Freelancers: Are you grabbing the best possible tax relief?
If you earn all or part of your income these days from freelance or contract work, you’re far from alone.
A CNN report this year estimates some 34 percent of the U.S. workforce is now part of the so-called gig economy, a segment expected to reach 43 percent — representing some 7.7 million workers — by 2020.
The gig workforce includes people paid per task through companies such as Uber and Lyft and those paid per project in more traditional roles such as writer, tutor, entertainer, carpenter or electrician. Some freelance by preference, enjoying the sense of freedom that comes with being their own bosses. Others become gig workers because they can’t find other work. And a certain portion holds down a part-time gig in addition to a steadier job so they can gain extra income or experience.
Because the surge in gig work is relatively new, however, many remain unsure how to maximize the multiple tax breaks available to freelancers. If you’re among them, user-friendly, online tax preparation software available through TaxAct can tell you everything you need to know about maximizing your gig income when tax time rolls around — regardless of your freelance profession. For example, did you know the following expenses are tax deductible?
* Home office and utility costs: Even if you only use a corner of your dining room as your work space, you can count that area as a deduction. Opting for the Simplified Home Office Deduction (instead of the regular deduction) lets you deduct $5 per square foot, with a 300-foot cap, of any portion of your home used exclusively for business. Conversely, the regular-deduction method allows a more specific professional-space deduction while also allowing you to write off the portion of your electricity, gas, cable and cell phone bills pertaining to your business. Further, under either method, a portion of your mortgage interest and real estate taxes could also be deductible under Schedule A guidelines.
* Website expenses: Many savvy freelancers invest in their own websites to further their self-employment. Related fees are all deductible, including anything spent over the last year on domain rights, design, building and maintenance.
* Equipment and supply costs: Save your receipts! If you’ve never taken time to identify and list the costs of doing business, you may be surprised how quickly they can add up in the form of a tax benefit. You can deduct all expenses related to purchasing computers, software (including standard programs such as Microsoft Office), printers, cameras and supplies, pens and paper as well as any other equipment needed to complete your work effectively.
* Professional development fees: Conferences, seminars and other educational opportunities that relate to your freelance career are all deductible. The same goes for travel and accommodations for business-related events and half the cost of your business-related meals. Are you networking through your local trade group or business association? Good news: Dues and membership fees associated with professional organizations also qualify as deductions.
* Unpaid invoices: One of the biggest thorns in freelancers’ sides can be unreasonable employers and/or disorganized accounts payable departments that don’t pay up in a timely manner. Unpaid invoices can be hugely problematic when you're trying to stay on top of your expenses. Fortunately the IRS has sympathy for such woes. If you previously recorded the invoice as income, you can likely deduct the amount you weren't paid as a bad debt.
Have more specific questions about your tax benefits as a freelancer? TaxAct has the answers. Let us demystify the complexity of your taxes so you can focus on maximizing your freelance income.