“I HAVE TO DO MY TAXES!” - screams most of us in horror around this time of the year. Let's talk about the fun part: tax deductions! - you can outsource the "not fun" part for $ to someone who actually enjoys doing it: an accountant. #Godblessaccountants
I don’t know of many people who enjoy doing their taxes but when you’re a freelancer, everything feels much more complicated.
When I had to deal with complicated tax laws as a virtual assistant for the first time, I didn’t know what I was getting into and watched in horror as tax after tax was applied to my income. When the specialist turned to me to ask about write offs, I had no idea what he was talking about.
So I’m going to give you the crash course tax deductions for freelancers that I didn’t have. I hope this will save you time and a few headaches. I had to learn so much of this the hard way and I don’t want that for you.
Taxes sound so much scarier than they actually are. Be ready to take some notes and do a little investigative work of your own so you can be certain when it’s your turn to do taxes.
With that in mind, let’s talk about the IRS and freelancers and why tax time looks much different for us than it does our friends in the 9-5 world.
The IRS and Freelancers
If you work for a traditional company in a 9-5 capacity, your taxes are taken out for you before your paycheck hits your bank account. When you look at your pay stub, you’ll see things like State Tax, FICA, and Medicare. These taxes are taken out of your pay and you get to keep the rest.
When you work as a freelancer, you get your paycheck before any taxes are withheld. This is a great feeling when you’re checking your bank account throughout the year but if you don’t plan carefully, it can cause some trouble come tax time because you will “owe” those taxes.
You need to apply your take-charge attitude to your taxes.
- One of the best ways to do this is by keeping a detail record of all your earnings and expenses in a spreadsheet or by working with an accountant who specializes in freelance and small businesses.
- It’s also a good idea to set money aside throughout the year so that paying your taxes isn’t such a blow first thing in the year.
- Another good tip is to find ways to reduce the amount of taxes you’ll pay on your freedom income. This is where tax deductions come in.
What Are Tax Deductions?
Simply put, tax deductions are business related expenses that decrease your taxable income in the eyes of the IRS. Less taxable income means you won’t owe as much in taxes. Most freelancers start out having no idea these even exist and believe higher taxes are the price to pay for having so much freedom. But this isn’t true.
Unless you have a very strong understanding of the tax codes, I recommend having your finances reviewed by an account or tax professional before you submit them to the IRS.
What can be counted as a tax deduction? The possibilities are endless! For now, I’m going to share with you the ones most commonly used by virtual assistants and freelancers. This is by no means an all-inclusive list! Consider the following tax deductions your starting point.
What Tax Deductions Help Freelancers?
Now that we have that crash course in the IRS and how tax deductions can help you, it’s get to the fun part: how you can save money. I’m going to talk about some of the best tax deductions you can use as a virtual assistant to protect your freedom income and keep you from going into shock when you file your taxes with the IRS. Ready to start saving? Let’s get started.
Think about what you use constantly to be successful as a virtual assistant. Chances are, you’re glued to your computer or laptop, smartphone, maybe even a tablet to communicate and work. Because of this, they qualify as a business investment and are considered a tax deduction. You need to produce some evidence that your technology, including software and other online tools you use to be successful, is relevant to your business. Keep a detailed account of what gadgets go into your work, when, and how. Remember to double check with your tax consultant before you file to make sure your deduction is up to code.
Did you know that if you have a net-profit from your virtual assistance work that you’re eligible for deductions with most medical and dental expenses? You can even include long-term health insurance premiums. To claim this deduction, be sure to include details in Line 1 of your Schedule A 1040 form.
Workman’s compensation, liability, fire insurance, theft, burglary, and other types of personal insurance policies can also be used as tax deductions for freelancers. Be sure to check with your tax consultant regarding your state’s policy on these deductions.
Let’s say you’re working with a client who wants you to research the history of Italian food in America and write an ebook for them on the topic. Research materials for this can, of course, include books but so can the pasta you’ve consumed for this book are tax deductible. Even tools like Skype or Call Recorder for conducting interviews for your book can be written off as well.
If you need to travel for your virtual assistant or freelance business for events or meetings then you can include travel and associated charges in your tax deductions. Associated charges are costs like hotels and car rentals. If you’re like me and combine your business trips with a vacation, you just need to include the work portion of your trip in Line 24A.
As a virtual assistant or freelancer, you’ve probably invested some money in advertising your business. Examples of advertising can include paying for Adwords, Adsense, Facebook ads and pay per click channels. Include these advertising investments in Line 8 of your tax form.
This one is somewhat related to advertising but I wanted to talk about it separately. Having an online presence is critical for a virtual assistant or freelancer. So if you pay for hosting for a web portfolio or a blog, you can write off these expenses on your tax forms. If you’ve invested in tools like a professional LinkedIn account, Hootsuite, or MailChimp to keep a strong online presence for yourself and your business, these can be counted as a tax deduction as well.
Sometimes freelancers have to hire other freelancers — there’s a tax deduction for that. So if you’ve hired a content writer for your blog and social media platforms or a graphic designer for your business cards or a photographer for your headshots, you can write off these expenses on your tax form.
Do you work on a freelance platform that charges a percentage of your earnings as commission or a membership fee to use their site? You can include these in your tax deductions as well because they are used to help you find work for your business.
Virtual assistants needs internet and mobile data plans to stay connected to their clients, work, and find new projects to spend their time on. Because of these work tasks, you can deduct these expenses even if you use them for personal reasons as well. In this case, you can only deduct a portion instead of the entire amount.
Did you need to seek out an attorney or a financial accounting service for your freelance business? You should be able to deduct these often very expensive costs on your taxes. You can even include the expenses for recruiting a personal account to help with taxes and deductions you’re doing. To do this, you include the services you have used on Line 17.
If Paypall, Skrill, Stripe or Xoom are regularly charging you fees for transactions on your payments, you can include them on Line 27A of your tax form. And if you sell your services online through a payment gateway, you can include their commission that’s charged per transaction or sale.
Professional Development or Education
Have you attended a conference or enrolled in an online class or even participated in a webinar geared towards growing your business or professional skills? So many freelancers do this without even realizing the IRS offers a tax deduction to them for doing this! Be sure you keep track of the ways you improve yourself as a worker and include them on your tax form. If you are part of my Work From Wherever Lifestyle Academy course for VAs and freelancers, you can deduct the cost. Yay!
I got very excited when I found out business-related meals are a tax deduction for freelancers. The rules for this are very strict so be sure to read over them carefully. Generally, if you take a client out for dinner to talk business, you can write off this expense. If you and your client take a trip to Mexico together, the IRS won’t let you include that as a tax deduction.
When I first learned about this one, I was shocked. I had no idea the IRS even took retirement into consideration for freelancers! Because we are self-employed, many tax accountants recommend something called the SEP IRA. It’s specifically designed for the self-employed and small businesses so we can prepare for retirement. You can contribute up to $53,000 each year and every dollar is tax deductible.
Remember this scene from "The Accountant"? No joke!
If you are working from home you might be able to write off your office space. Just ask your accountant.
Additional Tax Tips for Freelancers
As someone who has gone through so many tax seasons as a freelancer, the best advice I can offer you is to stay organized year round. Don’t put off gathering materials until the last minute or hastily trying to put together a log for the entire year. Schedule time in during your day or week to catch up. You can even work with a CPA to help you get set up or use a tax software geared towards freelancers to help keep you organized.
Remember to double check what counts as evidence and what doesn’t so you can back up your claims when you file your taxes.
So, What Are You Waiting For?
I know taxes are not most people’s idea of a good time but they don’t have to completely drain your bank account either!
I definitely recommend doing research on your own and consulting with tax specialists if you feel uncertain or are doing this for the first few times.
Your freedom income doesn’t have to be destroyed because your taxing looks different now. With some careful planning, a little saving, and some clever deductions, you can still enjoy freelance work and your freedom income.
If you’re not ready to make the leap yet or feel that you need more guidance with becoming a virtual assistant, I encourage you to check out my free training called How To Make $5K A Month As A Virtual Assistant Without Prior Experience. In this training, I teach you what skills you need to easily make $5K a month in as little as 90 days.
Have any questions about tax deductions and freelancing? Not sure if you’re on the right track? Leave a comment for me below!