30+ self-employed tax deductions you should know
The business side of freelance work can be intimidating. In addition to properly managing invoice templates, expenses, and project workload, there is the matter of self employed taxes. One way to be certain that you aren’t overpaying each quarter is to be vigilant about claiming legitimate expenses as self employed tax deductions on your income statement.
The simple rule for deciding what to include is to make certain your expense was used in the day-to-day activities of your business and that you made enough in your business that it can be counted as a business --- and not a hobby. The full rules and guidelines for making the determination can be found on the IRS website, and it is also recommended that you consult a tax professional if there is any doubt in your mind as to what counts.
While you will probably spend quite a bit when getting started, and even more as your business grows, it can be easy to overlook some of the most basic deductions. These are the most common categories that self employed in a variety of industries should be looking to deduct this tax season. Remember, you can use Bonsai tax to automatically identify such tax deductions.
Home office space
Whether you work from a converted closet, or have a separate structure (such as a “she shed”) that you create from, you should be able to get some tax relief for expenses related to this space. How much you can claim will depend on a variety of factors, including if you use that space only for business, and how large the space is.
The last few years, the IRS has made it very easy to claim this deduction by using their home office deduction guide. Some people choose to do a direct expense method, totaling up the exact out-of-pocket costs for everything from home insurance to utilities, to small repairs to the space. Others have found the simplified method to be quicker, giving them a standard deduction of $5 per square foot of home used for business, with a maximum amount of $1500 (for the maximum 300 square feet).
You may also be able to deduct expenses from working away from home, such as in an office-sharing agreement or creator’s space.
Did you know that you can use Bonsai for accounting? Or that Bonsai can help you be prepared for self-employment tax by providing tax estimates, filling date reminders, and identifying your tax write-offs?
Let's see how that works. First, head to your main Bonsai dashboard and have a close look on the left side - we'll be working with the accounting and taxes sections. First click on "Accounting".
Inside the accounting section, you'll see a breakdown of your income and expenses. Both can either be automatically imported from your bank account, or manually added. Work you got paid for via Bonsai will also be registered here.
Make sure this section is properly filled in and click on "Taxes" next.
This is where the magic happens: Bonsai will do all the calculations for you, and we'll provide you with an overview of your tax estimates, a list of tax deductions you can use for the upcoming tax season, and reminders for all the upcoming filling dates.
Simple, right? If you're ready to check out Bonsai and explore all the features, go ahead and sign up for the free trial!
Software and services
Your web hosting, domain names, creation tools and anything needed to bring a project from brainstorm to final delivery is all considered a legitimate business expense. In addition to getting in the habit of checking your bank and credit card statements for regular charges for these items, it’s wise to include them on invoices to clients, when you can directly attribute the cost to their work. Whether you choose to add that to the cost is between you and client, but it’s good habit to track and make it easier come tax time.
Other expenses in this category include:
- Project management services
- Stock images, graphic art, music files, video services
- Editing software
- Team communication tools
- Social media and blogging apps
- Email services
If you pay for it, and it’s relevant to your business, it’s definitely worth considering.
You may not even realize that you spend a significant part of your freelance budget to advertise. Unlike traditional ad costs that larger businesses have (such as advertising in publications), your costs are likely to be broken up into smaller chunks and spread out across many platforms. Examples of ad costs can be anything from the fees you pay to a freelance marketplace to list your portfolio to money spent on Facebook ads or a LinkedIn premium membership.
Here are some other ad cost ideas:
- Sponsorship on a website, blog, or in their newsletter
- Email drip campaigns
- Landing pages
- Business cards
- Promotional items, such as branded pens and t-shirts
- Professional head shots
- Resume or CV services
If it’s a dollar spent to get your name out there, it can usually fall under the advertising category.
This is a big cost for self-employed professionals, but the benefit is that you can claim it as a business expense in most cases. If you’re profitable for the year, the IRS says that you can claim the amount spent out-of-pocket only. (So, no deducting amounts that were covered by subsidies or additional credits.) You also can’t claim more than you actually earned in a year. More details on if you qualify for this deduction can be found here. Generally speaking, you can claim health insurance costs for you, your spouse, and dependents under age 27. This deduction can be applied to medical, dental, and long-term care insurance, according to the IRS.
(Note: Ongoing changes to the ACA, Affordable Care Act, may alter this advice or make it obsolete. When it comes to matters of health insurance, it’s always wise to double-check with a pro, as penalties for not being properly insured can be expensive.)
There are all kinds of freelancers trying to deduct from their taxes the cost of their internet, phone, cell data plans, and even Netflix! But is this legit? The answer depends on whether the service was used solely for business. If you need that Netflix service for research and you only use it for research (no “Game of Thrones” just because), then you might be able to claim it. It’s always wise to check with your tax pro first, however, as these expenses aren’t common and are rare to qualify.
If you do have a dedicated cell just for business, however, or you have high-speed internet in your stand-alone office, remember to include these as part of your self employed tax deductions.
Tablets, computers, photography equipment, headsets, your stylus, and even an upgraded graphics card can be deducted if they are used in the normal course of business and aren’t used for other things. A computer that is also used by your kids and grandma won’t be a legitimate business expense, even if it’s your primary device for creating freelance work.
It’s wise to keep these things very separate (get the kids their own device), so that you’re not missing out on the potential to save on taxes. You’ll also want to be aware of any depreciation law that might prohibit you from claiming very expensive items all up front, and rather require you to take small amounts deducted over a period of several years. Your tax pro can be helpful in determining which hardware items would fall under this guideline.
Payment processing fees
If you use Paypal or another third-party processor, you probably aren’t getting the full amount owed to you after they take out their fees. Be sure you are listing the fees as a business expense, so you are not getting taxed on the full invoiced amount. This same rule goes for the cost to have money sent via check, money order, or wire transfer. Legitimate money transaction fees, the cost to process a credit card via Stripe or another device, or banking fees related to accepting payments should all be tracked and considered.
Additional items to deduct
It’s impossible to cover all potentially eligible freelance tax deduction here, but there are some additional categories of tax-deductible expenses that may apply to you. They include:
- Travel costs – flight, hotel, taxi, airport parking, valet, Uber/Lyft, bus, resort fees
- Meals – up to 100% deduction for food provided to a client, up to 50% for food you eat while traveling, for example
- Insurance – Home office, equipment, errors and omissions
- Events – conference tickets, seminar costs
- Training – online courses, ebooks, coaching
- Periodicals – magazines, books, and publications relating to your industry
- Professional fees – club and membership dues
- Contract labor – costs incurred for outsourcing services or hiring a VA
- Office supplies – pens, paper, cleaning supplies, lightbulbs, trash liners, calendars
- Repairs and maintenance – laptop repair, parts for your printer, new phone screen
Remember, for an item to hold up against IRS rules, you should have at least a receipt showing the amount, date, and what you purchased.
This list isn’t exhaustive, and it’s always wise to save every receipt for items purchased while working your freelance job. You can present this list to your tax professional for their final opinion on whether it counts. Remember, for an item to hold up against IRS rules, you should have at least a receipt showing the amount, date, and what you purchased; a credit card statement backing it up is wise, as well!
Explore Bonsai with a free trial - see how we can help you track expenses, identify tax deductions, and estimate quarterly taxes.