As a freelancer, one of the best ways to keep your tax bill as low as possible is to track your business expenses. Every purchase that you make for your business is likely deductible on your taxes—and every time you take a deduction, you lower your profit, and lower the amount of income that you can be taxed on. The lower your income, the less you pay in taxes.
While the IRS doesn’t have a pre-approved list of expenses that you can definitely deduct, you’ll know that a purchase is deductible if it’s both ordinary, and necessary for your business; in other words, if it’s both 1) typical for your line of work, and 2) essential to doing your job well. Here are some common deductible expenses that self-employed people tend to incur:
Are you using your phone to communicate with clients, manage work-related apps, or complete work-related tasks of any kind? If so, a portion of your cell phone bill is deductible as a business expense.
You’ll need to find the “business percentage use” of your phone, meaning the percentage of time that your phone is being used for work purposes. We recommend taking a look through your phone bill and through your app usage history on your phone, and find 1) how often you’re using your phone for work-related calls and texts, and 2) the percentage of your data that’s being used for work-related apps.
It’s ok to use an informed estimate for this number. If you find your phone’s business percentage use for what you’d consider to be a “typical” month of work, you can use that same business percentage for the other months.
For example, if you find that your phone’s business percentage from April was about 60%, and you know that you conducted roughly the same amount of business with your phone from May - December, then you can use that same 60% for your phone bills from May - December.
You can also deduct any additional charges to your bill that came as a result of your business. For example, if you incurred international charges while traveling for work, or increased your phone’s data plan so you could use your phone for work, then those charges are 100% deductible.
If you bought an entirely new phone to use exclusively for work, that makes the process of deducting your phone bill a lot easier! That said, make sure you’re truly using it only for work purposes. Deducting 100% of your bill when you used the phone for personal reasons may get you in trouble during an audit.
If you’re paying for any software subscriptions or memberships that you’re using for work, you can deduct those! Design softwares like Adobe Creative Cloud, invoicing and accounting services like QuickBooks, communication tools like Slack, and any other softwares that you may be using to run your business.
Remember - you can only deduct the portion of these subscriptions that was used for work! If you use your Adobe account for work 75% of the time, and use it for personal projects 25% of the time, make sure you only deduct 75% of the bill.
A lot of self-employed people rely on a home office, or are setting up a home office for the first time these days. Office supplies like pens, paper, cords, postage, desk supplies, and other day-to-day items that you may need in your home office are deductible.
Rent for physical spaces like offices or performance spaces can really add up. If you’re paying rent for a space that you’re using for work, you can deduct that as a business expense.
Any labor that you pay for is deductible as a business expense. Payment to accountants, lawyers, servers, executive assistants, delivery drivers, and other people that help you run your business can be deducted.
If you use your car for work purposes, then a portion of your car expenses is deductible. For example, if 40% of the miles that you put on your car this month were from work trips, then 40% of your car-related expenses like gas, car payments, car insurance, maintenance, and a few others is deductible.
The IRS also gives you the option of deducting your mileage, instead of adding up all of your car expenses from the entire year. The standard mileage method involves counting up the miles that you drove for work, and deducting a flag rate for each mile. In 2020, the business mileage rate is 57.5 cents. You can read more about deducting your vehicle car expenses here.
Promoting your business is part of being a business owner! Any marketing and advertising expenses that you incur are deductible as a business expense. Physical ad spaces like print ads or billboards, marketing softwares like HubSpot or Mailchimp, promotional knick knacks like branded pens, social media ads on sites like Facebook or LinkedIn, and other forms of promotion are all deductible (even if they don’t perform well!).
When you’re self-employed and paying for your own healthcare, you can take advantage of a tax break called the “self-employed health insurance deduction.” This deduction will allow you to deduct the cost of your health and dental insurance premiums as an adjustment to your income on the Form 1040 (also known as an “above-the-line” deduction), rather than as a business expense on your Schedule C. You’re eligible for this tax break as long as you’re self-employed, paying for your own healthcare, and were not offered coverage from an employer or on a spouse’s health plan.
Traveling somewhere for work? Plane and train tickets, rental cars, hotels, taxis, and other forms of transportation and lodging are deductible as business expenses.
You can also deduct other travel-related expenses like dry cleaning, shipping costs for any materials that you’ll need to bring with you, or tips related to the travel services you may use.
Note: The IRS has a few rules about business travel deductions to keep in mind. Your expenses can’t be “lavish or extravagant,” meaning you shouldn’t try to deduct expenses that were far more expensive than they needed to be, or weren’t directly related to your work; for example, booking spa treatments at your hotel wouldn’t be considered “ordinary and necessary” for your work.
You may choose to meet with clients (or potential clients) over coffee or a meal, or you may pay for meals while traveling for work. You can deduct meal expenses that are directly related to your work, with a few guidelines.
The big difference is that, unlike other deductions, you can only deduct 50% of the cost of the meal. Additionally, the same “lavish or extravagant” rule that applies to travel also applies to meals; the meal expense for a client meeting has to be reasonable for your industry and for the context of the meeting. Meals paid for while you’re traveling need to be reasonable for the area that you’re traveling to.
Remember—if you incur any type of business-related expense, it’s very likely deductible as long as it’s “ordinary and necessary” for your business. If you use Found for your business bank account, remember to use your Found card for these purchases! That way, your business expenses will be automatically tracked for you, making you less likely to forget a deduction and leave money on the table. Not using Found? You can get started for free here.
Need a hand figuring out of your expense is deductible? Contact us at firstname.lastname@example.org, and we’ll help you make the right decision!