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Taxes: Writeoffs for Freelancers

by John Coates  |  April 6/2011  |  , , , ,
receipts - expenses

Need to hold onto these

Want to send a group of freelancers running for the hills? Easy – just tell them it’s tax time.

If your freelance career doesn’t involve accounting (or numbers, really) in any way, shape, or form–or you managed to get away with skipping all of your econ classes during college–then this guide to write-offs is definitely for you. And as always, an accountant can really help get you your largest write-offs.

Home Expenses

If you have space in your home that you use solely for work, then you can deduct it for tax reasons. You’ll have to prove, however, that it is really a work-oriented space (that means no deducting the TV/La-Z-Boy room, kitchen, or rock-climbing annex.) Just make sure to multiply the space of the office by your rent/mortgage, then deduct that amount. Additionally, if you can prove that your cell phone is used for business, feel free to deduct (home phone lines are usually never subject to write-offs and cell phones might be only partially deductible.) A portion of your insurance and mortgage interest might also be available for a write-off.

Travel/Transportation

Travel from your home office to and from business conferences, meetings, and for research is definitely a tax-deductible expense–even if you’re just running to the store to buy paper (as long as the paper isn’t an afterthought once you’ve picked up your midnight Doritos meal). Keep meticulous records of your gas mileage, receipts, and toll payments; you can also deduct a reasonable amount of your car payment and insurance if you use a car for a significant percentage of your business travel.

Memberships


If you’re a part of a membership-only organization that provides networking services (like your community Chamber of Commerce or Lion’s Club), and you need to pay dues, then you can also deduct that as a business-related service.

Health Insurance

If you purchase your own health insurance (which you probably are, unless you have the lucky distinction of being named a freelance doctor) you may be eligible for a deduction. As of 2010, you, the self-employed individual, can deduct 100% of the amount paid on health insurance premiums for you and your family.

Payment to Subcontractors

Subcontracting work is a good way to make extra money, free up the ability to take on new clients, and get a tax write-off. Make sure you explicitly document this arrangement so that it’s purely a contract agreement and not technical employment, or else you’ll be subject to extra taxes. Also make sure you get an invoice from whomever you’re working from, as well as track invoices on your own.

Research/Job Hunting/Site Fees

Sometimes, freelancers need access to job hunting sites–and sometimes, these sites make you pay. (Other sites compel you to buy leads on new opportunities, or bid for the opportunity to work on a particular project, as well.) And whether you’re a writer, a designer, a part-time clown, or anything in between, you’ll probably need to pay for research. Some deductible expenses may include the following: magazine subscriptions, book purchases, the cost of career-related software, printer/ink, web hosting fees, the cost of the computer itself, etc. And, if you use Paypal or other sites to collect payments from clients, you can deduct the merchant fees as well.

Unpaid Invoices

One of the downsides to freelancing? Often times, clients don’t feel obligated to pay you your work’s worth. Luckily, the IRS has a solution: Self-employed businesspeople can write off unpaid invoices as “bad debts.” IRS Publication 535 has more information. You need to have first recorded the invoices as income (if using the cash basis of accounting, you never would have and therefore cannot write unpaid invoices off).


  • http://SIX15.com Jeff Mackey

    This post and the past few have been great. Keep them coming–I love it!

  • http://digitalcraftworks.com Ben Dunlap

    It’s great to see reminders like this, but giving tax advice from Toronto that’s tailored for a US-based audience is a bit of a risky endeavor — for example the following bit from your post, about subcontractors, strikes me as fairly dicey:

    “Make sure you explicitly document this arrangement so that it’s purely a contract agreement and not technical employment, or else you’ll be subject to extra taxes.”

    Unfortunately in the USA (or at least in California where I am), simply documenting a contractor arrangement has very little legal weight at all. In other words, having a “contract” does not a contractor make.

    If the business owner ever does get audited, it would probably be the state employment department doing the audit, and the likely focus of the audit would be worker’s comp insurance, not taxes.

    In a worker’s comp audit, the relevant state agency will look less at the existence or wording of a contract, and more at the reality of the situation: What sort of work is the purported contractor doing, does the worker have other clients besides the business owner, who sets the worker’s schedule and work guidelines, etc.

    And if the worker is determined to be an employee after all, and not a true contractor (regardless of what any paperwork says), the business owner could owe back premiums for worker’s comp and possibly back wages for overtime. The business owner could also be subject to a hefty fine — $5k or $10k per worker in California. I can’t remember which at the moment, but either one could be enough to put a small operation out of business.

    Not a pretty reality but that’s what it is, at least in California.

  • http://www.freshbooks.com/blog John Coates

    Hi Ben – I totally agree. A lot of these laws vary state to state and country to country – but thanks for the specific information about California – very much a needed comment. There are still some good more general things to know and way to prepare yourself for taxes.

  • http://fundtimes.wordpress.com/ Tamar Cloyd

    This is why FreshBooks is the best thing since sliced bread! Love the timely posts and yes, keep them coming :)

  • Patrick

    A cash basis company cannot write off a bad debt if the debt was never included as income. Read down to CASH BASIS on that IRS page for US IRS rules!

  • http://www.freshbooks.com/our-team.php#coates John Coates

    Hi Patrick, absolutely correct. As said in the post, if you use the cash basis, you never would have counted it as income, and therefore, cannot write it off. I just updated the post to make it more clear.


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