Is that deductible? How to write off freelance business expenses on your taxes
The gig economy is showing no signs of slowing down with half of Americans projected to work freelance jobs by 2027, according to a study commissioned by the Freelancers Union and freelance project platform Upwork. The study also found that half of freelancers wouldn’t take a regular job for any amount of money. Given that contract work comes with a unique set of benefits like the opportunity to set your own schedule, rates and location, there’s little surprise there.
Whether you’re new to the game or you’ve been an in-house employee for the majority of your professional life, managing your finances as a freelancer — or specifically claiming deductions on work-related expenses — can feel like a second job in and of itself. Here’s what you need to know about writing off business expenses and claiming deductions as a freelancer.
What to write off
Claim office space
Granted you’re not a fixture at next door’s Starbucks, your home office is the first thing you want to write off. According to Andrew Oswalt, CPA, tax analyst at TaxAct, the standard way of claiming your total home expenses as they relate to that space, like mortgage interest, insurance, property taxes, utilities and security system, is to compare the amount of office space with the total space of your home.
“For example, if your office is 150 square feet, and your home is 1,800 square feet, you can claim 8 percent of your home-related expenses on your tax return,” said Oswalt.
Another simple way to claim deductions is to write off $5 per every square foot of your home used for business purposes, capped at 300 square feet, said Brittany Hamilton, director of operations at Bench Accounting.
Unfortunately, doing work from bed does not count as a home office. To qualify for the home office deduction, your area needs to be used exclusively for work purposes, photos of which you can include as evidence in your tax return. Additionally, said office needs to be the location in which you conduct your most important business activities the majority of the time.
Write off in-house expenses
Plenty of freelancers work in-house several or dozens of hours a week. Unfortunately, if you manage your freelance business from the confines of said in-house corporation, you cannot claim deductions on home office expenses like property taxes and utilities, said Hamilton.
You can only claim deductions on your home office if you prove that is where you perform administrative tasks like scheduling appointments or billing clients. However, if you purchase supplies like pens, paper and a laptop to use in-house, Oswalt said you’re able to write those off.
Claim a portion of phone and internet bills
If you’re like most freelancers, you use your phone and internet for both work and leisure. That means you can only write off the cost of each bill that was generated through business, said Hamilton. “Keeping detailed records to prove the amount of business use will help justify these expenses in the event of an audit,” Hamilton said. To do that, Oswalt suggested tracking the number of minutes you use each service for both personal and work purposes.
You can claim telephone and internet costs as utility expenses on Schedule C (Form 1040).
Write off business travel
As long as there’s internet, many freelancers are capable of working just about anywhere in the world. With that comes the need to expense travel. But the rules are a little tricky. “In order for a trip to qualify as business travel it has to be ordinary, necessary and away from your tax home. Your tax home is the entire city or area in which you conduct business, regardless of where your main residence is. You also need to be traveling away from your tax home for longer than a normal day’s work, requiring you to sleep or rest en route,” said Hamilton.
IRS-approved business expenses include your plane or train ticket, bus and cab fare, or car gas (to and within the destination), parking fees, tips, dry cleaning, meals, lodging, and any other elements you can prove are directly related to business activities.
How to keep track
Update your spreadsheet
Detailed Excel spreadsheets are your best friend when it comes to keeping track of your expenses. Oswalt suggested breaking down your expenses into columns like item purchased, description, data of purchase and reason for purchase.
“Those are exactly what you’ll need to justify your deduction to the IRS should the agency ever ask,” he said.
File any relevant paper receipts and keep a tab in your inbox strictly for electronic receipts so they’re in one place ready to go when it’s time to file taxes. Hamilton recommended apps like Shoeboxed or Expensify, which will create expense reports based on your scans of your paper receipts. Opening up a business-only credit card is also a great way to keep track of your expenses if you misplace receipts, said Oswalt, adding that you should hang onto receipts for at least three years after you file.
“You’ll want to keep track of receipts [of] anything over $75, invoices, confirmation emails or bank statements, and have detailed explanations of the cost, purpose and date of the expense,” said Hamilton. “That will help you or your tax professional streamline the process of maximizing the deductions that are available to you, and it will also reduce the stress of an audit.”
The chances of a freelancer getting audited are extremely low, but if you happen to be selected, don’t fret. “Generally, as long as you comply or dispute it legally, you won’t face serious repercussions,” said Hamilton. “Ensure that you are providing appropriate and sufficient proof when asked, paying the fees, or demonstrating intent was not criminal.”
Hire a professional
Unless you happen to be a freelance accountant, there’s a chance you’re going to be spending endless hours scrolling through the IRS website in a panic. Perform a cost-benefit analysis to determine whether it is worth it for you to hire a bookkeeper or chartered professional accountant in order to afford you more time to work on your business.
“This year in particular, there are a whole bunch of new rules associated with the new Trump tax law that are going to require interpretation,” said Hamilton, “and with the IRS facing an enormous backlog after the government shutdown, it’s going to be difficult to get your questions answered without hiring a professional.”