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:

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.

Posted on March 16, 2012 at 9:03 am by editor · · Tagged with: , , , , ,

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