As a freelance business owner, you take care of all out-of-pocket expenses in most cases. Sure, you can arrange contracts that request your clients cover expenses like research materials and even gas (if your client is local and requests in-person meetings), but a lot more goes into maintaining a freelance business. If you have a home office (a great idea both for your sanity and for tax season, if you have the space), you have to fill it with essentials like a scanner, notepads, furniture, etc. You might have subscription fees, PayPal fees, finder’s fees, books to buy … the list can go on.
Those expenses take a chunk, big or small, out of your monthly earnings. However, if you properly keep track of them, you can be compensated for them come tax time. So, how do you manage your expenses? I’m going to break down how I do it.
Understand What You Can Write Off
There are a surprising number of things you can write off as freelance writing business expenses. If you start keeping track of everything you need in order to keep your business running, you’ll begin to see why. Now, understand that I am not a tax professional, and I highly recommend hiring a CPA, like I did this past April, to make sure all of your expenses are eligible and inserted into your taxes correctly.
However, you need to understand the types of things you can write off so you can bring a list of expenses to your CPA to look through and validate. Let’s break it down into categories. Please note, I am only going to break down things that I have personally written off in my taxes, and there may be other expenses you have in your business that I’m not covering here. Again, I highly recommend talking to a CPA.
There are two different options for how you can write off your home office space. My CPA calculated both options and helped me figure out which was the best deal. If you are like me and have a decent-sized space, but you don’t really go crazy buying office supplies and/or you aren’t furnishing the office this year, it will likely be more beneficial to just write off the space based on a fixed percentage calculated using the office’s square footage. If you have a very large office space and/or you’re constantly purchasing supplies for your office based off your business needs, you may benefit from having your CPA calculate and bundle all the costs associated with the office, even going so far as to calculate what percentage of your heating and cooling bill goes toward the office.
This includes things like PayPal fees or bank transfer fees. I use an invoicing and accounting software called FreshBooks rather than using PayPal, and they allow my clients to pay my invoices via credit card directly from the invoice itself. Just like PayPal, they take a small percentage from credit card payments, and I always write those fees off.
If you belong to any associations or are subscribed to any magazines in order to keep up with your industry and stay connected to both clients and peers, you can write off those subscription fees.
Relevant Educational Material:
You can write off any books you purchased for educational purposes or any courses you took in order to learn a new skill to boost your business. Bought a book on copy writing? Took a course on affiliate marketing? Those are business expenses.
Meals with Clients:
Thanks to my tutoring gig, I get out of the house occasionally and meet that client at a coffee shop. I also meet with my beta reader for lunch. If you do anything similar, save the receipts for all those lunches and coffees, and you can write off half the total price in your taxes.
That’s right. You can write off a portion of your monthly internet bill if you’re a remote freelancer. The internet is essential for your job, thus it is a business expense. However, if you work from home rather than a leased office space, odds are you aren’t only using your internet connection for work, so you can’t write off the full cost, but 50% is probably pretty accurate if you’re anything like me.
Anything pertaining to your business website—such as hosting, themes, add-ons, domain, etc.—counts as an expense.
How to Keep Proper Records
Knowing what you can write off isn’t helpful unless you’re properly keeping track of those expenses.
No matter what medium or software you use to keep track of your expenses, you need to do three things:
- Record the Amount Spent
- Record Where You Spent It/Who You Paid
- Keep the Receipt (hard copy or digital)
It’s pretty obvious why you need to record the amount. Recording where you spent the money not only makes you more secure should you be audited for any reason, but it also helps you see the big picture of where your money is going so you can decide if/where you need to cut back your spending. Keeping the receipt makes sure you can prove you did in fact spend that money on that specific item or service.
I used to record my expenses in a journal and then clip all of my receipts together inside the notebook. It worked, but it wasn’t very efficient, and it didn’t let me see my money.
Now I use Freshbooks for invoicing and accounting, and they have an Expense Tracking Feature that lets me pull up a report like the one below in just one click.
It not only condenses everything in a clean, easy-to-read list, but it also breaks things down into categories and keeps an overall total for each category. It will even break down your expenses into a pie graph so you can see where you’re spending the most money at a glance.
The Freshbooks software automatically keeps track of the small processing fees that Freshbook takes when a client pays via credit card on my invoices. I can also manually add any other expense I want using this fill-in-the-blank form.
I love using this system because it goes way beyond just recording the amount you spent and where you spent it.
You can attach a digital receipt or scan of a receipt to each expense so you don’t have to keep track of the hard copies in a wallet or file cabinet, or hunt the digital ones down in your email. Here’s an example of one of mine.
If you bought something like research books or if you had to commute to meet a client and had gas receipts, you can make the expense billable and turn it into an invoice (with receipt attached) to send to your client.
If you have a recurring expense like a monthly subscription, you can set it up so that the expense is automatically logged on the same day each month.
Everything gets logged to the Expenses Dashboard, which looks like this.
You can quickly view your latest expenses and use the search tool if you need to find a specific one for some reason, like to upload a receipt to an automated expense.
Like I said, you can use a system as simple as a journal and a paper clip for logging your business expenses, but I’m personally never going back to that. A regular old spreadsheet and a computer file with digital receipts would work, too, but I personally much prefer the intuitive, clean, and efficient interface Freshbooks provides.
No matter what method you choose, understand what you can write off as a freelance writer, keep detailed records, and you may be pleasantly surprised come tax time next April.
(If you’d like to learn more about all the other cool features Freshbooks offers, you can check out their website or my in-depth review of the software. If you’re interested in signing up, Freshbooks offers a free 30-day trial.)