How do Freelance Deductions Work?

tax tips | October 05, 2017 | By Susannah McQuitty

Illustration of a clipboard and coffee for freelancers

Tax deductions for freelancers can be a confusing topic, because there is a lot of misinformation regarding what you can actually deduct and how those deductions work.

Here are three things you need to know about freelancer deductions.

1. Deductions reduce your taxable income.

You make money; you spend money. Such is life. Uncle Sam wants a chunk of the money you make, but he also wants you to invest in your business.

To give you a break on those business expenses, Uncle Sam won’t tax all the money you earn on your business (i.e., revenue). You can deduct most business expenses from your earnings, and, in most cases, business losses can reduce your total adjusted gross income (AGI).

Less tax, huh? That’s a pretty sweet deal, which means you’ll have to meet some qualifications.

2. Expenses must be ordinary, necessary and related to your business.

What does all that mean? Let’s take a look at two examples.

Say you’re a photographer. You spent $30 on social media ads last month.

  • That $30 expense isn’t out of the ordinary for photographers.
  • It’s necessary, because marketing is part of running the show.
  • The ads all pointed straight to your business, so it’s obviously a related expense.

Congrats! You get to deduct $30 from your taxable income.

Okay, now let’s say you spend $1,500 on a gold-encrusted hamburger. You know, for the experience. Let’s see how that holds up in the ordinary, necessary and regular argument:

  • A gold burger isn’t an ordinary photography expense (surprise).
  • You don’t need a gold burger to be a photographer. Or anything, really, but I digress.
  • Unless your entire business revolves around taking pictures of ridiculous luxury eats, you definitely won’t be dropping that much money on a sandwich on a regular basis.

Unfortunately, not all expenses are black and white when it comes to whether you could deduct them. Some expenses are split between personal and business use, like your gas mileage. In those cases, you can only deduct the amount that you used solely for business.

Illustration of a restaurant check to write off lunch as a deduction

3. Keep all records of business expenses, just in case.

Whether you’re absolutely sure that an expense is deductible or a bit fuzzy on the details, you must have records to prove the expense and its relation to your work.

infographic on deductible business expensesWhen you claim deductions on your tax return, the IRS and your state tax authority will look for red flags and suspicious patterns. Schedule C, which you use to report business income, is one of the most commonly scrutinized items due to its abuse over the years. If anything you claim looks off, you’ll be hearing from the higher-ups.

Being questioned by the IRS isn’t fun, but if you can back up your deductions by providing records that your expenses were ordinary, necessary and related to your business, you’re home free.

When it comes to claiming an expense for a business deduction, a good rule of thumb is “when it’s gray, stay away.”

Want to get a better idea of the sort of expenses you can deduct? Check out our infographic for a list of deductible business expenses and a few expenses that just won’t make the cut.