The author is a freelancer with in-depth knowledge of tax deductions for the self-employed.
Being self-employed is not at all easy. It takes a lot of courage, self-motivation, creativity, and tenacity to run a thriving business or to be a successful freelancer. I know how tough it is; I am one of you. In this cut-throat economy, we all struggle with our arms reaching out to a variety of resources and our heads calculating all kinds of possibilities. Despite all that effort, sometimes luck still might not be on our side. And then there's the IRS, the Gorgon of the tax world that constantly scrutinizes us with its numerous snaky eyes.
Many people usually turn quite depressed during tax filing time, fearing the tax Gorgon and its merciless rules. Guess what? It doesn't have to be that way. Below is a list and detailed discussion of self-employed tax deductions that many taxpayers might overlook. This list is not meant to encourage you to make up phony business expenses and cheat the system, but rather, it will help you acquire all of your legitimate tax deductions and be able to look at the tax Gorgon in the eye and say "Ha! You can't audit me!"
Determining Your Self-Employed Status
These are some important guidelines that the IRS uses to determine whether someone is a self-employed individual or an employee:
Sets their own work schedule
Told when and where to work
Purchases and uses their own supplies
Given or told to purchase supplies
Advertises their business
Does not advertise the business
Receives no worker benefits
Worker benefits are usually provided
Paid by a flat fee (no taxes are withheld)
Earns a regular wage and certain taxes (medicare, social security and income taxes) are usually withheld
Pays for all business expenses (meals, mileage, work space, etc)
Does not pay for business expenses or usually gets reimbursed for business expenses
Hired for a certain contract or project
Available to their relevant market
Works for only one employer
1. Advertising Expenses
Most people are aware of the deductible expenses on the obvious advertising media, such as newspaper ads, brochures, business cards, flyers, posters, website hosting, etc. However, there are other forms of marketing and promotion that might be indirect but can legitimately qualify as business advertising as well.
Commonly overlooked tax deductions:
- Holiday cards
- School sponsorship
Holiday cards you send to your clients are a good example of indirect advertising. Although the cards don't read “My yoga studio is the best in Sacramento” or “Please continue to come to my spa,” they do create a positive image for your business as well as foster a better relationship between you and the clients in the long run.
Sponsoring your child’s sports team or school rally is another valid advertising expense, especially if your company’s name or logo is printed on the uniforms or other products they use. As long as you can prove a clear connection between your business and your sponsorship, the IRS will see it as a deductible business expense.
Last but not least, holding a workshop or seminar is another clever and legitimate way to promote your business, and therefore the expenses in these activities are tax-deductible.
Scenario 1: Ms. Pumpkin Pie owns a baking supply store. One day she decides to give a special workshop on wedding cake decoration, using the products from her store. This will grant exposure to her business and possibly lead to an increase in sales; thus, she can deduct the costs of this workshop as advertising expenses.
Big Exception: When you offer your service for free in order to promote your business, you cannot deduct the value of your time as an advertising expense.
Scenario 2: Mr. Casper Whisperer, a fortune teller, has just opened a new psychic store. In order to attract potential customers and spread the word about his clairvoyant ability, he offers free palm-reading service every Saturday. Even if Mr. Whisperer usually charges $100 per hour for this type of service, he won't be able to take $100 as a tax deduction. Advertising with time and sweat is not deductible.
2. Business Gifts
Whenever you give a present to your customers, potential clients, employees, or business associates, that is a business gift and a valid business deduction. The bad news is it doesn't matter how expensive the gift costs or how many fruit baskets you send to the same client. According to IRS, here's the rule:
Business gifts are deductible up to a maximum of $25 per person per year.
You may buy a $200 bottle of wine for your beloved secretary, but $25 is all the deduction you will get from this business gift. You can give your client three presents for Valentine's Day, Christmas, and his birthday, but still, the maximum deduction for what you have spent on this special client is $25.
Commonly missed tax deductions:
- Business gifts given to people who also have a personal relationship with you
- Related incidental costs
Scenario 1: Mr. Harry Toothfairy's sister is a florist. Every week, she arranges an exquisite vase of roses for him, to place in the waiting room of his dental office. At the end of the year, he buys her a ticket to Justin Bieber's concert just to thank her for being so sweet. True, she is his sister; she is neither his client nor employee, and she is not in a business related to dentistry. Nonetheless, her flowers have made his dental clinic appear much more pleasant, and therefore she has helped nurture his business in a way. That's why the Justin Bieber ticket is a business gift, and Mr. Toothfairy is entitled to a $25 tax deduction.
Scenario 2: Ms. Simone Smith sends a HubPages coffee mug to Ms. Om Paramapoonya simply because she has always been such an awesome Hubber. The mug is wrapped up beautifully and mailed from San Francisco to Sacramento. In this case, HubPages can deduct the gift-wrapping and mailing as incidental costs beyond the $25 limit.
Gifts That Don't Count
- If you give away free samples of your products to prospective customers, you may deduct the costs as supplies or inventory, not as business gifts.
- If you give presents to both your client and his wife, you cannot count them as two business gifts. The IRS will consider husband and wife as one person.
- A gift or donation to a charity does not qualify as a business gift.
Keeping Track of Your Business Gifts
Sometimes when you fail to provide records for certain business expenses, the IRS might allow you to estimate the amount of them. These expenses usually include business equipment, supplies, or any necessary costs that sound reasonable to have actually incurred. However, the tax Gorgon is usually not lenient about business gifts. Unless you have records to prove, the IRS would likely assume the costs are invented, and you would receive zero deduction.
So make sure you keep the receipts of all the business gifts you have bought and also write the following information on the back of each receipt: date it is given, description of the gift, name of the recipient, business relationship between you and the recipient, and business reasons for the gift.
For example, Mr. Harry Toothfairy would write on the receipt of the Justin Bieber ticket:
12/18/2010 - Ticket to Justin Bieber's concert for Stephanie Toothfairy, office-flower provider. Thanks
3. Business Travel Expenses
What Defines Business Travel?
Whenever you need to be away from your regular office and stay at a distant location longer than one day for a business purpose, that is business travel according to the "IRS dictionary." It is NOT the distance that defines it, but the length of time you have to stay away from your regular place of business. If you fly from San Francisco to L.A. at 6 a.m. to negotiate a business contract, and fly back at 1 p.m. the same day, you cannot deduct your airfare as a business-travel cost but have to categorize it as "business transportation." Simply stated, business travel includes at least one overnight rest.
Typical business travel expenses:
- Auto rentals
- Taxi fare
- Bus/subway fees
- Lodging fees
Commonly overlooked tax deductions include incidental expenses that are necessary for your business travel, such as passport fees, laundry, concierge tips, fees for communication services (phone, fax, etc.), and costs for separately mailing the products or samples you cannot bring with you on the plane.
What Travel Expenses Are Nondeductible?
Any expenses that are totally unnecessary and unrelated to your business.
Scenario 1: While having his paintings exhibited in a famous gallery in Italy, Mr. Vincent Earless decides to visit a nearby opera theatre and purchase a pair of Versace boots for his wife. His trip to Italy might be a real business trip, but these are personal expenses and thus nondeductible.
Scenario 2: Mrs. Lovie Dovie is going to attend a three-day business conference in Japan. She asks her husband to go on this trip with her because she desperately needs emotional support. Mrs. Dovie won't be able to deduct her husband's airfare or any of his expenses in Japan because he is not her employee or professional advisor. Although the emotional support from him might enable her to handle the conference more confidently, his presence there does not directly constitute a business purpose.
4. Business Education Expenses
It doesn't matter whether what you learn is required by legal regulations or not; if it is necessary or useful in your trade, then the costs of your education are tax-deductible. Business education expenses usually include tuition fees and books. But guess what? Education does not always have to take place in a typical classroom.
Commonly missed tax deductions:
- Workshops or seminars
- Gallery or museum admission fees
- Library fees
- Document gathering
- Travel expenses related to your business education
Scenario 1: Ms. Loveleen Netgeek, an online store owner, has to drive all the way from Reno to San Francisco to attend a seminar on Internet marketing trends. Due to the late schedule of the seminar, she also has to stay in a hotel overnight. Any costs of attending this seminar (admission fee, books, DVDs, etc.) are deductible business-education expenses. Also, she can deduct all the costs of lodging, gas mileage and meals on this trip as business travel expenses.
Scenario 2: Mr. Romeo Montague, a drama historian, and author, is writing a book titled "Shakespearean Plays in the Modern Theatre." It is impossible for Mr. Montague to finish this book by just sitting on his couch and allowing Shakespeare's ghost to inspire him. Since thorough research is much needed, he spends a fortune on collections of DVDs, theatre tickets, museum admission fees, and many other educational documents. Luckily, he won't have to go broke because of that; these research expenses are tax-deductible.
What education expenses are nondeductible?
You cannot deduct the costs of your education if you need such education to meet the minimum requirements of a business or to qualify for a new career. In other words, your learning can qualify as "business education" only when you are already in that field of business.
Moreover, sometimes you may feel that certain education really has a positive impact on your business and should be tax-deductible, but the IRS might not think so. It all comes down to this question: is such course or educational material fundamentally related to your business? Think about it and give yourself an honest answer before trying to convince the IRS to grant you a tax deduction.
Scenario 3: Mr. Big Wig, a hairstylist, has no one to take care of his new dog while he is at work. It means he has to bring Rosemary, his beloved Chihuahua puppy, to his hair salon. Unfortunately, Rosemary turns out to be the little devil incarnate. She messes with his equipment and does her bathroom business wherever she wishes. When he decides to keep her in a cage, he has to listen to her screechy yelp all day long. The tiny dog drives both him and his customers crazy, so Mr. Wig decides to take a dog training course, hoping he will be able to deal with his Chihuahua more effectively. It is a great course, all right. He can finally order Rosemary to quit yelping and chewing up his hair dryers. As a result, he can run his business much more smoothly. Can he deduct the dog training course as a business education expense? Sadly, no. The course has absolutely nothing to do with hairstyling techniques, customer service skills, or salon management.
10 Common Business Tax Deductions
Home Office Deductions
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Om Paramapoonya (author) on June 18, 2012:
You're very welcome, livingpah!
Milli from USA on June 18, 2012:
Well explained. You are an awesome writer. Thanks for the advise.
gabdone on February 27, 2012:
Om Paramapoonya (author) on February 24, 2012:
@buckleupdorothy - You're welcome. Thanks for dropping by :)
buckleupdorothy from Istanbul, Turkey on February 23, 2012:
This was incredibly useful, thank you.
Om Paramapoonya (author) on October 08, 2011:
Thanks, Doroles. :)
Dolores Monet from East Coast, United States on October 06, 2011:
Great information provided here. But you really added a lot and clarified the hub with the scenarios. (Love your little touches of humor. I feel like a dash of humor helps us remember things.)
thetaxgirl on August 29, 2011:
Om Paramapoonya (author) on August 22, 2011:
Ace Fritzer on August 19, 2011:
Om Paramapoonya (author) on May 01, 2011:
Thanks. I will :)
Ibrahim Kamrul Shafin from Dhaka, Bangladesh & Washington DC, USA on April 30, 2011:
FAscinating Hub. Please keep up your hard work.
Om Paramapoonya (author) on April 16, 2011:
Yep, if those little things can help you improve your business in some way, then they're deductible business ecudation expenses. :)
Susan Hazelton from Sunny Florida on April 14, 2011:
Great advice Om. There are a few things I didn't realize were legitimate deductions such as Dvd's, CD's, and even museum tickets. It's amazing what you learn hanging around hubpages.
Om Paramapoonya (author) on April 14, 2011:
SUSANJK from Florida on April 14, 2011:
I guess I am self employed if I am an independent contractor. So I can use these deductions.
Om Paramapoonya (author) on April 12, 2011:
BlissfulWriter on April 11, 2011:
Great article. I especially like your intro paragraph; it pulls the reader in.
Om Paramapoonya (author) on March 06, 2011:
Thanks, KoffeeKlatch. Glad you stopped by. :)
Susan Hazelton from Sunny Florida on March 05, 2011:
Om, Great advice and tips. Loved you examples.
Om Paramapoonya (author) on February 28, 2011:
Thanks for the read and kind comment, Safiq! :)
safiq ali patel from United States Of America on February 26, 2011:
A spectacular hub and brilliant topic. Loads of awesome tips too. Great.
Om Paramapoonya (author) on February 24, 2011:
You're welcome, Lauren. And hey, you should hub more often; I miss your writing. :)
yxhuang on February 23, 2011:
Great work! Learn some new tricks from this hub. Thanks for sharing!
Om Paramapoonya (author) on February 04, 2011:
Thanks, Aris. :)
Aris Budianto from Lying along the equator Country on February 03, 2011:
Great hub, congratulation Om Paramapoonya.
kims3003 on January 30, 2011:
You have not missed a thing in this very well done hub! Nice work!
Om Paramapoonya (author) on January 29, 2011:
Thanks for dropping by, guys. :)
jblogys on January 29, 2011:
Great tips, Thanks!
bloggering from Southern California on January 28, 2011:
Great hub and most helpful - thanks!
Om Paramapoonya (author) on January 28, 2011:
Thanks, Kim. :)
kims3003 on January 28, 2011:
Very well researched, put together and written. Very nice work.
Om Paramapoonya (author) on January 27, 2011:
@6hotfinger3 - Yeah, do your own tax! It could be challenging at first but it's not too difficult to comprehend like many people tend to believe. Thanks so much for stopping by and commenting. :)
Om Paramapoonya (author) on January 27, 2011:
Hi, GmaGoldie. Thanks for dropping by. Yep, it is very tax-savvy for a small business owner or freelancer to have separate checking, paypal or credit card accounts just for their business only. :)
6hotfingers3 on January 27, 2011:
Thanks for the great advice. It is a stressful time when tax season rolls around. I had an expensive CPA last year who seemed to find every liability I could pay when in reality, I knew I should have had a different tax outcome. I won't use him this year.
Kelly Kline Burnett from Madison, Wisconsin on January 26, 2011:
Very well done. Being self-employed sounds glamourous but it is a tremendous burden. Managing the taxes effectively is an important skill for the self-employed.
A separate paypal account helps my book keeping for decuctions.
Om Paramapoonya (author) on January 21, 2011:
@tonymead - Thanks for stopping by, Tony. And welcome to Hubpages!
@Les Trois Chenes - hehehe yeah I will surely (but reluctantly) let the IRS know about my prizes. :)
@cashloanme - Thanks!
cashloanme on January 21, 2011:
Les Trois Chenes from Videix, Limousin, South West France on January 21, 2011:
This looks like great advice. Could you write one for me in France? I'm one of those that turn pale at the thought of tax forms. Congrats (hope you're going to declare your winnings!)
Tony Mead from Yorkshire on January 20, 2011:
very well written and thought out hub, I'm new to hubbing and yours is a great example for me to follow. Thank you
Om Paramapoonya (author) on January 18, 2011:
@sallycloak - Yep, sending out holiday cards is an inexpensive and subtle way to advertise your business. Thanks for dropping by. :)
@supplies expert - Too bad we can get only $25 deduction from each gift, isn't it?
@lender - Thanks! Glad you enjoyed it.
@Howard S. - Thanks. I've got the same confusing tax status! My freelance job and online stores haven't been very financially successful so I also work part time at a company. :)
Howard S. from Dallas, Texas, and Asia on January 18, 2011:
My tax status has usually been a combination of employee and self-employed, which most people find confusing. You have some great tips for those not used to concentrating on the details. Congrats on the win!
lender3212000 from Beverly Hills, CA on January 17, 2011:
Great tips! Nice to see this explained in language people can actually understand.
supplies expert on January 17, 2011:
amazing overview, hadn't even considered business gifts...great insight!
sallycloak from Westbury on January 17, 2011:
I like the idea of sending out christmas cards, it is a great idea, I have thought about it previously but always swayed away from the idea but this year I received some really nice ones personally and can see how they would work as marketing as it made me think of them and I checked what they were on with and if it is tax deductable even better!!!
Om Paramapoonya (author) on January 13, 2011:
Thank you so much, medor. In college, I did a lot of house cleaning and baby sitting, too! Now I'm a freelancer and a part-time employee at a test-scoring company. Nice to meet you. Glad you enjoyed this article. :)
medor from Michigan, USA on January 13, 2011:
Well written my friend... I have been self-employed on and off my entire life... even did landscaping, house cleaning and gardening for my professors in college...the apt cleaning... on and on...
I love your examples, good humor and right to the point... you rock.
Om Paramapoonya (author) on January 13, 2011:
@LJ - Thanks. Glad you enjoyed my little stories. :)
@oceansunsets - Thanks a lot.
@Dorsi - Thanks so much for facebooking and tweeting this. You're so sweet! :)
Om Paramapoonya (author) on January 13, 2011:
@k9keystrokes, Anglnwu & travel_man - Thank you! =D
@quicksand - LOL I wish I could hire you as my personal entertainer. I would pay you in pad thai and nam prik!
@rich_hayles - Yeah, it can be tough and somewhat annoying! Just like you, I work from home most of the time.
@Audrey - hehehe Time flies! :)
Dorsi Diaz from The San Francisco Bay Area on January 13, 2011:
Great information presented in a very easy to understand manner. Bookmarked for future use, Facebooked and tweeted.
Great job and congrats on the contest!
Paula from The Midwest, USA on January 13, 2011:
Congratulations Om, on being one of the weekly winners for week one of the contest! Way to go.
LJ Jackson from SW Michigan on January 13, 2011:
Yes, the scenarios add a lot to this, as do the exceptions. I can see I will have to seriously step up to the plate to win a weekly. :-) Congrats!
Audrey Kirchner from Washington on January 13, 2011:
So glad you won~!!! This was really my favorite for the whole week....has it only been ONE week? Good heavens...I need to get in shape!
rich_hayles on January 13, 2011:
Great hub. Just going through my return now and found your tips most useful.
It's always tough for me identifying the percentage of bills to deduct as I work at home.
quicksand on January 13, 2011:
Advanced Tax Deduction Methods
Scenario 4: Mr Quick Sand has purchased a bagful of diamonds to send Ms Om Paramapoonya as a gift. The accountant has informed Mr Quick Sand that since gifts of this sort will only be a monthly occurance the total value of the diamonds plus the courier's fees are tax deductable. Now Mr Quick Sand is thinking of doubling the quantity!
Ireno Alcala from Bicol, Philippines on January 13, 2011:
Congratulations! Thanks for the scenarios. I'm a self-employed writer on HubPages and our affiliates are deducting percentage on my earnings, too. I agreed with it upon signing on this virtual writing community.
anglnwu on January 12, 2011:
India Arnold from Northern, California on January 12, 2011:
Well done hub!! Very good stuff here, and congrats on your win!
Om Paramapoonya (author) on January 12, 2011:
Thanks for dropping and commenting, everyone! :)
Marie Landry from Ontario, Canada on January 12, 2011:
Really helpful, I've always had my financial advisor file my taxes but I'm going to try to save the money this year and do it on my own, so I appreciate this great, detailed article with the examples - thank you!
CDL Career Coach from Eugene, Oregon on January 12, 2011:
Great hub. I really like the self-employed vs. employed chart. There is an issue in the trucking industry where independent contractors are involved and if they are really employees... same factors apply to the company that is using services if they should be paying with w-2 or 1099s
Johnny Parker from Birkenhead, Wirral, North West England on January 12, 2011:
Lots of detail, well written, good job.
Om Paramapoonya (author) on January 11, 2011:
@ Calicoaster - Hi! Glad you stopped by. And thanks for following me. I am already your fan. :)
@Purple Perl - Thanks a lot. :)
@akichner - Welcome back! Ah you mean a pain in the rear end, eh? lol
@Trsmd - Thanks for the vote. I really appreciate it. :)
Trsmd from India on January 11, 2011:
congrats Omparampoonya for the award.. I have voted yours as best,,
Audrey Kirchner from Washington on January 11, 2011:
Had to come back and say your tips were excellent...being self employed for over 20 years. It can be a pain in the you know what but then on the other hand, it has its moments!
Esther Shamsunder from Bangalore,India on January 10, 2011:
Excellent hub with useful info. Congrats!
Voted you up!
calicoaster on January 10, 2011:
Awesome hub Om!!!..Your way of writing is so catching and informative! Well deserved...Congratulations!! :) :)
Om Paramapoonya (author) on January 10, 2011:
I won? Yay! Thanks for the kind comments, guys. :)
Paula from The Midwest, USA on January 10, 2011:
Congratulations on your win, Om. I am sure someone will be helped with your tax tips for self employed.
Pamela Oglesby from Sunny Florida on January 10, 2011:
Excellent hub. Congratulations on your win.
Audrey Kirchner from Washington on January 10, 2011:
Awesome!! Congrats on your win!!
Om Paramapoonya (author) on January 10, 2011:
@anglnwu - Yeah, it was those little examples that kept me awake when I was writing this hub. hehehe :)
@Ladda - Awwwww you're already a good writer! Thanks for dropping by. :)
Ladda Boonmee from Vancouver on January 10, 2011:
It is interesting hub :) I hope I can be a good writer like you someday! Awesome!
anglnwu on January 09, 2011:
Love your examples, they make the otherwise dry subject more interesting. Good going, as usual. I expect nothing less. Awesome.