One of the most important responsibilities as a freelancer is tracking your business expenses. Deducting expenses from your income can result in a huge savings, and in Running a Design Business: Freelancing, Petrula Vrontikis offers expense tips that are relevant for any kind of freelance business—not just design.
Personal versus business expenses
The smartest way to track expenses is to keep personal expenses and business expenses separate. Have separate checking accounts and separate credit cards so you can easily track, categorize, and recap your business expenses.
Rent and mortgage deductions
If your office is in your home, the IRS requires that you create a floor plan indicating the living space versus the office space (see example above). You can use it to calculate the percent of your home that is used as an office. Let’s say you live in a 900 square foot apartment and pay $1,500 a month for it. Your floor plan indicates that one-third of your space is used as an office. When you pay your landlord each month, pay $1,000 from your personal checking account, and $500 from your business account. You should also use this two-third and one-third calculation when paying utilities and any other business expenses that are shared. Although admittedly more complicated than a single-account solution, keeping your personal and professional deductions clearly separated will help maximize your write-offs and avoid confusion, should the IRS have questions later.
Most likely your car will be used for both personal and business reasons. Keep mileage records, so you know what percent is deductible for business. The IRS requires written records. Having a notebook in the car is a great way to make sure you’re prepared to record your automotive expenses as they occur—whether you’re at the pump, or at the end of a business trip.
Typical subcontractor deductions
As a freelancer, there are many deductions you can take advantage of—the list below contains examples of common subcontractor deductions that you may have overlooked in previous tax years. Tax laws are always changing, so be sure to consult with your accountant about any clarifications, additions, or exceptions to this list.
• Advertising, printing, and web hosting/maintenance
• Automobile, including parking, registration, and insurance
• Banking and service charges
• Books and subscriptions
• Computer, including hardware, software, inks, paper, and repairs
• Communication, including telephone and Internet access
• Education, including conferences
• Equipment leases
• Entertainment, including meals
• Insurance, including liability, property (fire), and theft
• Healthcare expenses, including insurance
• Licenses, including city
• Materials and supplies, including office supplies, and job/industry-related items for research
• Professional fees, including accountant, bookkeeper, and/or attorney
• Professional organization dues
• Rent or lease payments
• Repairs and maintenance of office space
• Shipping, including postage, messengers, and FedEx/UPS
• Travel, including transportation, lodging, and meals
The IRS requires receipts to determine the validity of your deductions. In addition to printed credit card and checking account statements, you should always keep original paper register receipts for everything that you plan to deduct.
It is wise to consult with an accountant, especially if you are just starting out as a freelancer, so you know what your tax and filing obligations are. They’ll give you peace of mind and may end up saving you more than they charge!
Interested in more? Watch Petrula Vrontikis’ full course Running a Design Business: Freelancing.