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The United States’ freelance economy is growing rapidly, with more and more workers choosing to strike out on their own full time or take on a side gig to supplement their income.
According to a 2016 survey by Freelancers Union and Silicon Valley freelancing giant Upwork, the number of freelancers and contractors in America hit 55 million last year – that’s 35 percent of the U.S. workforce.
While freelancing allows some workers to have flexible hours and develop a diversified client base, it also brings a number of new tax issues to handle. It’s always best to consult a qualified accountant to make sure you’re maximizing your deductions legally. That’s especially true if this was your first year working as a freelancer or contractor. Let us know what help you need!
If you’re doing freelance work, you should receive Form 1099-MISC from each client for whom you’ve provided services exceeding $600 during the year. Your client will report that income to the Internal Revenue Service, so you must include your 1099-MISC when you file your taxes.
Additionally, if your net earnings from self-employment exceed $400, you must pay self-employment tax, which is your payment towards Social Security and Medicare. You pay those taxes on Form 1040 Schedule SE, which is filed with your return in April. And since the IRS allows you to deduct half of your SE tax amount from your total taxable income, it’s important that you take advantage of all possible deductions so you don’t pay more in taxes than you need to.
So, what’s deductible if you’re a freelancer?
For starters, your home office is. But be very aware – this one is tricky. Freelancers need to meet some requirements to qualify for the home office deduction: You must use your home office solely for business (so the desk in your bedroom or your kitchen table won’t cut it). In addition, you must use your home office on a regular basis; and, you must spend the most work time and make the most important decisions in that office.
Expenses that can be deducted include the business portion of real estate taxes, mortgage interest, rent, utilities, insurance, painting, repairs and depreciation. The amount of the deduction depends on the percentage of the home or apartment used for business. To claim the write-off, use Form 8829.
If you’re self-employed and your home is your primary place of business, you can deduct the cost of driving from home to meet with a client or go to another one of your work locations. You are allowed to claim 54 cents per mile (depending on the purpose of your trip), plus parking and toll costs. Make sure you keep a record of your business driving, or the IRS can deny your deduction on audit. Mobile apps such as MileIQ are available to make it easier to track your mileage.
Many freelancers and self-employed workers take classes to gain certifications and further their professional development. The cost of those classes is deductible if they improve your business skills or add value to your business. Self-employed people are also able to write off dues for professional organizations and membership fees.
Website and Hosting Costs
Self-employed persons can deduct costs related to their business websites, including hosting, domain and design expenses, which are fully deductible as “other expenses.”
If you’re freelancing, that means you’re likely using your internet connection and phone for business purposes. And if that’s the case, then those costs are deductible as utility expenses. Keep in mind, however, that if you’re using them for both business and personal reasons, you’ll only be able to deduct a percentage of the costs based on how often you use your phone and internet for business.
If you’re self-employed and paying for your own health insurance (or yours and your spouse’s), you can also deduct all of your medical, dental and long-term care insurance premiums. But if you’re eligible for healthcare through your spouse’s employer, you won’t be able to claim those write-offs. To file those deductions, use Form 1040, Schedule A.
All of these deductions have a variety of conditions attached to them and it may not be in your best financial interest to take all of them. If you have questions or aren’t sure if you really qualify for a deduction, ask us!