The only sure things in life may be death and taxes, but when you work for yourself, you can also be sure that filing your taxes will be complex and confusing.
Like finding the right health insurance, filing taxes gets a little more complicated when you don’t have an HR department to guide you. We asked tax experts how to tackle tax deductions from a freelancer’s perspective, to get the most out of your deductions.
If you’re freelancing or self-employed, you’ll be filing 1099 forms, from clients who’ve paid you more than $600 in the year. You’re required to report your independent contractor income if it totals more than $400 from all sources. You’ll also pay Social Security and Medicare taxes, and calculate them yourself, since they’re not withheld from your income already. See this guide for freelancers for more information on forms and filing.
You’re employed with a company but on a freelance contract. Or you’re working several jobs and manage your own clients–or you’ve hired a few extra hands to help run things. With working lives getting more and more complex as roles shift to become more flexible, the first question you might be asking yourself is, What am I?
For the sake of filing for deductions, it doesn’t matter that much, says Mark Steber, chief tax officer of Jackson Hewitt Tax Service. “Freelancers or self-employed individuals have the same rules as those that work from home for their employer’s convenience,” he says. “The only difference is where the deduction is claimed.” Freelancers and self-employed use Schedule C for deductions, and contracted employees claim as part of a miscellaneous itemized deduction on Schedule A.
If only work and personal time could stay as separate as deductions in a freelancer’s life. As a general rule, work-related items and personal items have to stay completely separate in order to claim them as deductions. More details:
The physical space
As far as the physical space, you may claim the business portion of your rent or your mortgage interest, real estate taxes, homeowner’s insurance, and depreciation when you own the home, Steber says. The recently simplified laws for claiming a home office allow you to claim a deduction of $5 per square foot used for work, but no more than 300 square feet or $1,500. You won’t have to turn in records of utilities or divide your mortgage interest and real estate taxes between your home office and your personal residence.
“Any repairs or remodeling directly associated with making the office work may also be claimed,” says Richard Ogg, enrolled agent at The Master’s Tax & Financial Services. “Yard maintenance is not allowed unless the business regularly sees customers/clients in the OIH,” he says. “For a freelance writer, that wouldn’t fly.”
The big stuff
If you’re switching from Netflix to company email in your pajamas on the couch every day, you’ll probably have a hard time getting money back for your home office.
Claiming items like computers, phones, or camera equipment requires a written log showing the business and personal use, and only the business use percentage of the item is allowed as a deduction. Stashing non-work items in your office isn’t allowed either, says Steber, and neither is using it for a part-time TV room or spare bedroom.
“Many freelancers or self-employed people struggle to separate business and personal expenses,” Ogg adds. “The classic example is the person who puts an advertising sign on their car and wants to deduct the mileage for driving to the grocery store. Not allowed.” Bottom line: Don’t try to trick the IRS.
Little bits of deduction money add up. Business cards, office supplies, mileage (if you’ve kept diligent records–you don’t have to buy a separate work vehicle), professional services such as bookkeeping or tax preparation, continuing education, and even licensing fees may qualify for deductions.
Most importantly, keeping good records and filing receipts is a must. Freelancers should keep records for seven years, whereas salaried or full-time employees only need to retain records for three years for federal purposes, according to Ogg.
We get it, taxes are confusing. That’s why we are hosting a Live Chat with a tax expert on Friday February 20th at 11:30am. He’ll be answering your freelancer and independent worker tax questions.