Freelancers do not have taxes withheld like traditional employees. Instead they must make a lump sum payment of taxes due at the end of the year when many others are receiving a refund. While the freedom and flexibility of freelance work is a plus, a large tax payment due each April 15 can be a definite minus. Understanding the tax laws and claiming the write-offs available to you can make a big dent in your tax bill.
If you are a freelancer who works from home, the space you use as a portion of your rent or mortgage may be deductible. The equipment you use to perform your work is also deductible as long as the total deduction is not more than the income of the business for the year. Everything from the chair and desk you work at to the Internet connection and telephone line you use to work remotely is eligible for a deduction. You may be able to deduct a portion of your home's general utility bills, such as heat, water and landscaping maintenance, pro-rated to reflect the percentage of the home's square footage that is devoted to your home office. Keep careful, documented records of each expense for easy reporting at tax time.
As a freelancer your retirement savings is in your own hands. While diverting a portion of your income to future needs may be hard for many freelancers to manage, you are eligible to benefit from even better Roth and solo 401(k) plans than employees of large companies enjoy. As an employee and an employer of your own company you are allowed to deposit up to $50,000 a year in direct contributions and profit sharing as of 2012, or up to $55,000 if you are over 50. You can also take out penalty-free loans for up to 50 percent of the account balance. This can add up fast and provide far more tax-deferred retirement savings than the average traditional employee can accumulate.
Anything you do to improve your skills, enhance your ability to perform or to better serve your clients is considered deductible as an educational expense. This category includes everything from formal classes and degrees to self-help books, seminars, web programs, trade magazine subscriptions and attendance at industry trade shows. The best freelancers will constantly improve themselves and their craft and these deductions can help lessen the impact of doing so.
Freelancers often do not enjoy the benefit of employee funded health care coverage. Instead they are left to fund their own medical expenses or to enroll in an independent health insurance plan. The expense of medical care or coverage can be very high and at the end of the year it makes for a major deduction in your small business income tax. As someone who is considered to be self-employed, you are entitled to claim the money paid out for health insurance premiums as an adjustment to your gross income (1040 form, line 29). If you opt to claim the expense as an itemized deduction instead, you are limited to costs that total no more than 7.5 percent of your gross income in 2012, or 10 percent as of 2013.
Travel expenses related to your freelance work are also deductible. Travel expenses include the cost of an automobile, maintenance, gas, registration and all the other expenses involved with keeping it on the road and using it to travel to and from work or gigs. Records of business travel versus personal travel must be kept to prove the deductions are accurate. If you don't drive, you can still deduct the cost of bus or train fare or even a bicycle that gets you there and back.
If you spend part of your time trying to find work, arranging gigs or meeting with clients, your expenses in all these cases are deductible. Job searching is a real part of a freelancer's work schedule and the advertising, interviews, client lunches and other costs involved in getting things underway should be reported with documented proof of each expenditure.
- Kiplinger: Tax Rules and Write-Offs for the Self-Employed
- Forbes: Eight Money Tips for Freelancers
- Turbo Tax: Top Tax Write-offs for the Self-Employed
- The Wall Street Journal: Tax Tips for Freelancers and Those Who Lost Jobs
- CNN Money: Tax Write-Offs for Freelancers
- Mother Earth News: Tax Credit for Bicycle Commuting
- Bankrate.com: Deductible Health Insurance Premiums
- Fox Business: Small Business Center: Individual 401(k)s May Offer Self-Employed More Advantages Than a SEP IRA
Robert Morello has an extensive travel, marketing and business background. He graduated with a Bachelor of Arts from Columbia University in 2002 and has worked in travel as a guide, corporate senior marketing and product manager and travel consultant/expert. Morello is a professional writer and adjunct professor of travel and tourism.