For creators, tax time means a slew of 1099s, mileage records, crumpled travel receipts and a stack of credit card statements. Unlike your 9-5 working, W-2 filing counterparts, freelancer taxes aren’t quite as simple. Not to worry. As you gather your tax documents this season, we have a few tips to make sure you keep more money in your pocket. We asked CPA Gabe Lumby to point out deductions that every creator should be aware of.
Home office deduction
Are you working from your home office? If so, you can write off a portion of the bills you pay to maintain that office, Lumby says. For example, you can write off a portion of your utilities, taxes, insurance and mortgage interest.
Of course, there are a few rules. Your “office” can’t be your living room couch. An office must be a separate room that is exclusively used for business.
Business use of your automobile
Trips to the post office, a cross-town commute to meet clients and that trek to the Geek Squad when your laptop when up are all deductible.
“Any miles driven for business purposes are deductible at the rate of 56 cents a mile for 2014,” Lumby says. “If your home office is your primary place of business, any mileage driven for legit business reasons becomes a deduction.”
Of course, this is where good record keeping comes into play. Lumby suggests keeping a small notebook in your car to keep track of trips throughout the year, or you can use an app on your smartphone. TripLog and Milog are popular options. Both are available for $5 or less.
Additional tip: You claim the business mileage on Schedule C of your tax return (see Part IV of the form).
If you’re saving for retirement, you can get a tax break. Just as corporate employees get a break for contributing to their employer-established retirement fund, you can get a break for contributing to these three retirement options:
- Individual IRA. This is the easiest account to set up and maintain, Lumby says. It allows for tax-deductible contributions of $5,500 a year.
- SEP IRAS. With a SEP, you can contribute 0 to 25 percent of your net income from freelancing, which can’t exceed $52,000. A SEP is easy to set up with most of the major players in the brokerage game, Lumby says.
- SOLO 401(K) or Self-employed 401(K). This account is more technical, so Lumby suggests setting it up with the guidance of a broker. You can contribute up to $52,000 each year as of 2014.
All three options allow for pretax contributions meaning that whatever you put in for the tax year you are allowed a deduction for on the tax return.
Additional tip: In some cases, you can make contributions up to April 15, 2015 that can count on your 2014 tax return.
Credit card and PayPal fees
There are all sorts of little fees that can add up in your freelance world. Do you get paid via PayPal? If so, PayPal probably takes a cut. You can add up all of those fees and use them as a deduction. The same goes for credit card fees, Lumby says.
“This might seem too obvious, but I run into freelancers who forget that PayPal, Square, Stripe, and all the others actually charge fees when you use their services,” Lumby says. “Don’t forget to check your account before filing to ensure that you are claiming all these costs as credit card fees or collection fees.”
Additional tip: If you’re paid by a company that’s out of the country and receive wire transfers, those fees are deductible too.
Health insurance premiums
As a creator, you’re probably footing the bill for an independent health care plan. If so, all premiums paid for health insurance are deductible as an expense on your tax return, Lumby says. Be sure to total up your premiums for the year.
Additional tip: You might qualify for an advance premium tax credit with the recent implementation of the Affordable Care Act, Lumby says. To see if you qualify, you can check Healthcare.gov.
Are there other deductions or tax breaks that you’ve taken advantage of as a creator? If so, share them in the comment section below.