tax tips — February 20, 2018

I Lost Money Freelancing Last Year — Now What?

by Susannah McQuitty

A photographer shoots a coffee cup on a window sill.

Freelancing can be an awesome way to make money, whether you’re doing it for extra change or as a full-blown business. But what happens when you get to the end of the year and realize that, even if you made some money, that dough didn’t even cover your expenses?

Let’s walk through calculating losses for your freelancing gig and what that means for your taxes.

Reporting your business information

Doing freelance work means that you’ll report all your business information on your personal tax return. This is because you’re considered a sole proprietor (the business structure for those who run a business on their own), and as such you’ll fill out Schedule C on your return.

Schedule C is where you’ll list how much you made on your business and how much you spent on it: gross income and deductible business expenses, respectively.

A coffee cup on a window sill

Gross income versus business expenses

No, it’s not the same as “nasty.” Gross income is the total amount of money you earn, not counting how much income tax, bills, and business expenses will reduce your earnings. Add up all your income from any Forms 1099-MISC or personal records.

Next, figure out how much of that income went to business-related expenses. Be careful that the expenses you count as “business-related” can be proven — if the IRS thinks something looks fishy, they have the right to see any records you can provide as proof.

Once you’ve calculated the two, see which amount was greater: gross income or business expenses. If you made more than you spent, the difference is your profit (income – expenses = profit). But then, like we said at the beginning of this post, spending more money than you brought in creates a loss scenario — you’ll actually end up with a negative amount for business income on your taxes.

Losses and offsetting income

In most cases, any amount of loss reduces your overall taxable income. That’s because there are no safety nets here — if you spent more on your business than you earned, that’s affecting you personally. Since you’re a sole proprietor, it’s likely that most (if not all) of your loss amount is considered “at risk,” meaning your business losses affect your personal pocketbook.

Since you’re so tied to your freelancing as a sole proprietor, your loss amount may reduce other unrelated taxable income on your tax return.

When you file with 1040.com, we’ll ask you about your small business information and use your answers to complete the forms. We’ll also calculate how much your business losses will reduce your tax liability, so you can sit back and relax without worrying about the math. Instead, you can focus on how you’re going to turn that loss into a profit!

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