Here are my ‘elite eighteen’ for freelancers:
1. Advertising and marketing expenses
What good is having an amazing consulting business if no one knows about it? All things marketing and getting your business name out there are tax deductible- marketing email services, Facebook ads, promotional swag to customers, etc.
2. Books, courses, and coaching
Continuing your professional education is now on your shoulders, and you should write off all your learning and research expenses. This also includes any professional licenses you may need to maintain to do your job.
3. Health insurance
If you’re paying for your own health insurance, you’re likely able to deduct the cost of your premiums. There are some restrictions to this, and so check with your Mylance tax resource. Depending on your tax structure (read here: if you’re an S Corp owner), you may need to include your health insurance premiums as wages, but you should be able to take an income tax deduction for them on your return.
4. Software subscriptions and membership fees
Adobe, Google suite, Microsoft Office, Spotify, YouTube Premium, Amazon Prime, Audible… oh wait, those are just some of the subscriptions I write-off personally, but you get the idea. We all know these subscriptions quickly accumulate, so we recommend taking the time to review your monthly subs and make sure you’re paying for them with your business bank account.
If you need childcare in order to enable yourself to work or look for work, these expenses can be written off - with some limitations per year - $3,000 for one child and $6,000 for two or more children. So book that favorite babysitter, summer camp, nanny, after-school care!
6. Legal, accounting, and professional expenses
All the professional fees you pay to run and support your business (including your monthly Mylance subscriptions!) are tax deductible. Don’t forget about those professional fees/start-up costs you incurred before you actually got the business up and running, we don’t want you to leave money on the table.
7. Internet and cell phone bills
I bet the only reason you have those crazy expensive internet and cell phone plans is because you need them for your business… make sure you’re writing off the full portion of the bill that relates to your business.
8. Office supplies
It adds up fast! So use that business card for all your printing, postage, notebooks, pens, monitors, computer equipment, etc. Keep in mind that certain purchases may be considered depreciable assets instead of expenses - my general rule of thumb is that if a single item costs more than $2,500 it’s likely going to be an asset and not an expense.
9. Rent or co-working space
While we love working from home, sometimes you need a change of scenery. The costs related to a commercial or shared office space are deductible. Also, you don’t have to have a monthly subscription or signed lease - if you occasionally pop into a shared working space like an internet cafe these costs count as deductible, too.
10. Business travel and meals
If you’re travelling for work (even if partially personal), make sure you pay for it using the business bank account and deduct the portion related to work. Also, fun fact, since restaurants took such a beating during Covid, the IRS lifted the 50% limit on tax deductions of business meals and entertainment for 2021 and 2022 to encourage people to get back out there!
11. Business insurance premiums
We should all carry basic insurances: errors and omissions, worker’s comp, etc. - in fact, some insurance coverage may be required by the State you live in. These premiums are a deductible expense.
12. Credit card and loan interest
Do you use a credit card and/or business loan to fund your business purchases? If so, make sure you’re deducting the cost of interest and fees for these types of financing. It does need to be a loan/card at market rate and an arm’s length transaction, so you can’t necessarily just write off the loan Grandma gave you to get your business started (unless Grandma is a shrewd businesswoman and made you sign a market-rate loan instrument… go Grandma!).
13. Home office
You probably work from home (like everyone else has for the past two years…). Did you know you can deduct the relevant portion of your monthly household expenses from your business income? So if you use 25% of your home exclusively for work, you can deduct 25% of your costs (e.g. monthly rent, utilities, renters’ insurance, etc.) from your business income.
14. Vehicle expenses
There are two main ways to take advantage of vehicle expenses for business. Usually, the most advantageous method is to take a flat rate deduction per mile, but double check with your Mylance tax resource about your specific scenario. For 2021, the tax deduction rate is 56 cents per business mile, so make sure you’re keeping record of how many business miles you drive in the course of a year.
15. Wages and subcontractors
If you pay employees or subcontractors to perform work for your business, these payments should be deducted from your business income as labor costs. Just don’t forget to issue them a W-2 or 1099 after the end of year!
We’re all in different places in our savings journey. However, it’s important that the first person you pay is your future self. Even though you’re self-employed there are many retirement plans still available to you (e.g. SEP, solo 401k, IRA, etc.), and they may help lower your tax bill. For example, as a freelancer you can contribute up to 25% of your net self-employment earnings to a SEP IRA and it’s tax deductible.
17. Self-employment taxes
Self-employment taxes are just a fancy way of saying ‘social taxes for the self-employed’. This is how you pay your social security and Medicare taxes. One-half of the amount you pay (the ‘employer portion’) can be deducted against your taxable income for income taxes.
18. Qualified Business Income (QBI) tax deduction
This is a relatively new deduction, and it allows you to deduct up to 20% of your net business income from your taxable total. It can be a complicated calculation and there are certain restrictions on who qualifies, so ask your Mylance tax resource for help.
At the end of the day, the IRS considers a business expense to be deductible provided it is both ‘ordinary and necessary’. An ‘ordinary’ expense is one that is common and accepted in your trade or business. A ‘necessary’ expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
So make sure you’re scooping up all the ‘ordinary and necessary’ expenses you have, and also make sure to retain some form of record of the expense (and yes, credit card statements should suffice).
Remember! If you sign up for a Mylance tax subscription in the next two weeks, we’ll credit your first month and throw in your 2021 tax returns for free! A month on us and free tax returns - just use promo code MYFREE when you sign up here.
All the best,
I specialize in helping businesses-of-one and start-ups achieve financial and tax compliance while saving them tens of thousands of dollars each year.