When tax season rolls around, so does freelancer dread. It’s time to count up all the expenses you forgot to log and figure out how to calculate your home office deduction. The process is filled with obscure questions and hazy requirements. Does the bathroom count in my home office square footage? Can I write off my vacuum cleaner? What about that label printer I bought when I was procrastinating on filing my taxes last year?
Filing taxes as a freelancer can be anywhere from hellish to mildly inconvenient, depending on how diligent you are about tracking your business expenses and how educated you (or your accountant) are in tax law. Because the process is confusing and aggravating, many freelancers are less than thorough when it comes time to claim business deductions. In fact, 73% of freelancers overpay their taxes because they don’t claim any deductions at all.
That sucks. That means loads of freelancers are losing out on money that they could have in their pockets right now. And we don’t want that. So in this post, we’re going to show you how to track business expenses seamlessly and keep more of your income. Here are the five key steps to doing it right.
73% of freelancers overpay their taxes because they don’t claim any deductions at all.
1. Educate yourself.
The biggest challenge with filing taxes is that most of us just don’t know the rules. That’s no fault to us—people spend years learning this stuff. But even without a degree in accounting, you can get by with a little basic knowledge on tax regulations. Learning what qualifies as self-employed expenses is step one. The IRS says that any “ordinary and necessary” expense can be deducted from your taxes. That essentially means any expense that is necessary to run your business, like your software, cell phone, WiFi, and any subscription services you use for work.
If you’re working from home, be sure to factor in all of the hidden expenses that come with managing your home office. You can deduct office furniture and essential equipment, like a new computer, chair, or printer, as long as you’re using them for work. And (importantly!) you can factor in the basic costs of living that contribute to your work. For example, if your office area is 30% of your total living space, you can count 30% of your living expenses (like rent and utilities) as business expenses.
What else? Insurance premiums and certain types of retirement savings are also deductible. There are likely a whole host of other deduction opportunities for you too, depending on where you live and what kind of work you do. For example, if you use your car for work, you can typically deduct the cost of gas, so logging your mileage is smart.
Hot tip: The app MileIQ is great for logging mileage because it automatically tracks your trips and creates a comprehensive record that you can reference come tax time and, if necessary, submit to the IRS for proof.
2. Open a separate bank account.
This one is so easy to skip over as a freelancer if you’re only paying yourself. Why not just deposit everything into your personal checking? Well, it makes everything a whole lot easier come tax season if you have a dedicated bank account for your business. Even if you don’t have an LLC, we highly recommend opening a checking account. Seriously. It’s a huge relief when you can view all of your income and expenses in one place, and just download an account statement to submit along with your taxes.
If you’re spending more on your business than you’re earning and you’re worried about overdrafting, you might want to consider getting a business credit card to pay your expenses. There are loads of credit cards for small businesses that offer cash back rewards and low annual fees (or none at all). Again, having a dedicated credit card for your business instead of mixing personal and business expenses will save you many headaches down the line.
3. Keep all of your receipts.
I know, I know. It’s a hassle. But even freelancers can get audited by the IRS, and sometimes that bank statement just isn’t enough. Shove your receipts in a shoe box and let it gather dust in the closet for four years. Or, just use a tool like Expensify to snap a picture of your receipts so you can go paperless. The IRS will accept photos or physical copies.
4. Stay organized.
It will make your life infinitely easier if you spend 30 minutes a month organizing your expenses rather than waiting until the end of the year to scour your statements and figure out what all of those random charges were from. Plus, reviewing your finances regularly helps you catch erroneous charges and forgotten subscriptions when there’s still time to cancel them.
Reviewing your finances regularly helps you catch erroneous charges and forgotten subscriptions when there’s still time to cancel them.
If you’re not a log-expenses-as-you-go kinda person, try putting time on your calendar once a month to do this. Create a recurring monthly event in the first week or so of the month to review last month’s finances and log your expenses in your system of choice. You can use something as simple as a Google Spreadsheet or something more sophisticated. At Harlow, we’re working on bringing all of your bank account expenses into a single place, so you can easily categorize and organize your finances from one dashboard. Stay tuned!
5. File your quarterly taxes!
Finally, don’t forget about those four dates a year when you owe the IRS. As a freelancer, you aren’t just responsible for paying your income taxes. You also owe self-employment tax, which is 15.3% of your net income. (This is another good reason to log and deduct expenses!) The IRS expects you to pay taxes on a quarterly basis, so be sure to mark those tax dates on your calendar now, before you forget.
If you have all of your business expenses in a separate bank account, it’s easy to prepare for quarterly taxes. A little recommendation: Link a savings account to your checking account and transfer 25%-30% of your income into that savings account each month, so you have more than enough cash on hand to pay your quarterly taxes throughout the year. Trust us: There’s nothing worse than getting stuck with a huge tax bill and late penalties come spring. Save as you go and you’ll save yourself the stress.
Trust us: There’s nothing worse than getting stuck with a huge tax bill and late penalties come spring.
We know managing finances can be one of the most overwhelming parts of freelance life. But with a little practice and a good system, it can be pretty painless (or dare we say… fun?). Like any other unpleasant activity, tracking expenses and filing taxes is a whole lot more pleasant when you focus on the ‘why’ (e.g. planning for the future) and do whatever you can to make it more pleasant. So when it comes time to scour your statements each month, grab your beverage of choice, put on a great playlist, and channel your inner accountant. You got this.