As a freelance writer or other self-employed person, you are a sole proprietor, and you are allowed various tax deductions. Since these tax deductions will help offset the money you will have to pay in self-employment taxes, it will probably be worth your while to keep track of your expenses and take advantage of these tax deduction allowances. The following tips will help you learn what qualifies as a legitimate business expense for your freelance writing or other home-based business, as well as what other deductions are available to you as a sole proprietor.
1) Supplies and Postage
You’re relatively safe in deducting the cost of supplies and postage, within reason. The IRS isn’t likely to question the cost of basic office supplies. They know a writer has to buy pens, paper, and envelopes, as well as mail submissions.
2) Research Materials
If you use research software (like Lexis) regularly for your writing work, you can probably get these deductions by without question from the IRS. Magazine subscriptions are probably safe, too. Unless you subscribe to thousands of dollars worth of magazines, you should be safe deducting the costs of the few writing trade magazines you subscribe to. Book purchases (like Writers Market) or your online subscription to Writers Market can also be deducted.
3) Phone Calls and Mileage
If you do interviews that involve lengthy long-distance calls, or you have to travel for in-person interviews, you are relatively safe deducting these costs. If you dedicate a phone exclusively for business use, this deduction process should be easy, and the documented proof will be clear should you get audited. Mileage for trips to the library for writing work and such can also be deducted.
4) Computers and Software
If you have a computer dedicated exclusively to business use, you can deduct the full cost. The IRS allows a percentage deduction on computers used for both personal and business use. Cost of printers, scanners, copiers and the like can also be deducted under the same terms. Same with software.
5) Home Use
If you have an entire room set up as a home office, you can deduct a percentage of your mortgage or rent, as well as portions of your utilities and real estate taxes. This is an iffy area for people who don’t have an entire home office set up. Be prepared to justify your deductions should you be audited.
6) Writer’s Union or Small Business Association Dues
If you belong to a writer’s guild or small business association, you can deduct your monthly or annual dues. The knowledge of the dues should be gathered from the important site of the business. The dues can be deducted as per the union of writers.
7) Personal Health Insurance Costs
You can deduct the full cost of your insurance premiums. You cannot deduct your family’s insurance costs unless your spouse or children legally work for you. However, hiring your spouse or children is often a cost-effective option with added deduction benefits.
8) 401(k) Contributions
If you contributed to a self-employed or sole 401(k) plan last year, you can deduct 100% of those contribution costs this year.
9) Earned Income of Your Minor/Teenage Children as Employees
Sole proprietors can hire their minor children without paying payroll taxes. As long as the child earns less than $5,000 per year, the child’s income is generally not subject to federal income taxes either. (This means neither the sole proprietor nor the parent nor the teen will have to pay any income or employment tax on these wages.) So, if your teenagers help out with your business — stuffing envelopes, filing, typing labels — take advantage of this deduction. It could save you several hundred, or even a few thousand, dollars per year, as long as your business is profitable.
10) Spousal HRA (Healthcare Reimbursement Arrangements) Loophole
Healthcare reimbursement arrangements, known in tax-man lingo as a IRC Section 105(b) plan, are NOT deductible for the sole proprietor himself. However, if the sole proprietor hires his spouse as an employee, the sole proprietor can establish an HRA that reimburses the whole family’s healthcare costs. This reimbursement is a legitimate business deduction on self-employment and income taxes.