What are the most common deductions that freelancers can deduct on their taxes?
Depending on which country you’re in, freelancers are automatically considered self-employed unless they register a corporation. Either way, they get access to tax deductions in the form of legitimate business expenses.
According to Rukie, here are the major ones to pay attention to:
Licensing fees: Zoom, web hosting, Shopify subscriptions, platforms like DocuSign, or any other technology you pay for that’s explicitly to run your business.
Advertising: If you do paid ads or other advertising, you can deduct that as an expense.
Training: Courses or other paid learning opportunities that make you better at your job or at running your business.
Hardware: Computers, equipment, monitors, mics, and anything else you need to do your work.
Home office expenses: Anything in your home that’s exclusively for running your business.
Travel: If you drive regularly for work (or fly, pandemic notwithstanding), these expenses may be deductible.
“The key thing to remember is that if you're spending money in the pursuit of profit for your business, in most cases it would be considered a business expense,” said Rukie. “You do need to be a bit careful when the expense also involved a personal benefit portion (e.g. meals & entertainment).”
Are there any pitfalls or hurdles freelancers should be aware of when filing taxes?
Freelancing has been exploding lately, and that’s getting the attention of tax authorities. Rukie cautions that authorities have “looking a bit more closely at the taxes of freelancers and particularly business expenses.”
Worried about an audit? Rukie said that “Meals & Entertainment expenses, and Home office expenses are the most frequent line items that get audited for freelancers as many people put through personal expenses there, or claim way too high of a % of home office space.”
Thankfully, there are some rules of thumb you can follow to ensure you stay out of trouble with the tax collector. Rukie said: “Remember when claiming home office expenses, you can't include common areas (kitchen, hallways, bathrooms, etc.) and also need to apply a time factor - for example if you're only using your office 8hrs of 24hrs a day - you need to multiply your full claim by 33% to account for the fact that you're not using you office all day everyday 7 days a week.”
When should a freelancer file taxes by themselves versus hiring a tax professional to do it for them?
“I look at hiring a professional almost like Insurance,” said Rukie. “You're essentially paying a bit more up front to potentially save a lot of time / headache / money down the road.”
Rukie also added that a tax professional can help you avoid audits altogether.
“A tax professional can quickly look at your figures, and tell you whether your numbers are screaming for an audit and what you can do to assist to help prevent that,” he said. “ Along with this, you will get access to an accountant to ask questions to year-round so you're making proactive decisions rather than reactive decisions.”
The actual amount of money you might save depends on your personal situation, and there is no benchmark, said Rukie. Regardless of the money side, there are other reasons why you might want to hire a tax professional.
“It really depends on your unique personal situation, your comfort with taxes / numbers, your familiarity with tax rules, etc,” he said. “Also remember that the money you pay to a professional is also a business write off! If you're considering a corporation or have one, I would say you definitely should get an accountant hand down.”
Anything else freelancers should know about filing taxes?
“It's a common misconception that you need to make a certain amount of money before it makes sense to incorporate, however many times that's just not true!” said Rukie.
When it comes to incorporation, Rukie shared a few examples of when it might make sense to incorporate even if you aren’t making tons of money:
1 - “If your business makes more money than you actually need to withdraw out of the business there is an opportunity for huge tax savings.”
2 - “If you're in a relationship and can live off of one person's salary and really just bank the business funds, there's an opportunity!”
3 - “If you have a full time job, and freelancing is a side hustle - there's an opportunity!”
Since corporate tax rates are often less than personal income tax rates, Rukie said that “depending on the numbers, this could mean 10's of thousands of dollars every year!”
PS - Rukie and the whole Gram team publish regular educational content about tax prep on their Instagram.