Top Tax Deductions for Freelancers, Side-hustlers, and Self-employed: Are You Missing Out?

Having a side-hustle comes with a big perk: If you’re a sole proprietor, contractor, freelancer, or side hustler, you can write off business expenses to reduce your taxable income — and keep more of what you earn for yourself.

Taxes might not be exciting, but paying less? That may be something to smile about. As a self-employed professional or freelancer you can deduct expenses from your income to lower your tax bill. Learning about tax deductions can help make sure you don’t miss out on a chance to keep more of your hard-earned money.

5 things to know about business tax deductions

1. How tax deductions work for self-employed

Tax deductions, also called write-offs, are one way business owners of all stripes (freelancers, contractors, solopreneurs) can bring down the amount of tax they pay.

Here’s how deductions work:

• Throughout the year, you keep record of your business expenses (more on that later). Come tax time, you claim these expenses on your tax return

• These deductions will count against your total income and in turn reduce it

• For example, if your business income for last year was $40,000 and you claim $5,000 in deductions, your taxable income is $35,000. Your savings from those deductions are the total deduction amount ($5,000) multiplied by the tax rate for your income bracket. If your rate is 25 percent, those deductions would save you $1,250 on your taxes for that year.

2. Common tax deductions for small businesses – and what doesn’t count

Some of the money you spend running your business is considered a business expense and you can claim it on your tax return as a deduction.

Here are some common deductions:

• Accounting and tax software

• Advertising, web site and marketing fees

• Business supplies

• Home office and home office-related expenses such as utilities, rent or property taxes

• Meals, entertainment and travel

• Transportation, including your car

• Bank charges — This means the cost of your business bank account can be written off against your income

While many types of business expenses qualify as eligible deductions, not everything makes the cut. Personal expenses, for example, cannot be written off against business income. While some business owners might argue that certain costs are business-related, if the connection is questionable, it’s unlikely to qualify.

Here are some expenses many business owners believe can be claimed as tax deductions, but aren’t eligible:

• Clothing

• Dry cleaning

• Parking tickets — even if incurred while at a business meeting

• Gym memberships

• Commuting costs

3. The importance of being reasonable

A common piece of advice provided by accountants and advisors, when it comes to claiming tax deductions, is to be reasonable. If an expense doesn’t pass the smell test, just let it go. The last thing you want is to raise any eyebrows at the CRA and invite questions about your expenses.

Certain expenses are already on the CRA’s radar because they’re often abused. Car expenses are top of this list. For instance, people think that when they drive to an office, they can deduct those kilometres, but that is not business driving – it’s considered personal.

Other often-scrutinized expenses include personal health and life insurance plans, entertainment and meal expenses, travel and professional fees. It’s also important to note that some expenses are only partially deductible — meals and entertainment, for instance, are only 50% deductible. If the CRA determines that you’re over-claiming, there could be hefty penalties. It might even trigger an audit down the road.

4. Yes, keep your receipts

Many new business owners wonder if they actually have to save every receipt for expenses they want to claim. The answer is YES. A credit card statement won’t do — you need to have a receipt that shows proof of what the expense was.

While you don’t need to submit your receipts with your tax return, you must be able to produce them if the CRA asks for backup of your deduction claims.

Read full article to Ultimate Guide to Organizing your Side-Hustle

5. Keeping track of business expenses is easier with the right tools

Keeping track of your business expenses — and their corresponding deductions — can be easier with a few tools to help you out. One is a separate business account. When you separate your business expenses from your personal spending, you’re not digging through paperwork come tax time. Another is accounting software thats designed for small businesses. The right tools can free up your time and help you keep more of your money.