Working for yourself is a dream come true for many, but when tax time comes I understand all too well how all the forms, schedules and receipts can become a confusing mass of nonsensical paperwork.
The truth is, when you know what kinds of invoices and financial interactions to keep track of throughout your working year, the process can not only be smooth and simple, but satisfying as well.
In this post, I am going to share three important things with you:
- Tax deductions that freelancers can use
- Tips on how to prepare for tax season and get through it in one piece
- Specific lists of the forms you will need to use in the US, the UK or Canada.
If you’re a freelance blogger in any country, these fundamental tips will help you to complete your tax return correctly.
First, here are the basics
As a freelance blogger, your income tax return will be filed under “self-employed,” or “sole proprietorship.” As such, you’ll need to include all earnings on your tax return, even if some of them were paid from clients in countries other than the one you live in or pay taxes in.
You’re expected to pay taxes to your country of residence even if you’ve spent a significant amount of time abroad, though in the case of expatriation you may apply to become a “non-resident.”
Income tax is computed using a fairly simple equation:
(EARNINGS – DEDUCTIONS) × TAX RATE = HOW MUCH TAX YOU PAY
To make the correct calculation, there are two critical things that you need to track throughout the working year:
- Business expenses (these will be your “deductions” in the equation above)
Sounds pretty obvious, right? Okay, good.
Here’s the slightly trickier part – will clients automatically send you a 1099 or some kind of receipt come tax season? And what exactly constitutes a “business expense?”
To answer the first question, NO. In the United States you may receive a few tax file slips from clients, but never rely on these to account for your entire income. Why? People are fallible (except you, of course)! Slips can be late, erroneous, or simply not sent at all.
Do yourself a favour and keep a detailed spreadsheet of all your income; update it every time you are paid. Save the file onto a second hard drive, upload it to the cloud – do whatever you have to do to ensure that it will always be just a few clicks away. Enter all the relevant account information into your spreadsheet, including the client name, contact details, date of payment, and total amount.
As for what constitutes a “business expense,” it depends where you are filing your tax return. In any case, these expenses reduce the total amount of your taxable income, therefore lowering any payments you need to make.
Business expenses in the US
In the United States, the following items can be claimed as self-employment expenses:
- A home office
- Website domain and hosting
- Business phone
- Office supplies
- Business meals
- Business insurance
- Medical insurance
- Banking fees
- Interest incurred on business loans
- Retirement contributions
Business expenses in the UK
For freelancers in the United Kingdom, the taxation rules are based on two separate categories: capital expenditures and allowable expenses. The first category includes items that are necessary to your work; the second category includes expenses that pertain to maintenance and upkeep of those items. Here are the accepted expenses in both categories:
- Office supplies
- Travel costs
- Bank fees
- Office utilities
- Advertising and marketing
The UK taxation system allows for you to either make precise calculations to separate home office utility bills from personal bills, or to simply use a flat rate.
Business expenses in Canada
As in the UK, Revenue Canada separates business expenses into two categories: capital expenditures and current-year expenses.
Capital expenditures include property, for which you can only claim a certain percentage each year following the initial purchase. Specific instructions for claiming capital expenditures are included on the form, so don’t panic about this one.
These are the basic allowable current-year business expenses for freelance bloggers in Canada:
- Start-up costs
- Membership fees
- Loan interest
- Delivery fees
- Professional fees
- Maintenance and repair
- Motor vehicle expenses
- Office supplies
- Staff wages
- Property taxes
- Business phone
- Business utilities
- Travel expenses
Claiming business expenses
Whether you are filing a tax return in the US, the UK or Canada, each business expense that you claim must be backed up with evidence in the form of a dated, itemized receipt. These receipts should be included with your tax return so that workers at the tax office will be able to quickly cross-reference your claimed expenses with the proof of purchase.
So long as a receipt does in fact correspond to a real expenditure that was crucial to your work, you can go ahead and claim it. For example, if you travelled to another city to attend a writer’s conference, you can likely claim both travel and education expenses in the US, UK and Canada; though in the latter two countries you may need to claim the conference under “advertising and marketing.”
If you meet with a client or potential client for tapas while discussing a contract, you can write the meal off as a genuine business expense. On the other hand, if you leave your desk at noon to grab lunch, and continue working via your tablet while stuffing a sandwich into your face – well, no, that’s not a business meal.
To put it simply: if it makes sense, do it. If not, leave it out. If you would be comfortable explaining your claims to a tax auditor, then you’re doing it right. That said, just because a business expense isn’t listed explicitly in your country’s guidelines doesn’t mean that it won’t be accepted. No list is exhaustive.
Top tips for freelance bloggers at tax time
Keep your records organized
Neatness and organization is your best friend when it comes to filing your tax return. Not only do well-organized records make it easier for you to fill out your return, they make it easier for auditors to read through and approve your return quickly. Keep everything in one place, and always ensure that your digital records are backed up.
Don’t let the forms confuse you
Just because there are endless empty boxes on the tax form doesn’t mean that you have to come up with a number for each one! Focus on the information that you DO have, and find the spaces that correspond. Remember that there are two major elements to your return: your income, and your deductions.
It’s okay to use a tax professional
In fact, hiring a tax preparer to organize your self-employment tax return is a deductible expense! Make absolutely certain to collect all relevant receipts and income slips for the tax preparer, or he or she won’t be able to make the correct calculations.
Don’t throw your tax returns away
This is in case of a surprise audit where you may need to find old documents from previous filings. The American IRS says that you should hang onto your tax returns for 3 years, or 7 if you’ve made a claim on bad debts or loss of value on a property. In the UK, HM Revenue and Customs says to keep them for 5 years; the Canada Revenue Agency says 6 years.
Get your return in ASAP
There’s nothing to be gained from waiting until the last minute to file your tax return. If it turns out you’re missing a certain receipt or need extra time to print and fill out an additional form, you could be late and incur penalties.
Make note of varying deadlines
Depending on where you file, there are often staggered deadlines for your tax return based on whether it is filed online or on paper, or whether or not it is a self-employed form. If you file online in the UK, the deadline is January 31. If you send a paper form, the deadline is October 31. In Canada, the deadline for most tax returns is April 30, while self-employed returns are not due until June 15.
In many countries you may choose to make estimated tax payments
These are paid out to the taxation office throughout the year based on an estimated amount of tax owed. It is in your best interests to make these payments as it will cut down on any tax money owing at the end of the year. If you have overpaid, you will receive a refund once your annual tax return is filed.
Create your own home office
Even if you’re happy working on the couch, in bed or at the kitchen table, having your own home office is a standard tax write-off. Dedicate a room of the house to your work, and not only will it help at tax time but it will help you focus as well.
Save for retirement with a government-sponsored plan
Not only is this incredibly important for your future, but a portion of the payment you make into a government-sponsored retirement account is tax-deductible on your yearly return.
Self-employment income tax forms for US citizens
As a freelance blogger in the United States, you’re required to fill out a Schedule C or a Schedule C-EZ, as well as Schedule SE and a Form 1099. If your freelance business had expenses that were less than $5000, you will probably need to fill out the C-EZ instead of the normal C. Here are the appropriate forms and specific instructions pages for each:
- Schedule C
- Schedule C-EZ
- Schedule SE
- Form 1099
- Instructions for Schedule C
- Instructions for Schedule C-EZ
- Instructions for Schedule SE
- Instructions for Form 1099
*Note: Forms change each year. Updated versions are all available through IRS.gov
Self-employment income tax forms for UK citizens
Tax filing in the United Kingdom is considerably simpler than it is in the United States. Freelancers use one form to claim income from self-employment, while British employees needn’t bother at all, since their tax forms are automatically filed for them. Voila, a cheque in the mail, no paperwork required!
*Note: Forms change each year. Updated versions are all available through gov.uk
Self-employment income tax forms for Canadian citizens
For Canadians, Form T2125 is required to calculate the net and gross earnings from self-employment that will ultimately be recorded in the General Income Tax and Benefit Package. You will need to use an industry code to refer to your employment industry on the General form, which can be found via the list below.
- T2125 Statement of Business or Professional Activities
- General Income Tax and Benefit Package *Choose the form that is published for your province of residence
- Guide to Business and Professional Income
- Guide to Claiming Capital Cost Allowance
- Industry Codes
Hey presto, that’s all there is to it 😉
If at any time during the process you become confused or lost, just remember that basic equation:
(EARNINGS – DEDUCTIONS) × TAX RATE = HOW MUCH TAX YOU PAY
The government controls the taxation rate, but you’re in charge of calculating your earnings and deductions. No big deal! As a freelance blogger in charge of running your own business, earnings are already foremost on your mind. Whether you keep track via a simple Excel spreadsheet, accounting software or a mobile application is your choice, so long as the information is secure and easily accessible.
As a responsible self-employed person, I’m sure you’re also keeping track of your business expenses – everything from software purchases and website domains to your internet connection. This tax season, locate the forms that you need, fill in the information you have on record and just do the calculations as instructed on each page.
Get that thing in on time, and stop worrying about it! 🙂