The Freelancer’s Guide to Tax Deductions
Freelancing can be stressful during the best of times—but it’s never more so the case than at tax season.
By some counts, there are as many as 42 million independent workers in the U.S. today. But come spring, whether you’re freelancing as a management consultant, web developer, journalist or something else entirely, you may be asking yourself one crucial question: What can I deduct on my taxes this year?
That’s why we asked Jonathan Medows, a New York City–based certified public accountant who specializes in taxes for freelancers, to help us explain how deductions work for this group of workers, what to keep in mind when figuring out what to deduct as a freelancer, and which expenses typically qualify toward those deductions.
Deductions 101: How Do They Work?
Once you’ve accounted for all of last year’s income (whether it came with a 1099 or not), the next step is to start chipping away at that income through—you guessed it—deductions.
A tax deduction is an expense that you can subtract (aka “deduct”) from your overall taxable income, exempting that cash from taxation and subsequently decreasing the overall amount of money that’s subject to tax. “The whole point of deductions is to reduce your tax liability,” Medows explains. “So if you have $100,000 of freelance income, and $20,000 of expenses that you can deduct, your tax will only be based on $80,000 of profit.”
That said, tax preparation for freelancers “gets very complicated very quickly,” Medows cautions. So while we’re able to give you some general guidelines and things to keep in mind when thinking about deductions, only a professional familiar with your finances will be able to give you proper tax advice tailored to your specific situation.
A professional can also keep you updated on changes to the tax code—like the fact that the self-employment tax rate went from 13.3% to 15.3% in 2013, thanks to the expiration of the tax holiday during the recession. (And, in fact, half of that tax is deductible.)
And while you don’t have to work with a pro, Medows warns that the self-employed (that’s IRS-speak for “freelancers”) tend to be at higher risk of audits, so it’s critical to keep detailed documentation of your expenses. “You don’t want to cheat yourself,” he explains, “but you also don’t want to cheat the government. You want to be able to look someone in the eye and explain and justify your deductions.”
In fact, Medows encourages freelancer clients to hold on to receipts and documentation for six years—double the time officially recommended by the IRS. “If you are audited, the government will insist on seeing receipts,” he says. “People think that having a credit card statement is enough, but it’s not. If you buy something from Amazon, the government wants to know that it’s surge protectors for your office—not toys for your kids.”
If you find yourself pressed for storage space, Medows recommends scanning old receipts, as well as backing up the digital files. Because if you do end up being audited and can’t back up your claim, you could lose the deduction and be on the hook for the tax—plus interest and a penalty.
When deciding what to deduct, Medows suggests asking yourself the following question: “Would I have this item anyway if I didn’t use it for business?” If the answer is yes, tread carefully. “Is it worth the risk to save $100 on taxes?”