The tax deduction list for self-employed professionals
Being self-employed comes with benefits and drawbacks. For many, taxation is one of the latter, but it doesn’t have to be. There are various ways to achieve the much-sought tax deductions that any independent contractor wishes for. Freelancers, startup businesses and SMBs can proceed to job-related expenses deduction. Those expenses should be necessary and relevant to your field of business. To mention but a few, your home office, your bills and your travel expenses can be considered tax-deductible. That is the reason we assembled a tax deduction list for self-employed professionals.
All the following freelance tax-deductibles can lighten the burden of paying more taxes than you can handle. Typically, the possibility of a tax deduction is accompanied by a set of mandatory requirements that your business expenses should meet. Thus, we will dive into the most common cases in our self-employed tax deduction list to help you understand how to maximize your tax reduction. Plus, we will focus on the difference between standard and itemized deductions so that you, as an independent contractor, can choose the optimal way to calculate your deductions.
The simplified one (Standard Deduction)
Standard deduction involves a decrease of the gross income by a fixed amount of reduction. Every year, the deduction fluctuates. In 2020, the standard deduction for married taxpayers filing their income jointly is $24.800. For single taxpayers or married ones filing separately, the deduction is $12.400. If a taxpayer is head of household (unmarried with a dependent or child), then the standard deduction is $18.650.
The good news about choosing this method is that the amount rises every year. Moreover, you don’t need to keep track of each and every expense. Only the ones that opt for the method of itemized deduction should do that.
The regular one (Itemized Deduction)
Itemized deductions can be applied to the business expenses that the IRS recognizes as tax-deductibles. The deductions apply to a variety of business-related expenses. It takes more effort than the simplified method, but it can considerably reduce your taxable income.
By following this method, you can choose to deduct specific work-related expenses from your total income subject to tax. Some of the most common itemized deductions concern mortgage interest, investment interest, donations, unreimbursed medical costs and of course property, state and local income taxes.
Therefore, you should itemize to save more money if your standard deduction is not high enough. Remember that both methods cannot be used simultaneously, but you can choose a different method in every tax year.
Freelance tax deductions for home offices
If you operate your freelance ventures for the comfort of your home either because it’s cheaper or easier, you can deduct it as a “home office” expense. However, it’s not as simple as it sounds. If the Internal Revenue Service (IRS) knocks on your door, you should be able to justify the tax deduction for your home office.
First and foremost, your home office is a designated specific area where you do business. It does not include the whole interior of your house. Instead, you should carefully measure the exact square meters of your office space and have a layout that maps it out precisely.
Simplified deduction of home offices
If an independent contractor follows the simplified method, they should declare the accurate square meters of their workspace. Then, they are entitled to get $5 per m2, provided that the space is no bigger than 300m2. If the simplified method works for them, they don’t have to proceed to itemized deductions.
So let’s say that your office is 200m2, then you have to multiply the sum of square meters with the $5/ m2 that the IRS has set. So, your total tax deduction for having a home office will be $1000. In general, the home office tax deduction cannot surpass the amount of $1500.
Itemized deductions for home offices
However, if you see that itemized deduction benefits you more, opt for it. In the case that your residence is bigger than the limit of 300m2, the regular method will answer to your business needs. A bigger office means more expenses. Therefore, you should convert your square meters to the respective percentage of the house used for your freelance business. For example, if your office area is 500m2 and your house is 2000m2, 25% of it is destined for professional use.
Let’s not forget that house utilities can also be subjected to tax deduction if you are an independent contractor, which brings us to our next point.
Business expenses deduction
So, what job-related expenses are tax-deductible? Let’s start with the basic ones to address this question.
Businesses are eligible for cellphone, landline and internet connection deductions as long as they are only related to your business. However, if you have only one phone line connection, then you are not to deduct the whole bill but only a percentage of it. Similarly, you should calculate the time you have spent online in order to deduct the right amount of internet use.
Of course, all things can be more manageable if you have a business landline and internet connection so you can deduct 100% of its usage.
A percentage of electricity and gas are also tax-deductibles granted that they are strictly associated with the home office space. The same goes for heating and air conditioning if you are using either in the square meters of the home office. You can deduct all these expenses under the condition that you, as a taxpayer, choose to use the itemized deduction.
Rent and lease deduction
Not having your own office space at home requires you to find space for your business needs. Thus, rent deduction can be applied if you’re paying for an office, professional studio or any kind of work-related space to operate from. At the same time, if you lease equipment like computers and machines, they need to be used only for business purposes to be assessed as tax deductibles.
Tax-deductible business use of a personal vehicle
As a self-employed professional, your own car could be used for business reasons, especially if it’s the only vehicle you own. Thus, if you take work-related trips, then be sure to keep a full account of the reasons, the mileage and the timeframe for each one of them.
Regarding the mileage, you can count it by applying the standard mileage rate. In 2020, the rate is 57.5 cents (0.575$) per mile. So, you can multiply the miles you have done with your car by the standard mileage rate. If you have done 500 miles, you multiply them by 0.575$. Thus, the total tax-deductible amount is 282,5$.
Business travel tax deduction
A business trip to qualify for a deduction, it needs to be longer than a typical working day. It usually involves hotel accommodation as well as the cost of transportation to and from the place of destination.
Independent contractors also have the option to deduct 50% of their business meals’ worth. It would be wise not to try and deduct leisure activities and costly meals. The attempt to deduct those expenses could make your taxes a target for an audit by the IRS.
Business meals deduction
The meals you eat at your home office don’t count. However, business meals deduction by 50% is possible. Those meals can either be part of a business trip or simple professional lunch/dinner meetings with clients. Independent contractors should always keep safe all the necessary documents/receipts regarding their business meals to deduct those expenses.
Continuing education tax deduction
An interesting entry in our self-employed tax deduction list is the expense of supplementary education. If you wish to continue your studies in order to become a better professional, then a tax deduction is something you can rely on. Let’s say that a graphic designer wants to go back to university to attend some courses or seminars and learn new skills relevant to the profession they practice. So, self-employed professionals can deduct educational expenses like tuition, extra fees, university supplies, transportation, and other education expenses.
Life insurance premiums tax deduction
Having your own business means that you need to pay your own life insurance by yourself. When you were an employee, your life insurance policy and health benefits were strictly your employer’s responsibilities. If you have a small business of a few employees, you can deduct their life insurances since the tax administration views those expenses like employee benefits. Not anymore. If you are self-employed and self-insured, you can still deduct the life insurance premium, but there are specific parameters to take into account.
In reality, you could deduct as a freelancer your life insurance, as long as you are not part of your partner’s insurance plan. Only then, you can deduct premiums related to health, dental and other kinds of insurance premiums. Moreover, your spouse’s and children’s life insurance premiums are subject to tax deduction.
Advertising tax deductibles
In today’s business world, constant advertising is necessary to stay in the limelight. For that reason, this kind of costs requires a big part of a business’s budget. Therefore, you can deduct your web campaigns, Facebook ads, brochures, social media promotion, and hiring fees to ads experts or marketing agencies.
To sum up, digital and printed forms of advertising are tax deductibles. This is a valuable deduction, especially for growing startups and solopreneurs.
Tax deduction for publications & subscriptions
Anything related to your business development either it informs you, helps you network more efficiently or makes you a better professional can be deducted. So, business organizations, magazine subscriptions, book subscriptions, financial journals and publications related to your industry qualify as tax deductibles.
Interests are tax deductibles
If you have taken loans for business reasons, then their interests can be deducted. By interest, we mean credit cards, business car payments and generally loans (i.e. capital) concerning your company’s growth. Mortgage interests apply to people that have bought their houses and use a specified space of them as their home offices. For all the loans mentioned above to be deductible, you, as an independent contractor, should be liable for them.
First and foremost, it’s reassuring that our self-employed tax deduction list showcases multiple probable ways to lower your taxable income. Rent deductions, utilities and travel expenses seem likely to lighten the burden of taxation. Naturally, the expenses discussed in this article can be deducted (by following specific regulations) to help out independent contractors.
Your job is to have the full control of your expenses and the deductions you are entitled to. You can always hire a tax expert to help you organize your taxes and your deductions being an independent contractor. To facilitate the organization process, you can use an expense management software that can support you and help you keep track of what you spend.