Freelance Taxes: Deductions You Are Missing

Managing taxes as a freelancer or side-hustler can feel overwhelming. Without an employer withholding taxes from your paychecks, you are on the hook for the full amount when tax season arrives. Fortunately, the IRS offers numerous ways to lower your taxable income. Keeping more of your hard-earned money comes down to claiming the exact right deductions.

The Big Deductions Most Freelancers Forget

When you work for yourself, you are responsible for tracking your own expenses. Missing out on major structural tax breaks is the fastest way to overpay the government.

The Qualified Business Income (QBI) Deduction

The Qualified Business Income deduction is a massive tax break introduced in 2018. If you operate as a sole proprietor, an LLC, or an S-corporation, you can deduct up to 20% of your qualified business income from your taxes.

For example, if your freelance graphic design business earns $50,000 in net profit, you could potentially deduct $10,000 right off the top. You do not need to itemize your taxes to claim this deduction. It is available to you even if you take the standard deduction on your Form 1040.

Half of Your Self-Employment Tax

When you work as a W-2 employee for a company, you split Medicare and Social Security taxes with your employer. When you are self-employed, you pay the whole 15.3% yourself. This is known as the self-employment tax.

However, the IRS allows you to deduct half of this amount (7.65%) when calculating your adjusted gross income. You claim this above-the-line deduction on Schedule 1 of Form 1040. It directly reduces the amount of income you are taxed on.

Everyday Expenses You Can Write Off

Your daily operations require spending money. As long as an expense is ordinary and necessary for your line of work, the IRS generally allows you to deduct it on your Schedule C.

The Home Office Deduction

The home office deduction is heavily misunderstood. Many freelancers skip it because they fear it triggers an audit, but this is an outdated myth. If you use a part of your home exclusively and regularly for business, you are legally entitled to this write-off.

You have two choices for calculating this deduction:

• The Simplified Method: The IRS lets you deduct $5 per square foot of your dedicated workspace, up to a maximum of 300 square feet. This caps out at a very easy $1,500 deduction.
• The Actual Expenses Method: This requires you to calculate the business percentage of your rent, mortgage interest, utilities, and homeowners insurance. If your home office takes up 10% of your apartment, you can deduct 10% of your monthly electricity and internet bills.

Mileage and Travel Expenses

If you drive for your side hustle, you need to track your miles. This applies to rideshare drivers, freelance photographers traveling to shoots, or consultants driving to client meetings.

For the 2024 tax year, the IRS standard mileage rate is 67 cents per mile driven for business use. This is an increase from 65.5 cents in 2023. If you drive 5,000 miles for work this year, that results in a $3,350 deduction. You should use a mileage tracking app like MileIQ or Everlance to keep a compliant log automatically.

Software, Subscriptions, and Phone Bills

Look closely at your monthly credit card statements. Software subscriptions add up quickly and are fully deductible if used for your business.

Common examples include Adobe Creative Cloud, Microsoft 365, Zoom Pro, and accounting software like QuickBooks Self-Employed or FreshBooks. You can also deduct web hosting fees from companies like Bluehost or Squarespace.

Furthermore, if you use your personal cell phone for work, you can deduct a percentage of your monthly Verizon or AT&T bill. If you use your phone for business 40% of the time, you simply deduct 40% of the total cost.

Health and Retirement Tax Breaks

Freelancers do not get employer-sponsored benefits, but the government provides specific tax incentives to help you build your own safety net.

Self-Employed Health Insurance Premiums

Paying for your own health insurance is notoriously expensive. The good news is that self-employed health insurance premiums are completely deductible.

You can write off the cost of medical, dental, and qualifying long-term care insurance premiums for yourself, your spouse, and your dependents. This lowers your adjusted gross income. The only catch is that you cannot claim this deduction if you are eligible to participate in a subsidized health plan offered by your spouse’s employer.

Supercharged Retirement Accounts

Freelancers do not get company 401(k) matches, but they do get access to incredible tax-advantaged retirement accounts. Contributing to a Simplified Employee Pension (SEP) IRA or a Solo 401(k) dramatically reduces your current tax bill.

For 2024, a SEP IRA allows you to contribute up to 25% of your net earnings from self-employment, up to a maximum of $69,000. Every dollar you put into these accounts reduces your taxable income for the year. Brokerage firms like Vanguard, Fidelity, and Charles Schwab offer free or low-cost options to set these accounts up.

Education and Professional Development

Investing in your skills counts as a valid business expense. The IRS allows you to deduct the cost of education that maintains or improves skills needed in your current business.

If you are a freelance web developer, a paid coding bootcamp or a subscription to Codecademy is deductible. You can also write off industry conferences, webinars, and subscriptions to trade journals. Just remember that the education must relate to your current profession. You cannot deduct the cost of real estate licensing classes if your current business is freelance copywriting.

Frequently Asked Questions

Do I need to form an LLC to claim these freelance tax deductions? No. You do not need to form a Limited Liability Company or a corporation to claim business expenses. Sole proprietors can claim all of these deductions directly on Schedule C of their personal tax return.

Can I deduct business meals? Yes. If you take a client out to lunch to discuss business, you can generally deduct 50% of the cost of the meal. You must keep the receipt and note who you met with and what business topic was discussed.

What happens if I forget to claim a deduction on my taxes? If you realize you missed a major deduction after you already filed, you can file an amended return. You will need to submit Form 1040-X. The IRS generally gives you up to three years from the date you filed your original return to submit an amendment and claim your refund.