Paying taxes as a freelancer can be a particularly painful affair. In addition to paying all of the income taxes that regular employees have to pay, freelancers have the additional burden of paying the approximately 15.3 percent “self-employment tax”, which consists of the social security and medicare taxes that normally get paid by an employer. In some states, this means that freelancers can pay more than 40 or even 50 percent of their income in taxes!
Fortunately, freelancers have the ability to offset these taxes by deducting “legitimate business expenses.” While some of these expenses, like office supplies, are obvious, there are many others that are less apparent, and often go unused by freelancers. Remember, taking advantage of these business deductions is not in any way immoral or illegal; they are legitimate deductions that you should be taking.
Most freelancers are aware of the fact that businesses can deduct landline and mobile phone bills for their employees. However, many freelancers are unaware of that fact that they can deduct a portion of their personal phone bill as well. If you use (and can prove that you use) your personal cell phone for business purposes, you can deduct a portion of the bill that is equivalent to the amount the device is used for business (business use percentage). Depending on your phone plan, this can easily add up to hundreds of dollars per year.
If you need to use a tablet, laptop, or other electronic device for business (and again, can prove the legitimate business need), you can deduct some or all of the cost of the device. For some devices, you can choose to deduct the entire cost of the device in one tax year (section 179 deduction) or deduct the depreciation over a set number of years. Either way, you’ll be able to cut your tax bill and stay one step ahead of the competition.
If you’re like most freelancers, what you do for a living is probably closely related to your personal interests. You might already have (or be considering) subscriptions to websites, SaaS tools or other subscription-based services. All you have to keep in mind is how the IRS defines a deduction, an expense is ordinary if it is common and accepted in your trade, business, or profession. An expense is necessary if it is appropriate and helpful to your business. So, if the service in question is directly related to the industry you freelance in, you can deduct the entire cost from your taxes.
Safe Harbor home office
Last year the IRS released a "safe harbor" method that may make home office deductions more accessible. The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space. You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual. But you won't have to calculate any actual expense or depreciation deduction for the space. On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction but you can determine year-by-year which home office deduction method to use. You don't have to elect one and lock yourself into it for the future.
These are just a few of the ways you can offset the tax burden of being a freelancer. As a small business owner there are hundreds of potential tax deductions, that is why it is crucial to take the time to better understand what you can or can't do before you do it.
Make sure to speak with a tax professional about whether or not you qualify for these deductions, and if there are any other deductions you may be missing out on.