Someone once said the only things that are inevitable are death and taxes.
I’d add: they are also staggeringly complicated, especially for creative freelancers like me who majored in English (I know there are a lot of us out there). Plus, every year brings new tax rules, which compounds my apprehension when April comes around.
During Freelance Austin’s February event, Bonnie Forte, Founder & CEO of MDRNBooks, shared tips that helped allay some common tax misunderstandings.
What is a deduction?
If you tend to slack sometimes on tracking your deductions, remember that deductions add up and they will lower your tax liability. However, if you weren’t tracking deductions all year or you’re married, the standard deduction may be far more than any write-offs.
When you are unsure if an expense qualifies as a deduction, here’s a simple definition: deductions must be ordinary (common and accepted in your industry) and necessary (helpful and appropriate for your business) – for example, a camera purchase for a writer is not a common deduction or helpful to your business.
Gray areas and commonly missed deductions
But what about the gray areas – personal care, for example? Do makeup, hair, and nails or clothing for a professional event qualify? If clothing has a logo on it and is specific to a work event, it may be appropriate, but haircuts last beyond the duration of an event so they would not be considered a deduction.
The most commonly missed deductions are business coaching/training and cell phone usage. Training should be distinct from education, and it must apply to the current tax year. For cell phone usage, the rules have recently changed because personal devices are now used for so much more than phone calls, acting essentially as “mini computers.” Generally, 50 percent of cell phone charges can now be considered a business expense.
Charitable donations and gifts
For charitable donations, if you donate through your business to a 501(3)(c) organization, they are a business deduction.
Gifts are often red flags for audits. Make sure what you give is truly a gift by asking yourself: is it really a promotional item? Or training supplies? Or program materials? If you’re confident it’s a gift, limit your expense to $25 per person per year.
Health insurance is not a deduction
If you are self-employed and have a separate policy than your spouse or partner, 100% of the cost of buying health insurance can offset your business taxes. However, health insurance is not a business deduction; it is an adjustment to income. If your health insurance costs more than you made in a given year, you must pay the full taxes.
Using your home as office
There are two methods for determining this deduction: Calculate $5 per square foot of your office, up to 300 square feet ($1500 max) or use Form 8829. The latter method is not as easy, but it can lead to big savings because it includes fees for maintenance, utilities, and home insurance, for example. As Bonnie said, “You will always get more from the 8829 so it is worth filling it out.”
Select your tax preparer carefully
Your tax preparer is not liable for mistakes that create penalties or interest so it’s important to select someone you trust. Steer clear of so-called “ghost preparers” who won’t sign your returns – that’s an illegal practice. Remember: A portion of your tax preparation fees – what you pay someone to do your taxes – is deductible, but the actual business taxes are not.
Figuring out sales tax
Sales taxes are levied by states, not the Federal government, and the rules vary by state. Only products, not services, must pay sales tax, but there’s a caveat for creative freelancers in Texas: web design. In Texas, even though web design is not a tangible item, it is considered a product, but writing is not. The sales tax in Texas is 6.25%, and each city can charge an additional 2%. The bottom line is that sales tax varies widely, not just by state but where specifically in the state you do business and what services you provide to clients.
Common audit triggers
For freelancers, proceed with caution if your business experiences the following because they are the most common prompts for audits:
- Switching or changing taxpayer name
- Jump in income
- Excessive deductions
- Home office deduction
- Schedule C (Business income)
- Math errors
- Business Meals and Entertainment
- Schedule C losses
- Income reported not match 1099/W2
- Claiming 100% vehicle for business
While all of Bonnie’s suggestions were useful, perhaps the most helpful recommendation of all when thinking about and preparing tax returns is this: don’t go it alone. Find a reputable tax professional to help you. Non-communications and marketing professionals hire us to write copy, manage public relations, and create branding, so why would we DIY our taxes?