenses.
Startup Expenses
Whether you buy an existing business or start from scratch, you may be able to write off some or all of the expenses incurred to get your business going. To make the most of this tax deduction, it is crucial to keep detailed records from when you begin due diligence to investigate a business opportunity to when the business is officially operating or ultimately abandoned. Costs incurred to establish office space and meetings with professionals related to starting your business could all be eligible. The amount you can write off and for how long will require detailed research, and it is worth seeking financial counsel. Sometimes, startup expenses can lay the foundation for multi-year tax strategies.
Self-Employment Tax
Transitioning from being a W-2 employee to freelance work can be painful when it comes time to pay your self-employment taxes. However, when filing their year-end taxes, most new business owners don’t realize they can reclaim some of their self-employment taxes. Calculating the correct amount to claim can be confusing, so having a knowledgeable CPA will help you make the most of this deduction. The most important thing is knowing it’s a deduction available to you and worth discussing with your tax professional.
Transaction Fees
The IRS realizes that digital payment processing is a necessity for modern businesses. The same is true for Freelancers. If you accept payment by credit card, you can deduct some payment processing or merchant fees at tax time. This is a great deduction because it helps maximize your profit margins.
Unpaid Invoices/Bad Debt
If you ever wondered what the accounts receivable team did at your last corporate job, it had a lot to do with making sure bills owed to the company were paid on time. As a freelancer, you must set expectations with clients to ensure a good working relationship while protecting your time and money. But even the best of business people get a bad client that refuses to pay occasionally. After you’ve made every attempt to collect on a bill, your last resort is to write off the unpaid invoice as bad debt. Though no one wants to make a habit of claiming this deduction, it can help you recover some of your sunk costs.
Business Licenses
Depending on your freelance work, you may be required to hold and renew business licenses with various governing bodies. These could be licenses that certify your knowledge and compliance within a given industry, such as finance, cosmetology, food safety risk management, or several other fields. When you meet with your tax advisor, it’s important to discuss different licensing costs in addition to certifications and expenses incurred for continuing education. These fees can be similar but should often be filed under different categories.
Business Loan Interest
Though you cannot deduct entire loan payments, the interest paid on particular loans can be deducted. The most common types of small business loan interest that can be written off are bank and credit union loans, vehicle loans, credit card debt, and some other lines of credit. Where claiming this deduction gets confusing is in the details of how the loan was written. Consult your banking and tax professional to navigate the differences between business and personally guaranteed loans. When you work as a freelancer, these lines can often become blurry but make the difference between an eligible and ineligible deduction.
Retirement Plan Contributions
Though it’s easy to get caught up in the day-to-day operations of your business, freelancers always need to keep one eye fixed on the future. Planning and contributing toward retirement is no exception. In fact, making regular retirement contributions could help you save on taxes each year. The important thing is to choose an eligible retirement plan and maximize your annual contribution to get the most significant tax savings.
Supplies and Storage
If your freelance work requires a physical inventory of supplies or materials to perform your work, those expenses could be tax deductible. Things like storage units and the cost of raw materials or supplies can be written off. This deduction could be a welcomed opportunity for those working in cramped conditions surrounded by stacks of boxes. Use this tax tip to make space to think clearly and do your best work without taking a massive hit to your bottom line.
Educational Expenses
Traditional educational expenses, such as college tuition or textbooks, and continuing education expenses, like attending a course to improve a skill, may both be eligible for a tax deduction. However, it is important to consult a tax professional to ensure these deductions are taken correctly. Courses that result in a certificate or new license may need to be filed differently than those that refine a skill.
Home Office
Most, but not all, freelancers depend on having a home office. Designating a specific space in your home to conduct business can be a significant tax advantage. However, you must determine the method you will use to calculate the deduction each tax year. The IRS offers two calculation methods: simplified and regular. As with all deductions, meticulous record-keeping will typically be the determining factor when deciding which method to use.
Business Insurance
If you’re operating a business, you have assets and liabilities. Both of these categories benefit from having insurance. From errors and omissions insurance to business insurance covering crucial equipment like computers and other devices, it is in your best interest to have insurance that protects you and your business. Best of all, there is also a tax advantage. You can deduct the total cost of business-related insurance.
Health Insurance
Navigating health insurance is a common employment benefit that keeps many potential freelancers on the fence. Costs and plan options change dramatically when you leave an employer-provided program. However, to help with the changes in keeping you and your family insured with access to good medical care, the IRS will allow up to 100% deduction of health insurance premiums. This deduction is calculated monthly, so if you leave an employer-subsidized plan mid-year, you may be able to deduct some of your health insurance expenses during that tax year.
Knowing Your Tax Advantages as a Freelancer
Becoming a freelancer and small business owner is no small endeavor. There’s a lot to do as you switch hats between the different functions of your businesses and navigate the finer points of tax deductions. Having a system for good record keeping from the startup phase and a team of knowledgeable advisors can make all the difference for your successful freelance career.
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