Stake your claims: More tax tips for freelancers from the Born Freelancer
This series of posts by the Born Freelancer will share personal experiences and thoughts on issues relevant to freelancers. Have something to add to the conversation? Your input is welcome in the comments.
In my last post I talked about being a freelancer and the preparation required to pay taxes. I thought I’d covered most of the salient points pretty clearly but I’ve had a bit of feedback from some fellow freelancers asking for clarification of a couple key points. I thought that this would be the ideal opportunity to follow up on my main post and address these most significant issues.
To recap: One of — if not the most important — benefits of being self-employed or freelance when it comes to filing taxes is the ability to deduct legitimate documented business expenses. As I discussed last time, if you put money out in order to make money, there’s a very good chance that outlay will be tax deductible to some degree or another.
Regular 9-to-5 employees are not entitled to deducting the same business expenses come tax time like we freelancers are. And why should they be? Their regular employers provide almost all of their work-related necessities for them. We have to provide all of our own. Therefore it is crucial to be able to prove your self-employed or freelance status.
You’re a freelancer? Prove it.
But how do you prove — if ever challenged by your relevant tax authority — that you are a freelancer and not some regular 9-to-5 salaried employee? I discussed deducting defensively last time. It is also best to plan ahead and prepare the appropriate documentation to produce in the event you need to establish your freelancing status beyond any question or doubt. Such documentation covering the following points will help to prove your self-employed freelancer status:
- Membership in an appropriate guild or union or similar professional organization. The Canadian Media Guild is a good example. These must not be merely hobbyist groups but organizations dedicated to improving the benefits of working, paid professionals.
- As discussed in my previous post, getting a business registration number (in Canada) is a very good idea to prove you are serious about your freelancing status.
- Power over what you do. If you can document that you have the power to choose what you do and for whom you do it, this will definitely help establish your freelance credentials (as opposed to being a regular employee).
- Power over how/when you do your work. Most freelancers — given a specific deadline — can work whatever hours they choose in order to make that deadline. Most regular employees cannot; they must abide by a simple 9-to-5 routine.
- How you bill your freelance employer. Generating invoices, signing letters of agreement, or executing contracts can all be written proof of your freelancing status.
- Providing your own healthcare insurance coverage. Regular salaried employees get a lot of so-called benefits along with their weekly salaries. We freelancers must supply all of our own.
- You have your own computer, software, office supplies. Regular employees get all of these supplied to them by their employers. We freelancers must usually provide ourselves with all of our own tools of the trade.
- You have your own work space. Freelancers must usually provide their own space. If you are working in a corporate office you must be prepared to demonstrate that it is only for a fixed period of time for a set piece of work.
- Freelancers typically have multiple freelance employers. Although there may be periods of economic downturn when we are employed by only one freelance employer, more often than not we have multiple employers over any given time period. This is never true of a regular 9-to-5 type of employee.
- You have assumed the risk of loss while engaged in your work. In many cases payment comes in stages or else may be contingent upon any number of external factors. We may never get paid at all in many unfortunate cases. The true freelancer always assumes the final risk that he or she may not get fully paid.
- You must also always be able to demonstrate a reasonable expectation of profit. You cannot be freelancing for the fun of it. You must be deadly earnest in your quest to make it a viable, paying business. Document, document, document! The tax folk know it takes longer to show a profit when you’re a freelance writer or artist, but you must be able to demonstrate due diligence in your efforts.
- If you keep your copyright, this is another clear example of your freelancer status. If you don’t and sign it away (generally a bad idea which we will discuss another day) make it clear in your contract that you have exercised your voluntary right to do so.
- Prepare a list of previous clients and examples of the work you did for them.
- Keep a list of any professional awards or recognition you have received.
- Have documentation available for any relevant education, professional development courses, or specialized training that you have ever received for work in your field.
- Keep a diary of phone calls made, appointments kept, and meetings held in pursuit of past, present, and future freelancing jobs.
- Have a portfolio of any published reviews of your work available for inspection.
If you can document and demonstrate as many of the above points as possible as being relevant to your own situation you will be well on your way to proving your freelance status to your local tax authority should you ever be required by them to do so.
As a freelancer the ability to deduct legitimate business expenses come tax time is one of our most valuable financial advantages. It is up to you to ensure — if ever challenged — that you are accepted to be what you claim to be for taxation purposes. The above points will help you do that. For further information seek advice from your local tax office. If you are ever challenged — in the form of an audit or communication seeking clarification and more details from your relevant tax authority — contact your guild or union for assistance and possible legal advice. If you’re not a member, call the CMG anyway. They will do the best that they can to help.
Expenses with a personal use component
Another freelance colleague recently asked me to clarify an important point I made in my last post about deducting certain business expenses. I made reference to the fact that there may be some legitimate business expenses with a personal use component and that it is up to you to come up with an acceptable business usage amount from the total expense to use as a deduction. (You cannot deduct any personal usage amounts.) I have been asked to provide a more concrete example…
I know of a freelancer who had to have access to various television channels in order to do a new reviewing job. They signed up for an annual cable TV package. Now here’s where personal integrity and possibly a certain degree of subjective interpretation may come into play. What amount of that cable television subscription would you claim as purely business usage? If you watch it only for business purposes and no other reason you could readily justify claiming a 100 per cent deduction. (Whether the tax office would accept it is of course the nub of the matter at hand.) Suppose our freelancer has a family and their spouse and kids liked to watch cable TV too. Obviously then that portion of the cable TV fees would be for personal use and therefore completely ineligible for business expense deduction purposes. So maybe the freelancer would choose to deduct only half for business purposes (allowing half for the personal use component of the total expense.) If they live alone but like to watch it for fun just now and then — maybe 75 per cent (allowing 25 per cent for personal use).
You see the dilemma. What amount is a reasonable and realistic percentage to use? The figure you come up with in the end will need to be based on documented usage patterns in order to potentially justify your claim. All I can advise is that you always deduct defensively (as I outlined in my last post) and that you always do what is lawfully right for you.
I’ve used the cable TV fee here simply as a example. There are many other similar types of expenses in this category to consider such as — but not limited to — internet service, various forms of digital communication, some travel costs, some accommodation costs, etc. as well as those which will be unique to your own area of professional specialization.
One last point. If after reading all this along with my previous post you feel you need way more time in order to set up your accounting system and get all your tax-related freelancing paperwork in order — relax! Well, maybe relax a little. Many self-employed freelancers are able to file their tax returns a bit later in the calendar year than the majority of regular 9-to-5ers. As always, check with your local tax office for details.
Caveat: The author is still neither a tax expert nor an accountant! You should therefore always seek advice from your local tax office and/or accountant. The examples cited may or may not apply to your own circumstances. In other words — if you don’t know what you’re doing, please research it more fully until you do or engage a professional on your behalf. When it comes time to file you will be very glad that you did so.
