Freelancers: Did you know that you can deduct health insurance expenses, or, in certain cases, car trips back and forth from your house? Or that you can legitimately employ your own children and reduce your own self-employment taxes in the process?
There’s a host of deductions that freelancers don’t often claim, potentially costing them hundreds to thousands of dollars each year. “It’s a matter of being unaware,” says Julian Block, a Larchmont, N.Y.-based tax attorney and author of Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers. “They don’t realize that they should familiarize themselves with how the rules work,” Block says.
To help you save some money and hassle this season, we’ve asked our tax experts for their lists of common mistakes that freelancers like yourself don’t need to make again. Take a look at their advice and get thinking about what applies to your operation.
Focusing too much on medical expenses versus health insurance costs. Freelancers normally itemize medical expenses on Schedule A of the IRS Form 1040, and are often unaware that they can take advantage of the self-employed health insurance deduction on line 29 of the 1040’s front page, according to Block, potentially missing out on a deduction worth thousands of dollars.
Block thinks line 29 remains important to freelancers even though the Affordable Care Act cuts back on itemizing medical expenses on Schedule A. Before the present 2013 tax filing season, a person could deduct medical expenses above 7.5 percent of adjusted gross income. In other words, if you made $100,000 for the year, the first $7,500 in medical expenses did not count for a deduction. However, starting with returns for 2014, most freelancers can deduct medical expenses only for the part above 10 percent of their AGI. The change could reduce medical deductions by $2,500 for someone with an AGI above $100,000 annually.
Not claiming a home office. When freelancers who qualify for a home office deduction don't claim it, trips from the home to a story interview, conference or client meeting are technically considered commutes and not eligible for business mileage, Block says. The lost mileage can quickly add up. (The IRS standard rate is 56.5 cents per mile for 2013.) Block suspects freelancers are overly worried about home office deduction-related audits, or simply don’t understand what qualifies as a home office. The best bet is being able to show that you have a separate room or partitioned area in the home that is used regularly and exclusively for work. For some, the deduction is more attractive this season, as this it’s the first tax-filing season in which the IRS will allow a simplified home office deduction of $5 per square foot, with a limit of $1,500 for 300 square feet of home office space.
Not putting the kids to work. Have children capable of earning their keep? You might not realize there are tax benefits related to hiring them as staff, Block says. Kids can sort through emails, schedule interviews, perform clerical work and much more. Make sure your paperwork is in order, though. These hours must be documented with annual W-2s issued and paychecks drawn off the business account. If audited, you will have to be able to make a case that this was work connected to the business, not household chores or typical phone answering -- and that the children are of an age where they are capable of the work in question (That means no 9-year-olds writing news stories at $50 an hour.) Hiring your children has plenty of advantages. If they make enough to be liable for income taxes, it will be at a low bracket or a zero bracket. In most cases, their income is also shielded from social security taxes because the internal revenue code exempts wages paid to children younger than 18 who are employed by a family business.
Not realizing you’re a business. Freelancers really are small businesses, qualifying for a plethora of deductions on Schedule C of the 1040, says Miguel Farra, principal in charge of the tax and accounting department at Morrison, Brown, Argiz & Farra’s Miami office. “Automobile expenses, car travel, entertainment -- all of those expenses are deductible, and you should keep track of them,” Farra says. This where a meeting with a tax professional could come in handy, espeically if you make any large investment, because they can help you game out the potential deductions you should be documenting. It also might make sense to seek tax advice during an operational shift, such as hiring your first employee or opening up an office location.
Mistaking employment for business ownership. On the flip side, freelancers with just one client might be considered employees by the IRS, says Gail Rosen, a Martinsville, N.J.-based CPA. Get audited, and a whole host of “business”-related expenses could fall under suspicion because you appear to be an employee under common law, and not an independent contractor. Rosen advises freelancers to, “have a website. Have multiple clients. Show you’re out trying to get clients.” The IRS has online guidance when it comes to determining whether one is an independent contractor or a common law employee. Vinay Navani, a CPA and shareholder at Wilkin & Guttenplan in East Brunswick, N.J., many states have different standards when it comes to classifying independent contractors. He advises freelancers to check with their state labor department when determining thei employment situation to be sure.