Tax Deductions for Freelancers: The Essential Guide to Writing Off Business Expenses

If you’re a freelancer, solopreneur, or small business owner, the words “tax season” can inspire fear and dread. We get it: taxes can feel like a labyrinth of numbers, forms, and rules when you first get started. But if you’re diligent about expense tracking, tax season can pay off (literally).

This article guides you through the labyrinth of tax deductions for freelancers. You’ll learn how to write off business expenses on your taxes, including which expenses are tax-deductible and tips for optimizing your deductions.

Understanding Tax Deductions 

Before we dive into the “how,” let’s quickly recap the “what.” Tax deductions are certain expenses that the Internal Revenue Service (IRS) allows you to subtract from your total income, thereby reducing the amount of income you’re taxed on. For freelancers, business expenses can significantly lower your taxable income, potentially leading to substantial tax savings.

The hard truth? If you don’t report your business expenses, you’re essentially giving the IRS free money. We’re pretty sure that’s not the vibe you want to cultivate as your own boss.

Eligible Tax-Deductible Business Expenses

The IRS stipulates that for an expense to be tax-deductible, it must be both “ordinary and necessary” for your business. “Ordinary” means common and accepted in your field; “necessary” means helpful and appropriate for your business.

Here are some common deductible expenses for freelancers:

  • Home office: If you use part of your home exclusively for business, you may deduct expenses like mortgage interest, insurance, utilities, repairs, and depreciation.
  • Supplies and equipment: Purchases necessary for your work, such as computers, software, office supplies, and even specialized tools, can be written off.
  • Travel and meals: Business-related travel expenses, including airfare, hotel stays, and 50% of your meals during business trips, are deductible.
  • Education: Costs for classes, workshops, and seminars that maintain or improve skills needed in your current business are deductible.
  • Marketing and advertising: Expenses for marketing your services, including website hosting, paid advertising, and business cards, are fully deductible.
  • Health insurance premiums: If you’re self-employed and pay for your own health insurance, you can deduct premiums for yourself, your spouse, and dependents.

The Importance of Keeping Impeccable Records

A word on record-keeping: meticulous records are your best defense in the unlikely event of an IRS audit. Keep receipts, invoices, bank statements, and a detailed log of your business-related expenses. Consider using accounting software or apps designed for freelancers to streamline this process.

Step-by-Step Guide to Writing Off Business Expenses

Step 1: Keep personal and business expenses separate

The cardinal rule for freelancers is to keep personal and business finances distinct. Use separate bank accounts and credit cards for your business transactions. This not only simplifies record-keeping but also fortifies your claims of business expenses in the eyes of the IRS.

Step 2: Understand your business structure

Your business structure (sole proprietor, LLC, S-Corp, etc.) influences your tax obligations and the deductions you’re eligible for. Most freelancers and solopreneurs operate as sole proprietors or single-member LLCs and report their business income and expenses on Schedule C (Form 1040). However, understanding the nuances of your specific structure can uncover additional tax benefits.

Step 3: Categorize your expenses

Organize your expenses into the categories corresponding to those on Schedule C. This makes filling out your tax forms easier and ensures you don’t miss any deductions.

Step 4: Use the simplified option for claiming the home office deduction

If you work from home, the IRS offers a simplified option for claiming the home office deduction. You can deduct $5 per square foot of your home used for business–up to 300 square feet–without needing to calculate individual expenses. This method is straightforward but could result in a smaller deduction than itemizing your home office expenses.

Step 5: Deduct your health insurance premiums

The health insurance deduction is unique because it’s taken on Schedule C and can reduce your adjusted gross income. You’re disqualified from claiming this deduction if you’re eligible to participate in a spouse’s employer health plan.

Step 6: Keep up with quarterly estimated tax payments

As a freelancer, you’re responsible for paying estimated quarterly taxes if you expect to owe $1,000 or more when you file your return. Incorporate your business expense deductions into your quarterly estimated tax calculations to avoid overpaying.

Step 7: Consider seeking professional (tax) help

It’s easy to feel overwhelmed by the complexity of tax laws. We recommend working with a tax professional who specializes in freelance businesses. Tax professionals can provide personalized advice, maximize deductions, and ensure your business complies with IRS regulations.

Tips for Maximizing Deductions

  • Stay updated: Tax laws change frequently. The IRS website contains a treasure trove of resources, and freelancer professional associations often provide tax-related updates.
  • Track mileage: Keep a detailed mileage log if you use your car for business. You can deduct vehicle expenses using the standard mileage rate or actual expenses method.
  • Don’t forget retirement contributions: Contributions to SEP-IRA, SIMPLE IRA, or a solo 401(k) can reduce your taxable income.
  • Charitable contributions: While charitable donations aren’t a business expense, you can deduct them on your personal tax return to decrease your overall tax liability further.

Wrapping Up

By understanding what expenses are deductible, keeping detailed records, and utilizing available resources, you can significantly reduce your tax bill while staying on the right side of the IRS. Remember, every dollar you save on taxes is a dollar you can reinvest in your business, save for a rainy day, or use to boost your personal finances.

Survive Tax Season with UncommonGood

UncommonGood is the all-in-one platform where freelancers manage their finances, marketing, and business operations. UncommonGood is the perfect tool for surviving tax season thanks to these features:

  • Calendar: Never miss a tax filing deadline again! (That’s more of your hard-earned money that you get to keep.)
  • To-Do List: Assign tasks and reminders to yourself to record your business operating expenses, submit estimated tax payments, and check in with your favorite tax professional.
  • Invoices & Payments: Get paid via UncommonGood and Stripe so you can track your income in one place.

Sign up for a free trial and get started today!

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By Carolyn Driscoll

February 15, 2024

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