I never thought I’d see the day when I wrote about income tax, but it seems many people are unaware of the benefits working freelance has when it comes to write-offs. Especially if you’re working from home. While I didn’t exactly have a smile on my face when I left the accountant last week, I was pleased with the deductions I was able to make this year. I’m sure things are different from province-to-province, and definitely country-to-country. But that’s why it’s best to go and talk to an account who’s versed in the freelance world and can help you bring down your total taxable income as much as possible. I really had no idea the amount of things I could write-off until I went and spoke to someone, and highly recommend anyone working freelance does the same. You’ll likely be surprised!
How Write-offs Work
It took me a while to really grasp how you write things off, and when you actually save money. It’s not until you file your income tax that you get a break on the purchases you’ve made, and to sum it up – you take your total net income and subtract your deductibles. The new total is your taxable income. The more you spend, the less tax you have to pay. But at the same time, depending on the tax bracket you’re in, you’re spending a dollar to save 30-40 cents.
What You Can Write-off
There’s a great deal of things you can claim as tax write-offs, some of which are quite obvious. Others, likely not. Personally, I work from home and don’t do any traveling for business purposes. So I’m not able to write-off a percentage of my vehicle or gas expenses, as I otherwise would if I frequently had to travel to meet with clients. Some of the obvious deductibles that apply to freelance web design and development include…
- Computer Hardware
desktop computer, laptop computer, monitor, etc. - Computer Peripherals
keyboards, mice, speakers, printers, external storage drives, etc. - Computer Software
OS upgrades, any apps specific to your work - Web Services
web hosting, domain registration, project management, invoicing, client management, etc. - Office Furniture
desk, desk chair, lighting, bookcases, end tables, lounge chair, etc. - Office Supplies
writing utensils, paper, ink, etc. - Continued Learning
magazine subscriptions, courses, seminars, conferences, etc. - Self Promotion
any kind of advertising – print or web, business cards, stationary, etc. - Sub-Contracting
anyone you hire to help with your work
And the not-so-obvious…
- Utilities
percentage of rent/mortgage, electricity, gas, water, phone, mobile phone, cable, internet, etc. - Dental & Medical
regular dental visits, fillings, repairs, prescription drugs, hospital rooms, etc. - Travel Expenses
car payments, gas, hotels, dining - Moving Expenses
hired movers, truck and equipment rentals, etc.
Again, deductibles will vary depending on your profession and your position – whether you work from home or not. As a freelance web designer working from home, I’m able to take advantage of about 90% of the write-offs mentioned above.
Aside from these things, you’ll also catch a break the more dependents you have. Since I have a small family of my own, I get a few thousand taken off the top right out of the gate. I believe in total, my deductions this year were about $8,000.
Preparing for the Accountant
The worst thing you can do, is go to your accountant with a stack of receipts and invoices. Take a few hours and get yourself organized. Your accountant doesn’t actually need to see every single receipt and invoice you have, but you do need record of everything. As a general rule, I don’t write anything off unless I have proof of purchase.
What I have found that works well, is coming up with summary lists for my accountant. I categorize my income and expenses and present her with lists of each, so she can see breakdowns without having to page through invoices and receipts, and has quick access to total amounts. This past year, I was in and out within half an hour and it cost me just over $100 for her time. Where as, had I gone in unprepared, it would have taken significantly longer and cost much more.
Hopefully this helps to shed some light for those not in the know. And perhaps even entice some who have been on the fence about freelancing. If I missed anything significant, do let me know by leaving a comment.
18 people have had something to contribute so far.
Matt this is a great article, and what better timing for me. I recently got laid off, which is unfortunate as I’m getting married this in December (which is still all good to go!), but at the same time I’m in the freelance boat. I’ve been wanting to get back to it for a while now, and I guess the lay off has its way of telling me that maybe it was time to take the plunge. Your post definitely has helped me be aware of certain things that I really had no clue about. Great job. Keep sharing your advice/thoughts to the world. It really does help.
Sorry to hear about the job loss, Nathan. Best of luck with your venture into freelancing.
What might help others (it sure helps me)-have a business credit card or bank account that you use to purchase everything that’s business related. Then at the end of the year (or quarterly) use your monthly statements to determine what to write off. Of course, this would not help for utilities but 95% of everything else it would.
You could also use something like mint.com to categorize but their lack of reports bugs this shit out of me.
That’s a great tip, Dan. And something I’ve been doing for a while now. I actually have a specific email account I use for making purchases so all invoices and receipts end up in the same place.
Specific email: That’s a good one, it would help my label/filter setup in gmail.
PS: The beauty of separate accounts is not having to keep receipts at all–your monthly/yearly statement is your receipt.
I saw that you mentioned dining under travel, but also know that dining (and entertainment!) does not only apply to when you travel, but when you are local too! (obviously your dining or entertainment has to be business related).
I believe, if you travel outside of 50 miles you are able to deduct 100% of the cost, however if not, you can only deduct 50%. (check with your financial adviser to make sure though).
Also, depending on where you live TurboTax is amazing.
It’s good to share stuff like this, it’s amazing how many people don’t realize the savings, and still ignore it after you tell them about it.
Didn’t know that about traveling more than 50 miles, thanks for sharing that little tidbit. I actually haven’t met a client face-to-face in the years I’ve been working freelance, so no traveling or entertainment write-offs for this guy.
Good post. I also second getting a tax professional to do your freelance taxes. Remember, even the tax prep fee’s can be written off.
I should have kept better records this year though. There is always a degree of guesstimation when I do my taxes, though I generally er on the gov’ment’s side to be safe.
That’s right – I always bring my receipt from the previous year’s visit with the account as it can also be written off.
This was a great post. I do not think enough people know about the information you have written about. Thank you.
What software do you use to do all your write-offs in?
You mean, to track all of my expenses? I don’t, actually. I just have a folder setup in my mail client where I dump all electronic receipts, and a physical file folder for things purchased in the real world.
Nice article, a lot of people might not know this stuff. I’m also self employed and benefited from a lot of deductions for last year. Another tip I wanted to add is that you can effectively split your income by hiring your spouse (or kids) to work for you. So if you have a lower income spouse, you can pay him/her to do anything reasonably related to your business.
I keep on top of my receipts all year round, so it doesn’t become a nasty job at tax time. I have a spreadsheet for expenses by category and it only takes a minute to log an item before tossing the receipt in a file folder. Because I do home day care I can claim a portion of my grocery bills, so I’m dealing with a LOT of receipts. But even if you have less frequent purchases it’s really helpful come April if they’re all logged and categorized. i did my own taxes with Quick Tax’s small business software and it took no time at all.
Glad you put this together after mentioning it on Twitter. I never would have thought to deduct office furniture.
Thanks for the post. I am looking to jump into the freelance website design world in the not too distant future and have been looking for good posts that cover the business side of freelancing. So, thanks for publishing this! It was a very helpful read.
This was a really interesting post. I usually never bother to post a comment, unless it has inspired me in some way.
I would like to eventually end up as a freelance web developer – this post was both informative & encouraging!
I shall tweet the post to the twitterverse! haha.
Matt -
I found this excellent and helpful post just by Googling freelancers + tax + write-offs. After I finished reading and made it to the bottom of the post, I was pleasantly surprised to discover you designed CBR! I work for Jonah too, he’s the bulk of my freelance writing and editing. So I had to leave a comment. Thanks for the advice.
-andy k