These days, more professionals are shifting from the role of full-time employee to freelancer, a movement that some refer to as a gig economy. If you have freelance income to report by U.S. tax day (Apr. 17), your taxes will be more involved than your colleagues’, who only have W-2 forms.
Whether this is your first year self-employed, or you’re an experienced entrepreneur, freelancing comes with a whole new set of tax issues. But you can still find plenty of opportunities to cut your tax bill.
Related Post: 10 Tax Tips for Small Business Success
As an entrepreneur, you can deduct a lot of your expenses, such as the cost of a computer, office supplies and work-related travel. You may even be able to deduct your health insurance premiums and part of your rent or mortgage.
Below you will learn about some of the key business tax deductions available to freelancers, self-employed taxpayers with small or startup businesses, or other sole proprietors.
1. Health Insurance
As part of the Small Business Jobs Act, self-employed taxpayers, including sole proprietors reporting income on Schedule C, may be able to deduct the cost of health insurance for themselves and their families. However, the deduction isn’t available if you were able to participate in an employer-subsidized health plan (either by your employer or spouse’s employer). And this deduction can’t exceed the earned income you collect from your business.
If applicable, take this tax deduction on Form 1040 Line 29. You can find a Self-Employed Health Insurance Deduction worksheet in the instructions for Form 1040 (scroll down to line 29).
2. Home Office
If you work from home, you may be entitled to deduct a portion of your housing costs. To qualify, you must use part of your home, “exclusively and regularly as your principal place of business,” or “exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business.”
Home office deductions are based on the percentage of your home that is used for business purposes. If you use a spare room (180 sq. ft.) as an office and your home is 1,900 sq. ft., then you can write off 9.5% of certain home expenses, including rent or mortgage payments, insurance (homeowners or renters) and utilities. Direct costs relating to the space, such as repairs or paint, can also be deducted.
Although this business tax deduction is commonly considered a red flag for an IRS audit, if you play by the IRS’s rules and qualify, don’t be afraid to take this legitimate deduction. For a full explanation of the home office deduction, including eligibility and record-keeping requirements, check out IRS Publication 587.
3. Monthly Utilities
If you are taking the home office deduction, you may also deduct a percentage of your heating and electricity bills. You may be able to deduct a portion of your home Internet bill, if you can prove it’s work related.
Of course, if you rent or have purchased a dedicated, out-of-home office, utilities for this space are 100% deductible. Additionally, phones used for business are legitimate self-employed deductions. This includes a second line in your home or a cellphone for business use.
4. Office Supplies
You can deduct the cost of equipment you buy for your business, such as filing cabinets, desk, printers and office supplies like pens and envelopes.
What about your laptop and tablet? If they are used for your freelance or small business, they can be deducted. However, if you only have one laptop and use it partly for business, and partly for personal purposes, you can only deduct the percentage of its business use (e.g. 60% for business). Refer to publication 535 for more details on business expenses.
5. Autos and Commuting
In general, commuting is considered personal use and is not deductible. If you’re self-employed and have an office outside of the home, you cannot deduct your commute to the office. However, you can deduct travel to meet a client, purchase business supplies or conduct research. Travel expenses include any public transit, parking and tolls.
If you’re driving to meet a customer or conducting business travel, you can deduct a standard mileage rate for this travel (Note: you could also opt to calculate your auto deductions, based on actual expenses; refer to IRS Publication 463 for more details.)
For the standard mileage rate, you’ll need to use two different rates for your 2011 calculations. For Jan. 1 through June 30, 2011, the standard rate is $0.51 per mile; for July 1 through Dec. 31, 2011, the rate is $0.555 cents per mile. Again, refer to Pub 463 for all the details.
If your trip was primarily for business purposes, for example, to meet with a potential client or attend a conference, you can deduct certain expenses. You should be able to fully deduct any transportation costs (plane tickets, taxis, airport parking, etc.). You can deduct hotel costs for any business days; if you combine work and play, you can’t deduct lodging and meals for your personal days (although transportation is still fully deductible).
Business owners and self-employed taxpayers can write off 50% of business meals, as well as entertainment. If you take a client to a basketball game, you can deduct 50% of the ticket costs, as long as business was discussed before or after the event. If you’re away from home overnight, you can claim a daily meal allowance of $46 per day in small localities. (Most major cities will qualify for a higher standard meal allowance; per diem rates are listed in Publication 1542.)
While it’s always advisable to hold on to any receipts, you particularly need to keep track of receipts for your meal, lodging and entertainment expenses. Publication 463 advises you which expenses can be deducted.
7. Retirement Plans
Self-employed business owners can stash money away in tax-deferred retirement plans. For example, in 2011 you can contribute up to $49,000 into a SEP IRA or solo 401(k) plan. To qualify for your 2011 tax return, you needed to have set up a plan by Dec. 31, 2011. However, once the plan is established, you’re able to deduct contributions up to your tax-return filing date (Apr. 17).
As with any tax strategy, the best way to avoid trouble is to be honest about your income, deduct only the expenses you’re entitled to, and keep all receipts and supporting documentation to back up your deductions. And of course, consulting with a qualified tax professional is always wise to make sure you’re following the rules and enjoying all the deductions available to you.
Business Tax Deductions Conclusion
If you’re self-employed, operating as a sole proprietor, tax time can be yet another reminder that you haven’t addressed your business structure yet. Talk with a CPA or tax adviser to see whether an S Corporation (which can help business owners reduce their self-employment or Social Security/Medicare taxes) is right for you. The LLC and S Corp can protect your personal assets on the off chance your business is sued or can’t pay its debts. While it’s too late to impact your 2011 taxes, the end of tax time is a perfect time to reassess what’s next for your business.
No matter how busy you get with your startup, set aside some time to address these matters and take your tax and legal obligations seriously. Getting your tax filings in order from the start will help you avoid any pitfalls down the road, and will help you scale your business successfully as you grow.
How much money can you save with these business tax deductions?
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