Independent Contractor & Freelancer Tax Deductions to Keep in Mind

One of the benefits of being a contractor, freelancer, or otherwise self-employed individual is the potential for tax deductions to reduce the amount of income tax you owe. About a quarter of the United States working population, or 27 million people, are freelancers, contractors or sole proprietors – according to the National Association for the Self Employed. Even when freelancers are diligent and pay estimated tax payments throughout the year, many end up owing money at tax time.

The IRS allows contractors to deduct anything considered “ordinary and necessary” to conducting your business. Here are a number of tax deductions that most contractors or freelancers can legally take, which will help reduce the amount you pay to the IRS.

Research Related Expenses

If you attend conferences in your business industry, purchase books or other research related materials to perform your job and further your knowledge, these expenses are tax deductible with appropriate receipts and documentation.

Retirement Contributions

Depending upon your income level you can choose from various retirement options that can help reduce your taxable income for the current year or for the years you withdraw from your retirement fund. Below are the two most popular types of retirement accounts for self-employed individuals and some basic information on each:

• Traditional IRA: With a traditional IRA the contributions are tax deductible the year the contribution is made. These taxes are deferred until they are withdrawn from. Anyone can contribute to a traditional IRA since there are no income restrictions, but there are limits to contribution amounts. With this type of account withdraws begin at at 59.5 and are required by 70.5.
• Roth IRA: With a Roth IRA the contributions are not tax deductible in the year the contribution is made since taxes are paid the amounts prior to making the contribution. With this type of account all earnings and principal are tax free. One nice thing about growing money on a tax free basis is that you can use the Roth IRA as a dividend shield and avoid double taxation on dividends. A downside to the Roth IRA is that there are income limits and contribution limits.

Coffee, Lunch or Dinner Meetings

Do you meet with clients to discuss projects face-to-face?  If you decide to foot the bill of such meetings, you can deduct half the expenses.  Keep your receipts and good records for who you meet with and a brief description of topics discussed.

Paypal or Credit Card Merchant Fees

If you use PayPal or another credit card processor to accept payments online from your clients, you can deduct the fees you pay for the service each year.

Subcontractor Payments

If you pay other freelancers or subcontractors to help you on a project (which allows you to take on more work than you could handle on your own), you can deduct the expense of paying the subcontractor for their portion of work.  Keep invoices sent from contractors to show that you have “contractors” and not “employees”, and keep a record of when each payment was made.

If you maintain an office or work area in your home, you can deduct a percentage of your mortgage or rent, utility payments, and homeowners or renters insurance premiums. The percentage of deductions you're allowed for these expenses depends on the size of your office area – the square footage of a room used entirely for an office, or the desk area in the corner of your living room, for example.  If your office area is 12% of your total home square footage, you can deduct 12% of home expenses.

Professionals

If you have reason to consult a lawyer or accountant or other professional regarding your freelance business, the cost of the service is deductible.  Keep the receipt for the amount you pay.

Professional Memberships

While you can't write off the membership to the gym (unless maybe, if you are a freelance fitness coach?!) there are a number of business related professional memberships which are legal tax deductions.  If you join an organization for sales leads or networking, like the local Chamber of Commerce or the Lions Club, you can justify the expense as a business one.

Business Travel Expenses

You can't claim the costs associated with commuting to and from an office, but if you travel from your home office to meet a client or conduct research, the travel is considered a necessary business expense.  You can include tolls or parking fees in your expenses.  You're allowed to write off the cost of , such as a portion of wear and tear on your vehicle, or public transportation costs, or you may decide to take the IRS standard mileage deduction which covers gas, insurance, maintenance and depreciation.