So you want to learn more about freelancer expense tracking.
You became a freelancer to do the work you love—whether that's photography, writing, event planning, graphic design, or something else entirely.
You didn't become a freelancer to worry about taxes. Unfortunately, though, it's part of being your own boss.
It doesn’t matter how complicated or straightforward your finances are; filing taxes is a pain. Especially for freelancers, who would rather focus on the work they love than be bogged down with administrative work.
Are you already sweating at the thought of tax season? Well, you are in the right place. Here is what you need to know to sail through this tax season and make sure you claim all your expenses correctly.
What is Freelancer Expense Tracking?
Expense tracking is recording tax-deductible expenses so you can write them off on your taxes. Pretty much any money you spend or invest in your business is tax-deductible, which means you don't have to pay income tax on the money you spend on expenses.
Don't confuse tax-deductible with a tax credit — they are different. A tax credit is a reduction of the taxes you owe, while a tax deduction reduces the overall income you are taxed on.
For example, if you make $50,000 in a year and have $5,000 in expenses, you'll only be taxed on $45,000 in income.
If you make $50,000 a year and have a $5,000 tax credit, you'll calculate what you owe in taxes and then subtract $5,000.
Incorrectly tracking expenses can result in IRS fines and late fees (if you try to claim too many expenses) or overpaying in state and federal income taxes.
Just a quick note — we aren't tax professionals and every state has different tax requirements. So, make sure to check with an accountant or tax professional who knows your business before filing your taxes.
Biggest Mistakes Freelancers Make with Expense Tracking
Tracking expenses correctly is one of the most important things you can do for the health — and success -- of your freelance business. Unfortunately, most freelancers get it wrong. Here are four of the most common mistakes freelancers make when tracking their expenses.
Not Knowing What Expenses are Tax Deductible
Not everything you purchase as a business owner is tax-deductible--but many of the items you buy are. The average freelancer pays around 25% of their income in taxes. Failing to claim all your expenses can be an expensive mistake.
While the rules may vary by state (and by year), in general, freelancers can write off supplies, software, and tools they need to run their business.
In most cases, if you would purchase the item even if you weren't running your business, it won't qualify for a deduction.
Forgetting to Track Expenses
Do you find yourself scrambling to organize your box of paper receipts come tax time? Many freelancers fail to track their expenses throughout the year, leaving them stressed come tax time.
Tracking your expenses throughout the year is beneficial for two reasons — it ensures you actually remember to claim all your expenses (are you really going to remember that printer paper you bought six months later?), and reduces stress at tax time.
Remember: you don't have to keep paper receipts for expenses. According to the IRS, you must have supporting documentation, which can include:
- Canceled checks
- Cash register receipts
- Bank account statements
- Credit card receipts or statements
Not Billing Customers for Reimbursable Expenses
Reimbursable expenses are expenses you incur on behalf of your clients. For example, if a client requires you to read their biography before writing for their blog, the client should cover that expense.
Other reimbursable expenses might include:
- Travel and transportation costs, when incurred on behalf of the client.
- Meals or entertainment costs
- Materials and supplies purchased specifically for that client
- Required software, tools, or materials
For example, an event planner who drives 30 minutes to pick up flowers for a client might charge for the cost of travel and the flowers. (This, of course, will depend on your business model.)
Many freelancers either forget to charge clients for reimbursable expenses or aren't aware they should be charging clients, and those costs can add up.
Not Using an Expense Tracking Tool
Keeping up with expenses is a pain. Did you remember to write down last week's lunch? What about that order of office supplies from last month? Most freelancers have better things to do than spend time tracking expenses--but it can cost you come tax time.
Rather than spending precious hours tracking expenses, consider using an automatic expense tracking tool like Clarrow. Our tool connects to your bank account and automatically finds expenses so you can focus on growing your business, not keeping up with your expense report.
5 Tax-Deductible Freelance Expenses You Don't Want to Forget
Tax time is just around the corner--are you ready? Most tax professionals and tax software will walk you through the different deductions you are eligible for, however, there are a few that often fly under the radar. Before you file, see if you are eligible to claim these common freelancer expenses.
Home Office Space
The IRS allows business owners to deduct part of their rent or mortgage costs if they use a portion of their home exclusively for business. To be eligible for this deduction, you must:
- Use a portion of your home exclusively for conducting business on a regular basis.
- The home must be your principal place of business. This includes if you use your home exclusively for administrative tasks but also conduct business outside of your home.
Visit the IRS page on home office deductions to see if you qualify to write off a portion of your home costs.
Payment Processing Fees
If you use a payment processor, such as PayPal or Stripe, you may be eligible to write off the fees you pay on your taxes. This can add up for most freelancers, as Paypal and Stripe both charge businesses 2.9% plus .30 per transaction.
These fees cannot be directly passed on to your customers, so you'll want to remember to write the fees off on your taxes.
Home Office Supplies
Running a home office can get expensive. Luckily, most of those costs can be written off on your taxes. Just keep in mind, you can only write off materials and tools you use exclusively for your business.
Home office supplies might include:
- Printers, scanners, paper, and ink
- Pencils, pens, markers
- Notebooks and sticky note pads
- Computer chairs, keyboards, and new monitors
- Headphones, microphones, even podcasting equipment (if you run a podcast for your business.)
- Books and training for your business
In most cases, you can't write off decorative items, such as rugs, plants, or wall hangings. However, if customers visit you in your office, you may be eligible to write off a portion of the costs of furnishing your office. Make sure to speak with a tax professional to understand your unique situation.
Software (Including Subscription Services!)
One of the biggest expenses for most freelancers are subscription services. In fact, most of the software we used to purchase now requires a monthly fee. Nearly all those costs count as a business deduction.
Software costs might include:
- Keyword research or competitive analysis tools
- Word processing tools, like Microsoft Word
- Paid video conferencing tools, like Zoom
- Grammar tools, like Grammarly or Hemmingway App
- Photo editing or graphic design tools
- Social media marketing tools
- Cloud storage and computer backup services
- Invoice or expense tracking software
- Tax software
- Customer relationship management tools
- Invoicing and business management tools
Make sure to go through your business account and note any subscription services you pay for (Or, have Clarrow do it for you!)
Business Marketing Expenses
A big part of running a successful freelance business is investing in your future.Many marketing costs are also eligible for a tax deduction.
Freelance business marketing costs might include:
- A business website, including hosting and domain name
- The software you use to market your business, such as a social media marketing tool or competitor analysis tool
- Networking association costs
- The cost of paid ads, billboards, or other marketing campaigns
- Business cards and business swag
Early To Start, First To File
Procrastinating on doing your taxes until the last minute is only going to add to the pain. We are pretty sure you cannot do a pile of stuff at once, that you hate doing anyway.
Getting started with your tax returns early gives you an edge. You will have additional time at hand to figure things out, make informed decisions, and keep yourself from falling prey to tax identity theft. Don't let things become all the more stressful! Start early and see how smooth it gets.
Make More Time for The Work You Love With Clarrow
Keeping up with freelance expenses is critical to the success of your freelance business, but it doesn't have to be painful. Clarrow automates expense tracking so you don't have to spend hours calculating your expenses come tax time.