So maybe you’ve started an LLC, or a Sole Proprietorship or some other business entity (if you haven’t done this yet as a freelancer I highly recommend that you do, and more on this later). You’ve heard tales of massive deductions, and rumors that “everything is a business write off” PLUG YOUR EARS RIGHT NOW. Stop listening to the crazy.
First of all, the IRS will know the receipt for fuzzy bunny slippers you bought are definitely NOT a business expense so let’s be clear about this from the beginning. You want to start off and continue to be honest about your business expenses from the very beginning. Why? Because it’s simpler that way come tax time. Imagine that your business money and your personal money are in two completely separate dimensions. If you want some spending cash from all that profit you’re making write yourself a paycheck and deposit it into your personal bank account. Trust me, your accountant will thank you, and you will thank you if you get audited.
Now. Deductions. I am a writer (well, duh, Rez) and I know NOTHING about taxes other than I need to do them or end up like Al Capone (yes, famous kick ass bootlegger and scary American gangster booked for the wimpiest crime ever). I do know that deductions are out there the questions are, What can I deduct? How much can I deduct? How are my business taxes calculated? Since I can’t answer this myself I went to someone who could. My accountant.
As a first time business owner make sure you make friends with your accountant, because they’ll be the people who’ve got your back come tax time and they are a great source for answering tough questions like this. So after trading a few emails back and forth here’s the upshot:
How much of what I make as a freelancer is subject to income tax?
Short answer, ALL of what you make is subject to income tax, which is dependent not only on the federal rates but also the state rates as well. So factor that in before you make any purchases. A lot of companies meet quarterly to pay their taxes four times a year instead of doing it all in one shot which is a lot easier for freelancers since it fractures up paying those taxes into manageable chunks. It also shows you how you’re progressing since for many freelancers in the first year you’re not going to know how you’ll fall profit wise.
Are there any additional taxes I should know about?
Well if you make over $400 as a freelancer you’ll also be responsible for paying a self-employment tax which currently as of 2014 is 15.3%.
So, how do deductions work exactly?
The answer is a bit back to front but bear with me. Net earnings are the total earnings minus allowable deductions. This is why keeping a separate checkbook is so important. If you don’t know what an allowable deduction is then ask your accountant otherwise you could be making purchases and then still be responsible for paying taxes on top of that which would be a really nasty surprise.
What are some deductions I can definitely take?
If you work from home, you can take an estimated portion of your cell phone and/or internet connection costs as being related to your freelancing business, and if you need to use your car for anything related to business keep track of your miles. Office supplies, paper, ink, business cards, any advertising you do for your business are all deductible. If you mail anything business related, the postage is an allowable deduction.
If you buy a new computer for your business, then it is deductible but over FIVE years so you can only claim one fifth of what you spend for this first year.
Many people think that checks to themselves are deductible but they ARE NOT.
What about Insurance deductions?
If you carry liability insurance for this it’s deductible. If you have your own health insurance it will be partially deductible whether or not you have a profit or loss at the end of the year.
So there you have it! And if you need more information about this definitely check out the IRS website for more information.
IRS Website for Small Businesses and Self Employed