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As much as we like to strive for work-life balance, for many freelancers, small business owners, and self-employed earners, there is little separation between their business and personal lives. This blending can blur the line between a personal expense and a business expense. Luckily, many personal expenses can be written off as a tax deduction, at least partially, if they are also used for your business in some capacity.
So, if you’re a freelancer or operate a small LLC, those long days where you had a lunch meeting through Zoom with a client or drove your personal vehicle to fix a customer’s last-minute crisis can likely pay off during tax time.
Related: Credit Karma Tax Review
Why 1099 Workers Have so Many Tax Breaks
It may seem like workers who receive IRS form 1099 get all the sweet deals on tax deductions when compared to W-2 employees. In reality, the self-employed and small business owners are shouldering twice the tax burden as traditional employees when it comes to Medicare and Social Security taxes.
When you’re traditionally employed as a W-2 earner, you’ll pay 7.65% in Medicare and Social Security taxes, while your employer matches your 7.65% and pays up to the IRS. If you’re self-employed, a contractor, or a small business owner, you’re responsible for paying all 15.3% yourself, since you are essentially wearing both employer and employee hats.
While that 15% off your income can hurt, these 10 tax breaks can soften some of the tax hit.
Read More: Tax Deductions You Won’t Want to Miss
Tax-Write Offs for Self-Employed
Unfortunately, the IRS explicitly states that you can not deduct the monthly phone bill in its entirety if you also use that phone for business purposes. All is not lost, though.
The IRS will not be paying for your weekly call back home to nana. But it will accept business phone meetings as a deduction. You can calculate how much of your phone use goes toward business calls, and use that fraction to calculate how much of the phone bill is deductible.
For example, if 30% of your phone’s use goes toward working with clients or vendors, then 30% of your bill can be deducted (multiplied by 12 for the annual amount). Just make sure you estimate reasonably and can show proper documentation that backs up your deduction amount.
Even better, you can avoid all this math and estimation if you simply buy a second phone line that is solely dedicated to your business. The monthly cost of this second line would be entirely deductible as a business expense. Easy.
2. Apple Watch
Communication devices are evolving beyond phone lines and computers. Now we’re wearing them on our bodies. An Apple Watch technically counts as a way to communicate through phone calls, text, email, and facetime all reasonable and ordinary ways of running a small business or freelance endeavor.
If your Apple Watch is solely dedicated to your business, the full cost of it is an easy tax deduction. If you spend some amount of time on your smartwatch checking in on your favorite Instagram influencers and tracking your run miles, then you’ll need to break out the calculator and divvy up the percentage of use the device serves for business versus personal use. Of course, if you can reasonably argue that social media and fitness are a critical part of your business, then that time can count toward the business fraction.
3. Auto Expenses
For those of us who work in the rideshare industry like Uber and Lyft, you’re considered a contractor, and you’re going to find the lion’s share of your deductions related to your automobile.
Once again, you may have to split your automobile expenses to determine what’s legitimately deductible. If your car is solely used for the operation of your business or side gig, then you can deduct the following expenses, according to the IRS:
- Lease payments
- Gas and oil
- Registration fees
Alternatively, taxpayers who don’t want to keep a detailed record of all those vehicle expenses may want to consider the standard mileage deduction. For the tax year 2020, the standard mileage rate is 57.5 cents. Keep in mind, that you can only claim the standard mileage rate deduction if you used the vehicle the first year it was available to be used in your business meaning, the year of inception of the business or the year you purchased the vehicle.
As with many other freelance deductions, if you sometimes use your personal vehicle for business purposes, you’ll have to figure the ratio of personal use to business use and calculate the deduction accordingly. As a freelance writer, I often use my vehicle to get me on location to cover a commissioned piece as well as transportation to writing conferences and symposiums for networking. In my experience, the standard mileage rate deduction for these work trips has garnered the most beneficial tax deduction.
Can anyone run a freelance service or small business without the internet anymore? Hardly. Internet is certainly considered a necessary expense for a business, and 1099 workers can lower their taxable income by deducting internet costs.
If you’re working from the internet service that your entire household uses, then you won’t be able to deduct 100% of your monthly bill. You’ll need to estimate approximately how much of your internet is used for the business and report that amount as your deduction.
Not only can you deduct a partial amount of your internet service, but the IRS also advises that you’ll be able to deduct internet-related expenses like domain registration fees and webmaster consulting costs.
Occasionally using Uber and Lyft during your workday, even for freelancers and small business owners, doesn’t qualify as a tax-deductible expense.
However, if you’re using an Uber, Lyft, taxi, or any other transportation during a business trip, then these expenses can lower your tax liability.
To qualify as a business trip, the trip has to last longer than the hours in one working day, there must be a targeted business activity that you attend to, and you must keep impeccable records of all your expenses. Stash all those receipts so you’re covered when you file for your deductions.
Those restaurant meals you ate during your business trip are absolutely tax-deductible, and it’s another stash of receipts you should hold onto so you can reference them when you file. But what about all those solo meals you ate while working on your business because freelance and self-employed work sometimes afford no breaks. Unfortunately, these will not qualify.
For the tax year 2020, you’ll only be able to deduct 50% of the cost of meals that were consumed on business trips, at conferences, or while with a client.
Be ready for more meal savings when you file for this deduction in 2022, though. As part of the Consolidated Appropriations Act that passed at the end of 2020, business meals are fully 100% deductible as long as the food and beverages were purchased from a restaurant. This expanded deduction is in effect starting January 1, 2021 to the end of 2022. Time to start asking your clients for a zoom-lunch-business meeting.
7. Health Insurance Premiums
Since freelancers and small business owners don’t have employer-offered healthcare plans, this group of earners often ends up paying out of pocket for health insurance premiums for themselves and their families.
If this sounds like your situation, the IRS allows a tax deduction for any medical and dental insurance or long-time qualified care insurance for, yourself, your spouse, and your dependents.
8. Tax Preparation Fees
Before the Tax Cuts and Jobs Act passed in 2017, any taxpayer could deduct tax preparation fees as long as they were itemizing deductions and the prep fees exceeded 2% of their adjusted gross income.
The TCJA got rid of this deduction along with other miscellaneous deductions for W-2 wage earners. However, freelancers, self-employed individuals, and small business owners get a pass. Tax preparation services are still deductible for these folks because tax prep is an ordinary and necessary component of running a business.
Related: Best Tax Software for Small Business
9. Membership Dues
Running your own business or working for yourself can feel particularly isolating, and there are plenty of professional and social benefits to getting involved in a membership club. When considering whether you can deduct your membership dues from your taxable income, ask yourself, is the primary purpose of this club for business or entertainment?
A country club membership, for example, is not centered on your profession, even if networking may occur there, and cannot be deducted. The IRS gives the following examples of membership dues that you can write off:
- Boards of trade
- Business leagues
- Chambers of commerce
- Civic or public service organizations
- Professional organizations such as bar associations and medical associations
- Real estate boards
- Trade associations
10. Education (online courses related to your profession)
It’s always a good idea to improve the skill set that relates to your business, and you have the full support of the IRS. As long as your education expenses, whether that be tuition or a certification, expands your knowledge and expertise in your business field, then these expenses are deductible.
I was able to deduct a portion of my tuition for my Writing MFA program because it enhanced my skills in the industry of my LLCwriting and editing. However, if I woke up one morning and became impassioned by the prospect of earning money through real estate, I would not be allowed to deduct the expenses incurred in real estate licensing education because it has nothing to do with my current freelancing and small business income.
Read More: Best Free Tax Software
Avoid Trouble With the IRS
While the goal is to lessen your taxable income as a freelancer, self-employed person, or small business owner, you still have to operate within the framework of the IRS. This means honestly reporting and deducting the expenses that were related to your business, not the expenses that were only used for personal reasons, in order to avoid an IRS audit. As best as you can, don’t overshoot when you have to estimate the portion of an expense that was necessary for business vs. personal, such as your phone bill.
On the other hand, there’s no need to feel guilty about taking advantage of the tax deduction opportunities for 1099 workers. More traditionally employed people are often supplied with computers, networks, a medley of office supplies, and other equipment to effectively carry out their job. As a 1099 worker, you have to personally shell out the money to acquire those things and successfully run your small business or side hustle. The tax breaks are just a small recompense for those upfront costs.
Finally, it’s important to know your stuff when it comes to the tax code that applies to your filing status. Sometimes, guidance from the IRS can seem ill-defined. For example, the IRS states that all self-employed and small business deductions should be, ordinary and necessary.
What is ordinary? What is necessary? We’ve gone more in-depth on taxes for freelancers and what constitutes a safe deduction here.
But, after you’ve done your personal research, it’s always wise to seek out a financial advisor to make sure you’re filing correctly and not leaving any available tax return money with the IRS.
Read More: Pros and Cons of Self-Employment
When You’re Ready to File
Freelancers making over a certain amount should be calculating and paying taxes quarterly to the IRS. Hopefully, once tax season comes around, your quarterly tax payments have been either spot-on or generous, leading to a tax return after claiming your deduction.
We certainly understand how daunting it can be to file taxes on your own when you don’t work as a traditional wage earner. Multiple income streams and various forms to claim special deductions can quickly complicate the process. But tax-filing software is increasingly sophisticated and continues to improve to meet the needs of freelancers, gig workers, and small business owners.
TaxAct, H&R Block, and TurboTax all have editions of their tax-filing software to meet the specific needs of self-employed filers. Compare these services and their price points to determine the best filing option for you.
Running a small business is hard. Hustling for an additional income is hard. Working with clients without the backing of a large corporation is hard. There’s a gauntlet of obstacles for 1099 workers to face throughout the year. But filing your taxes doesn’t have to be another challenge to add to the pile. Knowing how to properly pay quarterly taxes, claiming the right deductions, keeping a solid record of your expenses, and using convenient tax-filing software make the process immensely easier. You may even find filing for taxes, dare I say it, pleasurable especially if there’s a refund at the end of your business year.