When you’re self-employed, you want to deduct as many legitimate expenses from your taxes as possible. The lower your taxable income, the less Federal income tax you’ll owe. When you’re a freelancer or independent contractor, it’s easy to overlook some of your basic expenses, like your website.
If you have a website that acts as your portfolio, a business card, or directly sells your services, that website is a legitimate tax deduction. You can deduct your domain name registration fees, webhosting fees, your SSL certificate, your VPN, professional email services, and malware detection software. You can even deduct the cost of your WordPress theme and any customizations you’ve paid for.
If you purchase any software, like white label products that let you rebrand WordPress themes or other website applications, that’s deductible, too. The same goes for any software used to manage and conduct your business. Project management applications like Basecamp and Asana, CRMs like Infusionsoft, mailing list managers like MailChimp, and accounting software like Quickbooks are all legitimate deductions.
Web related expense deduction precautions
It’s common for freelancers to manage a client’s web related accounts by fronting payments directly to the company and receiving reimbursement from the client later. If you’re not in a position to itemize, this could get you in trouble or cost you money.
For example, say you register your client’s domain name for ten years and pay out $300 to a company like Godaddy. Then, your client reimburses you with a check for $300. You haven’t made a profit, but your client still sends you a 1099-MISC for that $300. For them, it’s a legitimate business expense. Since they reported it on a 1099-MISC to the IRS, you’ve got to claim it as income, even though it wasn’t technically income.
If you itemize, you can use your receipt from Godaddy to claim the $300 as an expense and it will cancel out. However, if you’re not itemizing, the IRS will treat that $300 as income and doing that favor for your clients will cause you to pay more taxes.
Moving might reduce your tax liability even further
With the new tax breaks introduced in 2018, this could be the year we see many entrepreneurs relocate to states with laws that protect individuals from being overly taxed in every area of their lives.
For instance, Florida and Washington have no state income tax, and Florida’s sales tax is so low, they’ve been attracting corporations for years. Florida also has no estate or inheritance tax, and doesn’t allow the first $25,000 of a home’s value to be taxed at all.
Choose the right professional to prepare your taxes
One thing to keep in mind when having your taxes prepared is that most of the people who work for retail tax franchises aren’t seasoned professionals. These companies hire competent people and train them for about five weeks before they’re on their own. Most of them do really well, but many lack experience.
If your tax situation is simple, you won’t have a problem. However, if your situation is complex, it’s a good idea to find a Certified Public Accountant (CPA), or an Enrolled Agent (EA). Both have gone through rigorous testing and usually specialize in some area. Sometimes these professionals work for retail tax franchises, and it doesn’t hurt to ask for one.
Be cautious with your itemized deductions
For self-employed entrepreneurs, tax deductions are often tricky. Certain laws change each year and if you claim a deduction based on a misunderstanding, you might get in trouble during an audit. Conflicting information – even from tax professionals – can get you in a bind.
For example, the law regarding the home office deduction has many caveats you may not be aware of. It’s generally known that a home office must be the principal place of business and used exclusively and regularly, as outlined in Section 280A of the tax code. However, the requirements for what constitutes a home office continually change.
Advice on the internet that states a partition is helpful but not necessary, could be outdated. As of 2018, many tax professionals have been informing self-employed individuals that a home office now only qualifies when there is some kind of door present.
It’s difficult to find an official IRS source for this information, as most resources that come up in searches were written prior to 2017. Conflicting and changing information is the best reason to consult a tax professional when you’re self-employed.