As the end of the year approaches, it’s time to consider your finances, and what you need to figure out for tax time. I recently had a phone call with my accountant, to talk about what I need to do to organize my paperwork and prepare for tax time with all of the new developments in my life and business during the last year.
I’ve also thought about the tax deductions available to me this year. There are a number of tax deductions for freelancers, and here are 5 that you want to miss.
1. Health Insurance
If you have to purchase health insurance as a self-employed person, you can deduct the premiums you pay. I’ve long been responsible for my own health insurance, and when I moved to Idaho, I used the health care exchange to find a new policy. My income doesn’t allow me to qualify for a subsidy, but being self-employed means that I can deduct a portion of my costs on my taxes. You can report on your Schedule C, but I usually report on my Profit & Loss statement.
2. Computers and Software
When you use a computer for your freelance work, its cost can be deducted on your taxes. Consult with your accountant to determine whether you will need to use a depreciation calculation, or whether you can deduct the entire amount at once, in one year.
Software programs you use for your work can also be tax deductions for freelancers. I bought Scrivener, a great program for writers, to help me when I ghostwrite books. Graphic designers can deduct the cost of programs like InDesign. Just make sure that you use what you buy for business, not personal projects.
3. Internet Costs
Many freelancers live on the Internet. It’s where we find jobs, communicate with clients, and turn in our work. When you use the Internet for work, you can deduct the cost. However, you do need to make a calculation. Chances are, you use your home Internet for more than work. You need to figure out how much of your online usage is for legitimate business. About 75% of my household’s Internet usage is for work (it used to be closer to 90%, but my son is a teenager now), so I can deduct 75% of my monthly Internet bill on my taxes.
4. Home Office
One of the classic tax deductions for freelancers is the home office deduction. You have two choices when deciding how to take your home office deduction. You can base your deduction on the percentage of your home taken by your office, or you can deduct based on a flat rate. Because my home office space is small, it makes more sense for me to base it on a percentage.
You do need to be careful, though. If you have bought your home, and you sell it at a profit, you may owe money, based on the appreciation of your home. As a renter, you don’t have to worry about the appreciation of your home, and you can still take a deduction for your home office.
My favorite of all the tax deductions for freelancers is what you can take for travel. However, in order to claim tax deductions for travel you need to go for business. If you attend conferences or trade shows related to the freelance work you do, it counts as a deduction. I usually attend a conference for financial writers, as well blogging conferences. This allows me to learn skills and network with potential clients and partners.
No matter what deductions you take as a freelancer, it’s important to keep good records. You need to be able to show the IRS that you really are engaging in business activities. Look back on this year to see what you are eligible for, and then plan ahead for next year. You might be surprised at the available tax deductions for freelancers.