5 Essential Tax Deductions for Entrepreneurs and Freelancers
As you’ve probably figured out, taxes for the self-employed entrepreneur are no walk in the park.
For one, you have 1099’s to deal with: that notorious tax document where solopreneurs like you report income from self-employment earnings, interest and dividends, government payments, and more.
Unlike traditional employees that earn a salary and whose employers report their annual earnings on a nice and neat W-2, independent contractors and self-employed people such as yourself will receive a Form 1099-MISC from every client that paid you at least $600 during the tax year.
In other words, while traditional salaried employees have one simple tax document to deal with, you may have two, three, or ten different 1099s to manage, come tax time.
However, there is good news! Did you know that there are certain tax deductions just for solopreneurs? Knowing which deductions you can take will ultimately end up saving you thousands of dollars on your taxes.
To help you get the most back on your taxes, we’re reviewing five deductions in particular that nearly all solopreneurs can take advantage of. For the most part, the deductions we’re covering will go directly onto your Schedule C. Ready to save some money? Let’s do this.
1. Education and Training
If you take classes or training courses to further your professional education, like the online business classes here at CreativeLive, you may be eligible to deduct your tuition, related course materials, and even certain travel costs on your tax return.
There are a number of requirements you must meet, in order to be able to deduct your education expenses. However, the most important points for sole proprietors to take note of are that your training and education cannot qualify you for a different trade or business; they cannot be for the purpose of meeting minimum educational requirements; and they must maintain or improve the skills required in your field.
Sole proprietors can deduct qualifying education expenses on their Schedule C or E. Employees may be eligible to deduct unreimbursed training and education expenses on their Schedule A, subject to the 2% limit.
Here’s a real-life example: Sarah Gomez has a Masters in English and has been a freelance writer for the past 6 years. Her articles and books are targeted towards a younger demographic, so she regularly participates in training courses to stay current on how to communicate with young readers.
She spends approximately $1,900 every year on these courses, all of which would be deductible on her Schedule C, since these courses improve the skills required in her business.
2. SaaS (Software Online Service Subscription)
Many entrepreneurs subscribe to online services or purchase software to support project management, accounting, and marketing activities, to name a few.
MailChimp, Hurdlr, Podio, ZenDesk, Contactually, and Adobe CS could all be considered software or online service subscriptions that are often critical to the operation of your business. They’re generally fully deductible.
Here’s a real-life example: Ian is a web designer with three employees. To keep track of the hours his employees work on each website project, he pays $32 per month for a Harvest subscription. At the end of the year, Ian’s Schedule C deduction would be $384 ($32 x 12), and it would be more if he paid other subscription fees related to his business as well.
3. Conventions, Seminars, and Trade Shows
Many entrepreneurs regularly attend industry trade shows, conferences, and seminars both near and far, to support their businesses.
These events allow business owners an opportunity to network with other entrepreneurs, vendors, and industry leaders, not to mention stay on top of the latest technology and innovation in their respective fields. Often, these events have a high price tag, but it’s important to remember that if the event you attend serves a legitimate purpose, its cost may be deductible come tax time.
Here’s a real-life example: Jolly is a professional speaker and an author who writes books for parents on child care. Jolly makes sure to attend at least two different seminars each year to promote her books and stay on top of the the most current parenting strategies.
Last year, she spent a total of $1,750 on conference registration fees, all of which will be deductible on line 27a of her Schedule C when she prepares her taxes.
4. Commissions Paid
Commissions paid by your business to employees, real estate agents, and contractors, to name a few, are generally fully deductible business expenses that no entrepreneur should overlook.
Depending upon your business, commissions can quickly add up and end up being one of your largest deductions each year.
Here’s a real-life example: Donovan is an author who just finished writing a science fiction book on UFOs. He has contracted with an agent who will help him supply his books to a chain of bookstores nationwide. As per Donovan’s agreement with his agent, he will pay her a fixed fee of $15,000.
When Donovan files his taxes at the end of the year, the fixed fee will be deductible as a contractor expense on line 11 of his Schedule C. Donovan would only consider this fee or a portion of this fee a commission if it were variable based on the number of books his agent sells.
5. Member Dues
Being a successful entrepreneur oftentimes requires that you participate in some extracurricular activities to help further your business goals.
If you are a sole proprietor, business owner, professional or otherwise, and you incur costs throughout the year to be part of a trade group, professional organization, business league, public service organization, board, or otherwise, these could all be considered deductible business expenses.
Here’s a real-life example: Ross Rubin is an English teacher who moonlights as a freelance writer on nights and weekends. For the past five years since starting his business, Ross has deducted his annual $70 dues for his Association of Writers and Writing Programs (AWP) membership.
Since this organization provides him access to guides, community events, and ideas, it is a key component of his business operations and is thus fully deductible.
Putting Your Deductions to Work
Now that you know which deductions you can take advantage of, you’re probably wondering how you can use them to save money.
If you’re looking for an easy-to-use online tool to do your taxes as a self-employed business owner, Hurdlr is a great option to check out. Hurdlr has a beautiful, simple to use, visual interface that requires little effort and financial know-how. Of course, if you would prefer desktop software, one of the most widely used online tax tools in the United States is TurboTax, which has a nominal fee.
And if you’re still in need of more guidance on navigating your self-employed taxes, there are a lot of great resources available to help edify you about all things related to tax. To find more creative deductions online, check out this guide to filing your freelance taxes on Freelancer’s Union. Over on the Hurdlr blog, we also wrote about the 17 best deductions for solopreneurs.
Of course, it’s hard to beat getting reliable tax advice from a Certified Public Accountant. There are even CPAs, such as Steven Zelin, who work specifically with freelancers and independent contractors.
You should also try 99Deductions, a site for independent workers, freelancers, and solopreneurs where you can learn how to maximize your take-home pay and minimize your taxes. Whether you’re an Uber driver, Graphic Designer, Airbnb host, or even a Real Estate Agent, 99Deductions can help you see all of your potential deductions explained in plain English.
If you’re ready to start a freelance business, or get serious about growing your existing client base, download our free eBook, The Freelancer’s Roadmap.
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