The idea of claiming expenses as a freelancer might be new to many beginners. But it’s an important concept to get your head around, as there are lots of things you’re able to claim!
In this guide, I’ll cover everything you can and can’t claim as a business expense when you’re a freelancer, and I’ll also talk about how you go about claiming those expenses.
Note: As always, this is for educational purposes only, and it does not constitute legal or financial advice. If you’re unsure of anything, consult a professional.
Freelancing Expenses Explained
Freelance business expenses are costs you incur as a direct result of running your freelance business. As self-employed freelancers, it’s important to understand business expenses as they’re tax-deductible and reduce your overall tax liability.
Freelance Expenses Example
Let’s say your annual revenue is $35,000 and you calculate your allowable annual business expenses to be $3,000, which you spend on software and a computer for your business.
The tax authorities will then calculate your tax on $32,000 (revenue minus expenses), rather than $35,000. If we imagine a tax rate of 25%, you would pay $8,000 in taxes. You therefore ‘spend’ $11,000 overall ($8,000 on tax + $3,000 in expenses).
While you don’t end up with more money in your pocket come tax time, you have made use of more of your money than you would if you didn’t have any business expenses.
How does that work?
If you didn’t claim the $3,000 you spent on the computer and software as expenses, you’d pay 25% tax on $35,000, which is $8,750. But you’ve still paid for the equipment, and now you’d also be paying $750 more in taxes for the year. So instead of paying $11,000 for the expenses plus your tax, you’re paying $11,750.
This is a very simplified example, but it should hopefully illustrate how claiming expenses—when legally allowed—can help you ‘save’ money come tax time.
Staying Legal As A Freelancer
That ‘when legally allowed’ part is vital here. Don’t be under the impression that you can just put everything down as an expense and pay less tax. You can only claim certain things as business expenses as a freelancer, and I detail many of them below.
What Counts As A Business Expense For Freelancers?
When it comes to tax time, you can only claim ‘allowable’ expenses that are reasonable, not excessive, and relevant to your business. I’ve set out the different categories of allowable business expenses below, along with some examples of each.
The general rule of thumb is that, if you use the thing you paid for as part of your business, it is something you may be able to claim as an expense. If you didn’t use it for your business, or it’s primarily personal use that you get out of it, you probably can’t claim it as an expense.
Office Supplies & Equipment Expenses
- Phone and internet bills (if used for the business)
- Computer software (there may be specific rules on this depending on where you live)
Business Premises Expenses
- Utility bills
- Property insurance
- Accommodation for business-related travel
- Meals for overnight business trips
- Repairs and servicing
- Roadside assistance
- Parking & tolls
- Mileage (this is often capped)
Other Transport Expenses
- Taxi, bus, train, and plane fares
- The cost of buying a bicycle and maintenance costs
- Website costs, such as creating and hosting the website
- Business website domain and setting up a business email address
- Paid advertising placement (either online or offline)
Business Insurance Expenses
- Insurance for business premises
- Professional indemnity insurance
- Public liability insurance
Financial & Legal Expenses
- Accounting fees (including freelance accounting software if you use it)
- Legal fees
- Bank fees or credit card charges (for accounts in the business’ name—not your personal ones)
- Interest on business and bank loans
Professional Subscriptions & Training Expenses
- Member fees of any professional organization you must register with (as recognized by HMRC)
- Annual subscriptions to trade or professional journals
- Training courses that directly relate to what your business does (if you’re retraining in a different field, you can’t claim the course as a business expense)
- Pensions & benefits
- Employer’s National Insurance
Whether you can claim some of these as expenses and how you do so might vary depending on how you do your accounting. In the UK for example, some things vary depending on whether you use cash basis accounting, and you can learn more about that on the Gov.uk website.
While there are a lot of items you can claim as allowable business expenses as a freelancer, there are also several you can’t.
What Expenses Can You NOT Claim As A Freelancer?
You can’t claim any of the following as a business expense as a freelancer:
- The cost of traveling between home and your place of work (you may be able to claim expenses for traveling to clients)
- Entertaining clients (there may be exceptions to this)
- Buying business premises (you may be able to deduct leasing costs)
- Gym memberships
- Charitable donations
- Childcare costs (other tax relief may be available)
- Pension payments (other tax relief may be available)
- Parking fines for a business vehicle
It can be hard to know exactly what you can and can’t claim when filing your tax return, especially when some items on the above list look closely related to allowable expenses. If you’re unsure, it’s a good idea to contact the HMRC Self-Assessment helpline to confirm whether or not something is an allowable expense if you’re in the UK. For those in the US, consider checking the IRS website.
Lots of freelancers don’t have an office, and instead work from home. How do business expenses work in this case?
Freelance Business Expenses For Those Working From Home
If you’re a self-employed freelancer working from home, you use your house and services, such as the internet, for both personal and professional reasons. You’ll need to work out what proportion of these services you use for business purposes.
Note: You need to be careful with this, as it’s easy to claim for something you shouldn’t be claiming for. It’s often also going to result in little benefit if the numbers are very small, but it can add to your accounting headache. So, consider each potential expense carefully and whether it’s worth trying to claim for.
Freelancers working from home can usually claim a proportion of the following costs, in addition to any purely business-related expenses:
- Rent or mortgage interest
- Utility bills including electricity and heating
- Telephone line rental
- Household insurance
- Household repairs (except those that only relate to a part of the house you don’t use for the business)
Freelance Work From Home Expense Examples
Let’s look at some examples. If your home Wi-Fi costs $25 a month and you calculate that you use it for business purposes 40% of the time, you can claim $10 a month (40% of $25) as a business expense.
If your electricity bill is $300 a year and you have three rooms in your flat, one of which you use exclusively as an office, you can claim $100 a year in electricity as a business expense ($300 divided by 3).
Rather than doing complex calculations each year, you might be able to use simplified expenses to claim business-related costs while working from home.
If you’re in the UK and working from home at least 25 hours a week, you may be able to use simplified expenses rather than having to work out the actual cost. Simplified expenses use a flat rate to calculate the allowance for mixed personal and business expenses.
The current simplified expenses amounts you can claim towards the costs of working from home are:
Hours of Business Use/Month
It’s worth checking whether using simplified expenses is the best approach for your circumstances (you can do so on the Gov.uk website). Even though it saves you time (and therefore money) when it comes to preparing your tax return, you might save more money in the long run by working out your actual costs.
How To Claim Business Expenses As A Freelancer
To claim your business expenses as a freelancer, you’ll first need to track your expenses over the course of the tax year. You can use accounting software for this, or you can do it manually using a spreadsheet. Alternatively, you could hire an accountant to help with this as well.
When you do your tax return, there is a section where you can add information about your business expenses. The tax authorities may ask you to either simply add your total expenses or an itemized list, depending on your circumstances.
Even if you’re using simplified expenses (in the UK), you must keep records of all your business expenses for six years in the UK and 3 years in the US. This includes receipts, statements, invoices, mileage etc.
When it comes to anything tax-related, it’s a good idea to get professional advice relevant to your circumstances. There is a lot to gain and lose come tax time if you do things right or wrong, so I really recommend learning as much as you can. After all, running a freelance business is partly about the freelancing, but also partly about the business itself!