Freelancing is a business and the way you will handle your taxes working as a freelancer will be different than someone who is solely employed by a corporation. If you are working full-time as a freelancer, whether it is as a computer consultant, writer, artist or any other job, there are several things to keep in mind.
If you are taking continuing education courses related to your work, these are tax-deductible. Organization dues and membership fees, car expenses, travel expenses, professional journals, healthcare, advertising expenses, computers, printers, software, hardware, office furniture, paper and pens are tax-deductible. Business-related expenses like a business telephone line, Internet connection, web domain registrations and hosting fees, and "working meals" are deductible. Working meals are expenses you incur while eating with a colleague or client while at a business-related meeting. Commuting is not tax-deductible; this includes travel from home to your first place of business and back home from your last place of business.
The IRS website has an entire section on self-employed filers and Sisterstates.com links to all state tax sites.
If you are not doing your own taxes, make sure you get a good accountant who specializes in small businesses and knows how to deal with freelancer returns. It's important to select someone who knows the ins and outs of home related tax-deductions. If you have a home office, a portion of your rent and utility expenses is deductible. Because home-related deductions are generally a big portion of your deductions, you'll want to work with someone who will get these calculations right. Also, in order to deduct a home office, you need to have a profit. If you own a home and have a home office, you also need to account for depreciation. Check out Form 4562 and Publication 946 for help in determining how to depreciate an asset.
Forms to File
Freelancers need to file, at a minimum, Form 1040 and Form 1040 Schedule C for sole proprietorships, depending on their particular situation. It's important to file taxes as a sole proprietor because doing this enables filers to deduct business expenses.
According to Howard J. Samuels, CPA, MST and Managing Tax Partner at KDMS LLC, self employed health insurance is fully deductible on page one of the 1040 as an adjustment assuming your profit is more than the insurance. In New York City and surrounding suburbs, if you make a profit over $10,000, you'll also need to file NY Form MTA-6 (semi-new metropolitan tax). If your profit is over $100,000 and you are located in the city (any of the boroughs), you'll need to file forms and pay NYC Unincorporated Business Tax ("UBT") says Samuels. Make sure you find out the appropriate forms to file within your current location if you live outside of NYC and surrounding suburbs.
Keep a few things in mind. Samuels says that if you receive a W-2 (taxes withheld) instead of a 1099 (no tax withheld), then this is not freelance income, but rather you are an employee. The deductible expenses against employee income are limited compared to expenses for 1099/freelance income which have much fewer limitations. Be aware that as a W-2 employee, the employer pays half the self employment (Social Security) tax and you pay the other half through your paycheck. As a freelancer, you pay both portions since you are deemed to be the employer and the employee.
Everyone has to pay this on income/profit they earn says Samuels. "As an employee, the employer pays half and half out of your paycheck. As a freelancer, you pay it all. Overall it is about 15% in total," he says.
The Bottom Line
It's important to know the difference between what you can file as an employee and what you can file as a freelancer. Freelancers can deduct more than regular employees, so there are certain advantages to freelancing. Consult your accountant to find out exactly what is tax-deductible.