12 Tax Deductions Freelancers Should Be Claiming
Running a freelance business can be costly — surprisingly so for those new to the gig. We’ve got a reputation for having a wide array of awesome deductions, and that’s true, but what’s even moreso true is that they are well deserved deductions. In this article, we’ll take you through 12 of the best deductions almost every freelancer can claim, but often newer players don’t bother with.
Of course, allowable tax deductions vary wildly from country to country. For those in the Western world, these should remain fairly consistent between countries with differences in the details, so consider this a jumping off point for further country-specific research.
Home office expenses
There are so many expenses incurred in running a home office and for many freelancers, this is unfortunately where the entirety of their deduction focus lies. As you’re about to see, it’s just the start — but certainly not to be ignored, because it can take a massive chunk off of that tax bill.
Internet, phone lines, mobile phones, office furniture, computers, utilities, stationery — there’s a laundry list of stuff that falls in this category. Make sure you check out the rules for each individual item in this category — you’ll often have to figure out the percentage of a net or phone connection that you use for business purposes as opposed to home purposes, or depreciate office equipment like computers over a few years and claim accordingly.
Research and publications
Need to buy a book for research, or you subscribe to a magazine that’s related to your field? You’re in luck — these are deductible expenses. As always, don’t jump the shark as you’ll need to be able to defend these deductions in case of an audit. No, that scuba diving magazine won’t fly if you’re a web designer who specializes in sites for politicians.
On a related note, education that relates to your field is deductible. You can’t take classes in order to get into a new field and deduct them, but if you’re advancing your knowledge of the field you are already in you’re in luck.
Though this largely hearkens back to research and publications, textbooks and other expenses required by the class but on top of the class fee itself are generally deductible.
Meals, entertainment & other client meeting expenses
Some clients sure like to be wined and dined. I’ve heard of clients who will play hard to get just to try and get a business diner out of a service provider’s inner salesman. Fortunately, these pricey adventures — and their more common cousins, the coffee shop meeting — are deductible.
Beware your country’s laws, though — in some, such as the United States, you’ll only be able to claim 50% of the cost, not the entire bill.
Many modern freelancers conduct business across and even within borders using PayPal. Despite its astronomical fees, this service is used out of convenience more than anything else — but if you go for that convenience you’ll feel it when the money gets to your bank account.
While it doesn’t quite make up for the loss of large chunks of your fees, you can deduct those fees from your taxable income. Small blessings.
As you scale your sole proprietorship into a small business, or if you simply need to palm off some work when things get busy from time to time, you’ll find yourself using subcontractors more and more as time goes on. Fortunately, these expenses are deductible. Since they can be huge expenses — especially when they are ongoing — you’d find yourself unable to pay your tax bill without these deductions, so be sure to apply them.
In a similar category to subcontractors are advisors who you go to for help with the running of your business — accountants, lawyers, business planners and the like. For business purposes, these guys are all deductible. If you use the same lawyer for business purposes as you do for personal matters, though, you’ll need to deduct only those bills that pertain to the business.
What happens when a bad client doesn’t pay an invoice? Obviously you’re not going to be liable for tax on the amount you’re invoicing for as you never received payment, but what few freelancers realize is that you can actually write off the amount of that invoice as a bad debt. You spent time working and didn’t get paid for it, so it makes sense that the tax office should help you mitigate how that affects your tax bill.
Payments to non-profits
In some countries such as the United States, charitable donations are not valid business expenses. If you’d like to use your business to support non-profits while getting a tax deduction, though, you can opt for a marginally different solution: payments to non-profits for products or services.
In some countries donating to registered charities may qualify you for a tax deduction, so be sure to check out your local laws.
Health insurance premiums
If you’re coming from a full-time job to freelancing, one of your big concerns may be the lack of benefits such as health insurance. Most governments make this easier on the self-employed by allowing the cost of health insurance to be deducted from taxable income.
There are some conditions in most areas that you’ll need to check. You have to be paying the premium yourself, and if your spouse has a health care plan that covers you, your own health insurance won’t be eligible for deduction.
Unless you work exclusively from your home office, you’ll likely be putting in some miles in the car getting to client meetings, co-working locations and cafes with Wi-Fi. You can keep meticulous mileage records and deduct your actual expenses incurred, or you can use the standard mileage rate determined by your country’s tax authority.
If using the actual expense method, which requires you to calculate the percentage of driving you did in a year that was business-related and deduct only that percentage of the costs, be sure to include expenses other than gas alone. Car services, repairs, and other maintenance costs can be included in the calculation.
Expenses incurred in taking business trips are tax deductible. There are a bunch of conditions that tax authorities impose in order to ensure you can’t deduct for any old holiday. There must be a pre-determined business-related purpose for your trip, outside of your own city, and be overnight or longer.
Travel is a big audit flag, as with car usage, so keep your records meticulous and don’t try and push the limits of your claims (not that you should be doing this at all to begin with). That said, it’s a fair business deduction so don’t let that scare you off — just be careful.
Though these 12 items are the biggest deductions that most freelancers will be able to make, there are plenty more possibilities — often niche items that apply to specific professions. Let us know about the little-known legitimate deductions that make your tax season a bit easier in the comments.