As a freelancer, you can write off an amazing amount of your spending on your taxes. If you work from home, you can write off a percentage of your mortgage or rent and utilities. If you don’t have a commute, you can write off the cost of transportation for any business errands you run. You can even write off membership dues for organizations related to your business.
There are thousands of different deductions you can take, but keeping track of them can easily drive you out of your mind. Receipts, usage logs and more are enough to eat up all of a freelancer’s time. There are a few steps you can take, though, to make deducting your business expenses easier.
Separate business and personal spending — and keep them separate!
Freelancers are notorious for keeping their personal and business spending as one budget, making life a lot harder when tax season comes around. It’s worthwhile to get a credit or debit card for your business spending (and nothing else). While it might seem a bit of a hassle to go to the store and purchase your ramen and printer paper on different cards, you’ll like the result in April. All of the spending you did for your business — most of which is deductible — will be on one set of documents. There’s no highlighting purchases, explaining personal matters to the nice fellow from the IRS or trying to remember what you really made a purchase for.
Find a mileage tracking system and stick with it.
Mileage can wind up playing a big role in your tax deductions, especially if you use your car as transportation for business trips. There are a thousand different ways to track mileage, but it doesn’t particularly matter which one you use. Instead, the crucial factor is being able to stick with the same tracking method through the end of the year. Changing up tracking schemes is a guaranteed method to winding up with errors in the record.
Clearly separate which part of your home is your office.
If you work from home, you can write an amazing number of expenses off. But home office deductions are dependent on you not using that part of your home for anything except work. When you decide which part of your home is your workspace, make sure to determine its size — the percentage of your home it makes up. All those home office deductions are based on the percentage of your home used for work: you can write off that percentage of rent, mortgage, utilities, etc.
Keep receipts and other printed records.
While a lot of freelancers want to eliminate clutter, don’t start with the paperwork associated with your freelance business’s finances.
Freelancers are just as easy for the IRS to audit as anyone else and a spreadsheet listing your expenses for the year isn’t going to convince an auditor that you filed your taxes properly. There’s nothing wrong with making a spreadsheet. It can be much easier to work with when you’re filing your tax return. But, rather than shredding or throwing your receipts away, just sort them by month and put them away.
Get your quarterly payments in on time.
If you’re a full-time freelancer, no one will be withholding taxes from your income. It’s up to you to make sure that your quarterly payments make it to the IRS’ P.O. box on time, every three months. Late payments have all kinds of nasty consequences, including fees. If you can afford to, you can pay your entire estimated tax on April 15 — the due date for the first payment. If you can do it, it’s worth it — you won’t have to worry about the other three payments. Unfortunately, that’s not always a practical option for freelancers.
Income taxes are complex. It’s impossible to provide advice that will work for everyone — and if you aren’t sure about any aspect of your taxes, it’s worthwhile to consult an expert. The IRS also provides extensive explanations of deductions and other tax topics online. If you’re planning to do your own taxes, they are definitely worth a read, especially Publication 334, The Tax Guide for Small Business.
How do you handle your taxes? How well do you know your deductions? How do you save money?