The Top 20 Self-Employment Tax Deductions Freelancers Need To Know
Before filing your self-employment taxes, see if you qualify for any of these self-employment tax deductions to help you save on your tax return.
Understanding the small business tax code’s nuances has never been a walk in the park (especially when the tax laws are constantly changing), but when it comes to freelance taxes…? Let’s just say that those are a whole different ballgame.
According to a 2015 study done by Xero, 73% of freelancers don’t deduct any expenses when filing their taxes. Considering how many people now rely on freelancing gigs as a primary source of income, that number is frankly shocking and prompts the question: Are you maximizing your tax deductions as a freelancer?
If you’re self-employed, there are 20 very important tax freelance deductions you need to know about. Gaining a basic understanding of how freelance taxes work and what you can and can’t deduct can save you a good chunk of change and spare you from trouble with the IRS down the line. Whether you operate an online shop and are looking to slash your tax liabilities or you operate a blog and you’re looking for freelance tax deductions, this post is for you.
Read on for several money-saving tips and learn about the top 20 tax deductions available for freelancers.
Table of Contents
- The Basics Of Self-Employment Taxes
- The Top 20 Self-Employment Tax Deductions For Freelancers
- 1) Self-Employment Tax Deduction
- 2) Deduct Health Insurance Premiums
- 3) Home Office Deduction
- 4) Office Supplies Deduction
- 5) Travel Deduction
- 6) Mileage Deduction
- 7) Hardware & Software Deduction
- 8) Education Deduction
- 9) Retirement Contributions Deduction
- 10) Advertising & Marketing Deduction
- 11) Membership Dues Deduction
- 12) Internet & Phone Expenses Deduction
- 13) Transaction Fees Deduction
- 14) Web Hosting & Online Tools Deduction
- 15) Contract Labor Deduction
- 16) Business Loan & Credit Card Interest Deduction
- 17) Business Insurance Deduction
- 18) Startup Costs Deduction
- 19) Real Estate Taxes Deduction
- 20) License Fees Deduction
- How The Coronavirus Affects Self-Employment Taxes
- New Tax Laws May Equal New Savings For The Self-Employed
- Start Saving On Your Self-Employment Taxes
- Self-Employment Tax FAQs
The Basics Of Self-Employment Taxes
Freelancing is a form of self-employment in which a person offers their service for a fee (rather than relying on a traditional employment arrangement). A person is required by law to pay taxes to the US government if they receive a freelance income of $400 (or a church employee income of over $108.28) in a given year.
If you are a freelancer, you will have to save a certain percentage of your income to pay your taxes. Most financial professionals advise freelancers to save around 25% (or even 30%) of their total income to cover these taxes. Freelancers may be required to pay taxes every quarter rather than annually (cue estimated quarterly taxes), depending on the size of their earnings.
If you’re new to freelance taxes, check out our post, The Complete Beginner’s Guide To Freelance Taxes, to learn more about what taxes you may owe, what you need to file, and how to lessen the stress of filing and paying your taxes.
Estimated Quarterly Taxes
Most taxpayers are used to the April 15th deadline when filing taxes for the previous year. However, freelancers are often required to pay estimated quarterly taxes. Instead of paying taxes once a year, some self-employed individuals will pay these estimated taxes four times a year.
According to the IRS, individuals who expect to pay at least $1,000 in taxes for the year should file estimated quarterly taxes instead of waiting until April to file.
As always, we recommend consulting with an accountant or tax professional for tax advice — especially when it comes to freelance taxes. They will be able to assist you in officially determining whether you need to pay estimated quarterly taxes and, if so, how much.
Tracking Freelance Finances
When you’re self-employed, it’s incredibly important to keep your finances organized. That’s where easy-to-use accounting software comes in.
Most freelancers would probably rather be finding new clients, creating new marketing strategies, improving their brand and social media presence — basically doing anything but accounting. But earning freelancer income is only half the battle. Managing that income and keeping track of your business earnings and expenses — that’s what sets you up for long-term success.
Luckily, there are multiple accounting programs that are designed specifically for freelancers, such as QuickBooks Self-Employed. QuickBooks Self-Employed helps freelancers keep track of their income and expenses, manage deductions, and calculate estimated quarterly taxes. It even includes a TurboTax plan so that you can easily file your taxes. Read our full QuickBooks Self-Employed review to learn more.
A great choice for freelancers needing some extra help managing their business
Whichever accounting software you choose, it’s important to record your income so that you can set aside the proper amount for taxes, track your expenses to maximize deductions, and keep your finances organized in case you ever face an audit.
Tip: Hire A Tax Professional
The biggest tip I have for freelancers is to hire an accountant or tax professional. When you’re self-employed and trying to save as much money as you can, it seems counterintuitive to hire an accountant, but trust me — the expense will more than pay for itself.
As a previous independent contractor, I’m speaking from experience here. When I started out as a 1099 contractor, I knew a little bit about self-employment deductions. I saved 25% of each check, kept a careful record of my business-related mileage, and saved all of my business expense receipts. But without the help of an accountant, I still would have missed out on over $3,000 worth of deductions I didn’t know about.
Accountants and tax professionals can help you navigate the murky waters of freelance taxes and find you all sorts of savings. They know exactly what you can write off, which deductions you qualify for, and which deductions could put you on the radar for an audit. This expertise is priceless.
But don’t let your accountant do all the work. Even if you’re paying someone to do your taxes for you, every freelancer needs to know what qualifies as a tax deduction. Knowing which deductions you are eligible for and keeping careful records of your receipts and expenses throughout the year can help ensure you save as much on your freelance taxes as possible. (And since accountants are often paid by the hour, the less work they have to do, the more money you’ll save.)
The Top 20 Self-Employment Tax Deductions For Freelancers
Whether you are about to file your taxes and are searching for last-minute savings, or you are trying to track your deductible expenses throughout the year to get ahead of the tax game, here are the top 20 tax deductions freelancers and independent contractors should know about:
1) Self-Employment Tax Deduction
Remember when we said that freelancers are required to pay a 15.3% self-employment tax? Since freelancers are self-employed, they serve as both the employee and the employer, resulting in that 15.3% tax rate. Half of that tax would be covered by your employer in a traditional job.
This deduction allows you to deduct the employer-equivalent portion of your self-employment tax (approx. 50%-57%). This deduction only affects your income tax. Contact an accountant or tax professional to see if you’re eligible for the self-employment tax deduction.
2) Deduct Health Insurance Premiums
Since freelancers have to provide their own health insurance, self-employed individuals can often deduct their health insurance premiums. The deduction cannot exceed your annual earned income.
3) Home Office Deduction
If you have a designated space in your home that is used exclusively for your business, you may be eligible for the home office deduction. You can use the simplified method and claim $5 per square foot, or you can use the complex method and write off direct expenses related to your office, including furniture, maintenance, equipment, and a portion of your utilities. Contact your accountant to see if you are eligible and determine the best way to claim your home office deduction.
4) Office Supplies Deduction
Do you use printer ink or buy stamps to run your business? There’s a deduction for that!
Freelancers (and small businesses) can deduct office supplies so long as they are “ordinary and necessary” (which is the IRS’s rule of thumb for all deductions). Be sure to save all of your receipts so that you can file your taxes properly at the end of the year.
5) Travel Deduction
As a freelancer, you can deduct travel expenses so long as the travel is strictly business-related. Again, be sure to save your receipts, airline ticket confirmations, etc.
6) Mileage Deduction
If you’re self-employed, you can deduct business-related mileage. The 2021 mileage rate is $0.56 per mile, which quickly adds up.
Carefully log your start and end mileage, your starting point, your destination, and the purpose of the trip in a notebook (or using a tax software program such as QuickBooks Self-Employed). You can also choose to deduct vehicle expenses instead of mileage. Talk to your accountant about which option is best for you.
7) Hardware & Software Deduction
If you require specific hardware and software to run your business, these purchases can count as deductions. Talk to your accountant about the best way to deduct these expenses, as some bigger purchases may need to be depreciated.
8) Education Deduction
Certain educational or certification expenses can also be deducted so long as they are directly related to your current line of work and not a new career. Keep track of your tuition and other education expenses throughout the year to claim this deduction.
9) Retirement Contributions Deduction
Since self-employed individuals are responsible for their own retirement accounts, retirement contributions can also be deductible. Keep track of any contributions you make to your SEP or IRA plans throughout the year to take advantage of this deduction.
10) Advertising & Marketing Deduction
Advertising and marketing expenses used to expand your business and bring in new customers can also be deducted.
11) Membership Dues Deduction
If you’re a member of a qualified club or organization, you may be able to deduct your membership dues. No, a country club or social organization doesn’t count. However, you can deduct dues paid to organizations, including the Chamber of Commerce, state boards, or trade associations.
12) Internet & Phone Expenses Deduction
If you use your internet, landline phone, or cell phone for business, you qualify for a deduction. Remember, though, that you can only deduct a portion based on your business usage of your phone and internet — personal usage does not qualify for a deduction. Talk to your accountant to learn more about calculating your deduction for phone and internet.
13) Transaction Fees Deduction
This deduction is for you if you work or receive payments through platforms such as Etsy or PayPal. Any transaction fees paid to a third party can be deducted from your taxes.
14) Web Hosting & Online Tools Deduction
If you have a website and pay fees for web hosting, these expenses can be deducted from your taxes. If you use other online tools for your business (think Hootsuite, Skype, or Buffer), these expenses can also be deducted.
15) Contract Labor Deduction
If you hired another freelancer or contractor to do work for you — for example, writing content for your blog or website — a deduction can be taken.
16) Business Loan & Credit Card Interest Deduction
If you’ve paid interest on a business loan, line of credit, or credit card, this interest is deductible. Interest on loans or financial products used for personal expenses does not qualify as a tax deduction.
17) Business Insurance Deduction
If you pay an annual or monthly premium for any type of business insurance, you can claim it as a deduction. Some examples of qualifying expenses include auto insurance for a vehicle used for business or business liability insurance.
18) Startup Costs Deduction
Started a new business? You can deduct up to $5,000 of business startup costs. Per the IRS, these costs include “any amounts paid or incurred in connection with creating an active trade or business or investigating the creation or acquisition of an active trade or business.” Talk to your accountant to find out more about eligible startup costs.
19) Real Estate Taxes Deduction
Certain taxes can be deducted on your return. These include real estate taxes paid on your office (if you work from home, a portion can be deducted), state and local taxes, and federal unemployment taxes.
20) License Fees Deduction
If your business requires you to hold a specific license, fees associated with this license may be eligible for deduction. For example, if you’re a freelance real estate agent or real estate investor, licensing fees may be deductible. Talk to your accountant for more information.
The COVID-19 pandemic likely affected your business in some way, and for many small business owners, this carries over into tax season. There are a number of money-saving tax benefits and credits that may apply to your business. Here’s a brief rundown of what deductions and credits you may be eligible to receive:
- Economic Injury Disaster (EIDL) Loans & Advances: If you received an EIDL loan or advance, expenses paid for with these funds might be tax-deductible.
- Paycheck Protection Program (PPP) Loans: If you received funding through the PPP, expenses paid for using these funds might also be tax-deductible.
- Employee Retention Credit: Small businesses that meet specific requirements may be eligible to receive the Employee Retention Credit. This credit can be claimed on quarterly tax returns. One thing to note is that most small businesses that received a PPP loan are ineligible to claim this credit.
Navigating the new territory of COVID-related tax deductions and credits can be confusing, so make sure to discuss your specific situation with your accountant to get the most out of your next tax filing. Also, make sure to check out How Will PPP Loans & EIDL Advances Affect My 2020 Taxes? to learn more about the tax relief afforded to businesses impacted by the coronavirus.
New Tax Laws May Equal New Savings For The Self-Employed
The new Tax Cuts and Jobs Act was one of the biggest tax law changes in decades. While the IRS is still rolling out the full implications of these changes, one of the most important changes for freelancers is the new 20% qualified business income deduction, otherwise known as the pass-through credit.
Certain types of businesses — sole proprietors, S corporations, and partnerships — are eligible for an up to 20% deduction on taxable income. There is an income limit for this deduction, so be sure to talk to an accountant or tax professional to see if you qualify.
Start Saving On Your Self-Employment Taxes
Now that you know about the top twenty freelance tax deductions, it’s time to start saving! (Saving receipts, that is.) Make sure to carefully preserve all expense receipts and keep detailed financial records of anything you plan on deducting. This helps your accountant maximize your deductions and prevent a tax audit.
You can now rest easy knowing exactly what’s expected of you as a freelancer when it comes to filing taxes. You can also be confident about the best ways to save money on your freelance taxes, so you can continue to do what you love — and get paid for it.
As always, we recommend consulting an accountant or tax professional for the best tax advice.
Self-Employment Tax FAQs
Still have questions on self-employment taxes? See if we clear things up with the answers below, or leave us a comment with your specific question.