When it comes to calculating tax deductions for self-employed freelancers, "business expenses" can take many forms. Office supplies, tools of the trade, meals with clients, travel expenses, even moving expenses in some cases -- may all be eligible to be written off, come tax time.
Unfortunately, many self-employed entrepreneurs neglect to take advantage of the tax deductions available to them, as they do not have much/any background in business accounting and find the mere topic of "taxes" confusing and intimidating.
It's understandable: they are already working overtime delivering their professional services to clients, so dealing with taxes can feel like a second, completely new full-time job.
With Bonsai Tax software on their side, however, freelancers don't need a degree in finance to run a "tight ship" with their taxes, as it provides guidance along with functionality so that one can streamline tax material organization, categorization, tracking, and computing while getting more comfortable with the topic of taxes in general.
To take the fullest advantage of the different write-off options, freelancers should familiarize themselves with the deductions options available to them, as well as keep meticulous, ongoing records of qualifying expenditures and receipts (which is significantly simplified by using the Bonsai Tax receipt organizer feature).
Self-employed freelancers owe the IRS taxes every tax year, in accordance with how much money they made from their businesses. A tax deduction/write-off is a justified business expense that is subtracted from the entrepreneur's adjusted gross income. The more deductions there are, the smaller the sum of adjusted gross income that gets taxed.
You can use our self-employed tax calculator to see how much you'll owe.
Since tax deductions save money by paying fewer taxes, it follows that self-employed individuals who don't pay attention to organizing and claiming their business expenses as write-offs end up losing money by paying more taxes than they could have.
Which is a shame. Freelancers work very hard for their clients: they do not deserve to be short-changing themselves! The good news is that Bonsai Tax is designed specifically for taking the burden off of freelancers who struggle with juggling their professional work and staying on top of all the tax accounting -- by helping with organizing, filing, and generally making sense of their business expenses.
One type of business expense some freelancers find difficult to keep track of is gas expenditures associated with using a personal vehicle for business purposes.
If you use your car (that you own or lease) for business purposes, then yes you can deduct some vehicle expenses (including gasoline consumption), albeit within specified conditions and limits.
Not all business trip expenses qualify for a tax write-off. Driving to and from one's own office (known as "commuting miles"), for example, does not count. Tasks loosely related to business dealings -- such as using the trunk of the car to transport a work laptop or taking a call with a client while driving somewhere -- are not considered ways to "actively engage" with one's business and are, therefore, not tax-deductible.
To qualify for business mileage rate versus actual car expenses deduction, the self-employed entrepreneur's driving must be fully necessitated by hands-on business-related activity, such as:
There are two mutually exclusive ways "travel expenses" write-offs can be claimed by self-employed workers:
In most cases, the IRS lets self-employed entrepreneurs choose whether they prefer to deduct miles or gasoline (along with other travel expenses) on their tax return -- as long as the mileage or driving expenses qualify as deductions.
With this method, the taxpayer is responsible for tracking the miles driven for the qualifying business use by keeping a comprehensive record of all the dates and miles driven within the tax year, with brief descriptions of the corresponding errands (you can use our free mileage log template).
Standard mileage rates for "business miles" are set by the Internal Revenue Service (IRS) and the General Services Administration (GSA) each tax year: for the year 2020, the standard mileage rate was set at 57.5 cents per mile driven exclusively for business purposes; in the year 2021, it is 56 cents per mile.
The IRS also allows a standard mileage rate of 14 cents per mile driven for charitable organizations for entrepreneurs who volunteer.
Additionally, the self-employed taxpayer can claim a deduction of 17 cents per mile in 2020 and 16 cents per mile in 2021 for medical transportation costs. This is only in case when driving is essential to the individual's medical care, namely driving to/from doctors, hospitals, and pharmacies.
Keep in mind that the medical expenses deductions come with a caveat: one can only deduct one's medical expenses once they add up past the sum that surpasses 7.5 percent of one's adjusted gross income from the previous tax year. So, for example, if your adjusted gross income is $50,000, once you accumulate medical costs of $3,750 (which is 7.5 percent of $50,000), the qualifying medical expenses that come after that are tax-deductible.
To calculate your standard mileage deduction, tally up all your qualifying business miles and multiply that number by the IRS mileage rate. Say, you have driven 10,000 miles for business in 2021: so it will be 10000 x 0.56 = 5600. That's $5,600 you can deduct for travel expenses when you file taxes this year.
Keep in mind that taxpayers who use the standard mileage rate method are not allowed to write off other itemized car expenses other than mileage, with the exception of qualifying tolls and parking fees.
When it comes to the "actual expenses" method, it is very important to hold on to all receipts for taxes or qualifying business travel expenses (if you scan/import those receipts into the Bonsai Tax's travel expense tracker as they come in throughout the tax year, you will bypass the whole "buried in paperwork at the last minute" nightmare!)
The actual expenses approach allows for several car expenses to be deducted, such as:
Make sure to keep track of the personal miles vs. business miles you put on your car every month: you will need an estimation of the percentage of your car's business use. For example, you use your personal vehicle for personal errands 60 percent of the time and 40 percent of the time exclusively for business use: this means that, when you are calculating actual expenses for the tax year, your car's "business use" is at 40 percent.
Use the following formula to calculate the actual vehicle expenses deduction: take the sum total of your car expenses for the tax year and multiply it by the percentage of the miles you spent on a business-related driving activity. For example: if your total vehicle expenses for the tax year were $4,000 and you know that your business miles comprise 40 percent of car-related expenditures, you have: 4000 x 0.4 = 1600. That's $1,600 you can deduct for travel expenses that tax year.
Taking advantage of these deductions is a great way for independent contractors to avoid paying taxes.
For the most part, self-employed individuals are free to choose whichever write-off method makes the most sense to them (though not both, as a deduction "double dipping" is not permitted).
Novices are encouraged to try calculating both, the Standard Mileage and the Actual Expenses approaches to get a sense of how they work and the different results they can produce.
Note: In fact, if you want to scan your bank account or credit card records and automatically discover tax write-offs, try Bonsai Tax. Our software can help you determine which method is better for you. On average, our users save $5,600 on their tax bill by using our software. Claim a 14 day free trial here.
Some things to keep in mind when choosing:
If you own/lease your vehicle and wish to use the standard mileage method in filing your tax return, you must choose this option the first year you are claiming business miles. In the following years, you can switch to the calculation of the actual expense, but you must start off with the standard mileage first.
Furthermore, if you are leasing a vehicle and you started with the standard mileage approach, you must keep that same deduction method for the duration of the entire lease period, including renewals (review the IRS' full list of disqualifiers for claiming standard mileage here).
The actual expenses method may be especially attractive to a freelancer with a vehicle that costs higher-than-average to operate/maintain, as it allows for a bit more expense write-off versatility that can result in a bigger deductible for the tax year.
Some freelancers opt to use the standard mileage rate not necessarily because they see more sense in it but because they are put off by the comparatively more labor-intensive record-keeping required for tracking actual car expenses. However, Bonsai Tax simplifies and streamlines all the record-keeping, making this "disadvantage" of the car expenses deduction method a non-issue.
if you are a Lyft 1099, Uber, TaskRabbit or DoorDash independent contractor, you'll definitely want to double check both methods to see which one leads to the greater deduction.
Whether you choose to deduct your qualifying travel expenses through the standard mileage or the actual expenses method, the Bonsai Tax 1099 expense tracker for freelancers can take care of it for you, as it is capable of logging your business miles as well as scanning your receipts and importing your online credit card and bank statements into your online account.
Bonsai Tax software/app does not just lend a hand with receipts and the tracking of expenses: it helps you identify deductible expenses and sort them into appropriate categories, it keeps your digital archives safely stored in the cloud (so, if the hard copies are lost or destroyed, you still have all your records), and, come tax time, it assists with the filing of the tax return, using previously enrolled information to fill in the bulk of the digital "paperwork" on your behalf.
It also analyzes your expenditures and provides you with quarterly income tax estimations, so that you never lose sight of how much you will owe to the IRS for the tax year (truly, this is not the sort of "surprise" a business owner can afford).
Additionally, using Bonsai Tax does away with much of the pressure and anxiety associated with the whole tax process. Knowing that all your business expense materials are in order/on schedule is a big relief. Understanding that all of those records are there to serve as deductions that will lower your tax liability to the IRS is rewarding and validating.
Hiring an accountant is expensive. Tackling business taxes on one's own is stressful and time-consuming. Bonsai Tax is the "golden middle" solution that delivers the quality of an accountant and the precision, affordability, and convenience of an app. Sign up for a free trial and let smart software assist in the organizing and the filing of your taxes, so that you can focus your time and energy on what matters most to you: your professional work and your clients' satisfaction.