by Art Piccio . February 16th, 2017
After doing a private poll of freelancers and contractors, we were surprised to find out that a lot of sole proprietors were unaware that you had to pay your IRS dues quarterly – among several other things. Even more surprising was how many didn’t know which purchases they could actually could count as deductibles against their estimated quarterly taxes.
A fundamental problem is that if you don’t claim enough deductions, it might simply not be worth the trouble. While it might seem silly to keep tabs on every little deductible expense, it really can all add up.
The key is to have a good recording system set up. While you can go with any system you’d like, they should always indicate the purpose of the purchase as well as who you paid for it.
…is the general rule with which the IRS judges a purchase not clearly in any of the other categories to be deductible or not. And it’s where you get to be a little more creative.
What’s “ordinary and necessary” will naturally differ depending on your industry. An entertainer for example, will be able to claim deductions for things a security contractor can’t- and vice-versa.
As you’d expect, there are plenty of exceptions and it would be impractical to nail them all down in one blog post.
Here we’ve tried to list down as many items the IRS allows freelancers to list as a tax deductions — in even more categories. While that may seem to be needlessly complicated, we feel that these are key areas freelancers often forget to look at when listing deductions.
There will be plenty of overlaps, in the name of presenting all this in an easy-to-understand piece. If we’ve missed anything important, let us know in the comments!
Note: Capital expenses are expenditures for fixed assets – items with a usable life extending beyond the taxable year.
Note: Just make sure it’s directly connected to work. It’ll be more reasonable to an auditor if you bought the items after starting/incorporating your business.
Note: Make sure these things are all directly related to your business. Commuting within 50 miles of where you live is NOT deductible.
Note: These expenses have to be “reasonable”, which is a fairly subjective term.
Note: Some items that do not qualify: dress shirts, bibs, overalls — even if required onsite. If it’s something that you could be expected to wear for personal reasons, chances are you can’t claim a deduction for it.
Only applies if you pay for it yourself and if the costs are higher than 7.5% of your adjusted gross income.
Note: Not applicable for insurance through a union membership
Note: If you’re working from a home office, only a portion of these expenses can be deducted, within reason. You also cannot deduct expenses for phone lines that already existed in your home before you set up your home office. However, you can completely deduct expenses from subsequent lines.
What You May Not Deduct
Note: Be sure to follow state and Federal tax laws on their compensation.
Not all these options will be available to all freelancers. There’s a reason why there are lawyers and accountants who specialize in this sort of thing – it’s impossible to give everyone the same tax advice.
Check out the IRS’s sole proprietorship forms page to figure out what you’ll need to fill out. Next, talk with a qualified professional before deciding on what your business’s tax strategy should be.
Don’t forget to ask for a receipt.
business.tutsplus.com – 10 Deductions- Freelancers Can Grab
mashable.com – self-employed-tax-deductions
nolo.com legal-encyclopedia – How Sole Proprietors Are Taxed
sba.gov – Business Structure and Tax Implications
smallbusiness.chron.com – Deductible Expenses Sole Proprietorship
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Arthur Piccio manages YouTheEntrepreneur and has managed content for major players in the online printing industry. He was previously BizSugar's contributor of the week. His work has appeared multiple times on The New York Times' You're the Boss Small Business Blog. He enjoys guitar maintenance and reading up on history and psychology in his spare time.