Does tax time leave you feeling stressed out and overwhelmed? Freelancers around the country spend months faithfully gathering paper receipts in an effort to lower their tax bill come April.
It's annoying, and it takes time away from client work that actually helps your freelance business grow.
We've got good news.
You Don't Have To Save Paper Receipts To Track Expenses As A Freelancer
That's right — you do not need to save paper receipts for expenses. 🥳🎉
Keeping track of paper receipts is not only a waste of time, but it can also create clutter and stress. Those little pieces of paper get stuffed in random drawers, left in pockets, or lost. By the time tax time comes around, you might not even remember what that expense was for!
If you have been faithfully saving those paper receipts, it is time to make a change.
Don't worry, you won't be skirting IRS rules or opening yourself up to a tax audit.
What Are The IRS Rules For Reporting Expenses as a 1099 Worker?
But, you might be wondering, doesn't the IRS require freelancers to save paper receipts for tracking your expenses? Actually, they don't!
According to the IRS website, freelancers must save "supporting documents" to track most expenses. Here is what that means:
Your supporting documents should identify the payee, the amount paid, proof of payment, the date incurred, and include a description of the item purchased or service received that shows the amount was for a business expense.
Documents for expenses include the following:
- Canceled checks or other documents reflecting proof of payment/electronic funds transferred
- Cash register tape receipts
- Account statements
- Credit card receipts and statements
Note: A combination of supporting documents may be needed to substantiate all elements of the expense.
Account statements and credit card statements can be used to report expenses to the IRS — so say goodbye to that shoebox of paper receipts.
How to Record Freelance Expenses for Taxes
If you don't have to save paper receipts to prove purchases, how do you record your expenses? A lot of freelancers rely on clunky spreadsheets. But, there's an easier way.
Here are three ways to record expenses as a freelancer:
- Bank or credit card statements: Contrary to popular belief, you can use bank or credit card statements to record expenses. Your bank statement shows what you spent, where you spent, and when you spent it — which is the information the IRS requires.
- Digital receipts: These days, most places will email you a receipt. File those on your computer (or the cloud), and you'll always have a copy if you think you'll need it.
- Use an expense tracking app: Using an expense tracking tool like Clarrow makes expenses even easier to track. If you connect Clarrow to your bank account, the program will look for purchases and prompt you to mark them as expenses.
Note: For purchases under $75, you do not need to provide documentation at all! According to the IRS:
Section 1.274-5(c)(2)(iii) requires documentary evidence for any expenditure for lodging while traveling away from home and for any other expenditure of $75 or more, except for transportation charges if the documentary evidence is not readily available.
So any expenses under $75 (except for lodging) don't have to have any proof at all. Stop saving those coffee receipts - unless you spent more than $75.
Frequently Asked Questions About Freelancer Expense Tracking
Tracking expenses is stressful, but necessary, part of being a freelancer. Below, we've compiled a list of the most-asked questions about expenses and expense tracking.
Can I Claim Expenses on My Taxes Without a Receipt?
Yes! According to the IRS, freelancers must have "supporting documents" to claim expenses, which can include account statements, credit card statements, and invoices. You can also save a virtual copy of your receipt by saving a picture of the receipt in an expense tracking app.
What if I Get Audited By the IRS and Don't Have Paper Receipts?
The IRS does not require freelancers and 1099 workers to save paper receipts to prove expenses. If you get audited, you can provide credit card statements, invoices, or digital copies of receipts to prove your expenses.
It is also worth noting that your chances of being audited by the IRS are pretty low. According to Nolo.com, the chance of getting audited by the IRS is 0.6% or one in 167 returns. Even if you are audited, saving digital copies and account statements are perfectly acceptable!
Is There Any Time I Should Save Receipts?
If you make a large cash purchase, it's probably a good idea to hold on to a copy of that receipt. For example, if you pay for a new computer in cash then you'll want to hold on to a copy of the receipt.
But, that doesn't mean you have to hold on to the physical receipt — instead, take a photo of your receipt and store it digitally! (Of course, the easiest route is to make large purchases on a card, but you do you.)
What Business Expenses Can I Claim as a Freelancer?
The expenses you can claim on your taxes will vary based on factors like where you do business. Speak with a tax professional to better understand the exact expenses you are eligible to claim.
In general, however, most freelancers can claim the following business expenses.
- Office space
- Office supplies
- Travel expenses
- Advertising costs
- Educational costs (for business)
- Meals with clients
- Business tools
- Membership dues to industry groups
Pretty much anything you do to support your business can be claimed as an expense!
Automate Freelance Expense Tracking with Clarrow
Expense tracking is a huge burden for most freelancers — but it doesn't have to be! Clarrow makes it easy to automate tracking expenses. Connect your bank account to Clarrow and receive smart suggestions that make tracking expenses a breeze.