Filing Taxes as a Sole Proprietor can be overwhelming. I hope these Tax Tips will help clear some of your questions up and have you better prepared to file your Tax Return.
A big difference of working as a Freelancer vs working as an Employee and receiving a W-2, is that as a Freelancer, you can actually deduct some of your Business Expenses against the Income you received. After deducting your Business Expenses, the net amount is the actual amount that you are taxed on. This is an important distinction from Taxpayers who receive a W-2, because they are categorized as Employees and therefore not eligible to deduct any business expenses related to their work.
How to Report your Income
As a Sole Proprietor, you will be reporting your Income and Expenses on a Schedule C which is attached to the IRS Form 1040. The process of gathering your Income and Expenses is called Bookkeeping. A suggestion would be to come up with some type of system of how you plan to do your Bookkeeping. Every month is ideal. Planning a sit down time at the end of the month and gathering all of this information will help you stay up to date. There are also tools that can assist you with this such as Bookkeeping Software (Quickbooks, Wave, etc) and Microsoft Excel.
Here are 5 Common Freelancer Expenses. Please make sure to keep track of these expenses so that you can deduct them on your Schedule C at Tax Time.
- Advertising- Deduct any expenses that are associated with you Marketing your Freelancing Services.
- Office Expenses- Deduct any expenses that were needed for you to do your Freelancing work. Any type of office supplies, notebooks, pens, printer supplies, computer supplies are all examples.
- Mileage- Keep track of any mileage expenses if you have to use your vehicle to perform Freelancing Services. Personal miles are not included. A good app to assist you in keeping track of your mileage is MileIQ.
- Travel Expenses- This will include any airline, train or parking tickets as well as hotel stays.
- Dues and Subscriptions- Any monthly subscriptions that you pay in order to perform Services as a Freelancer. Examples of this could be monthly Calendar Organizers or Microsoft Office.
There are many other business expenses that could possibly be deducted. The IRS States that deductible Business Expenses must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. Please keep these guidelines in mind when thinking if a potential Business Expense is deductible or not.
Ask yourself these two questions:
Is the Expense necessary for me to carry out my Freelancing Business?
Is this a common Expense that is regularly incurred in my Freelancing Industry?
If both of those answers are Yes, then there is a good chance these potential expenses would be considered deductible.
References: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses
