First time self employed - what can be deducted? Therapy, bike, health?
July 2, 2013 6:38 PM   Subscribe

Hello! I am an independent contractor (1099 Misc form) for the first time in my life and need some tax advice as the budget is a bit tight! Therapy, acupuncture, bicycle, insurance, computer, etc. How do deductions work?

THERAPY: Weekly counseling, possible acupuncture or alternative therapies as needed (0-2 p/year). Would it be best to pay out of pocket, then look into write offs? Or get an insurance plan, then pay the deductible. Is depression a valid enough reason to qualify for weekly counseling? Does this have to be confirmed by another professional or can one just start going?

HEALTH: I do not have health insurance currently. Could anyone recommend a very reasonable plan for someone who rarely sees a doctor but would like accident coverage for peace of mind?

BICYCLE: To meet with clients, I would prefer to commute via bicycle rather than car. I know that car expenses are tax deductible if for work use. What about purchasing a modest bicycle to take the place of car commuting?

COMPUTER: Thinking of purchasing a desktop for ergonomic reasons, as work is primarily on the computer.

RENT: Work from home mostly. Can a portion of rent or the purchase of a work-desk + ergonomic chair be written off?

INTERNET: Home when possible. Sometimes have to work from wifi hotspots such as coffee shops.

Can the above items be deducted and how does it work? Has anyone had experience with similar write offs? Are there restrictions/conditions that I should be aware of? And are there other things that can be deducted that I may be overlooking?

I truly appreciate any information you can provide. Many thanks!

- Danah
posted by Danah_78 to Work & Money (14 answers total) 21 users marked this as a favorite
There's a book on this. It's probably worth the $20.
posted by Mr.Know-it-some at 6:45 PM on July 2, 2013 [5 favorites]

Never been a full-time freelancer, but I unfortunately have navigated health insurance. I think most MeFites will agree that you should definitely have insurance. What state do you live in? Plans vary state to state. As for therapy, even "good" plans don't usually cover it, or they have weird restrictions, or like 5 doctors on the plan. Usually better to just pay out of pocket.
posted by radioamy at 6:48 PM on July 2, 2013

You should get an accountant who can help you with this stuff. Mine found all sorts of deductions I wouldn't have known existed. Bonus: you can deduct your accountant's fees!
posted by PhoBWanKenobi at 6:54 PM on July 2, 2013 [3 favorites]

I agree with PhoB, you should look into an accountant/bookkeeper.
posted by radioamy at 6:56 PM on July 2, 2013

The IRS publishes all this information. Here is a starting point for finding out more about deductions. Here's another. And here is (pdf) Publication 535: Business Expenses. As a self-employed person with limited extra cash, it's worth perusing the information they provide for free.

I think your ideas about acupuncture and counseling would not fall under the self-employed tax breaks, though. How does that contribute to you running a business? (That's the general question to ask yourself.)

Also keep in mind that writing something down as an expense does not mean it wound up being free for you. It's just slightly cheaper.

I use BlueCross BlueShield of Texas. Individual health insurance plans vary wildly depending on your ZIP code, current health, age, weight, and tobacco usage. But for a data point, I'm not overweight, I'm in my early 40s, my plan is about $250/month, and it has a $10,000 deductible before it covers anything, including prescription drugs and doctor visits.
posted by Houstonian at 7:24 PM on July 2, 2013 [1 favorite]

Also keep in mind that writing something down as an expense does not mean it wound up being free for you. It's just slightly cheaper.

More specifically, let's say you made $20,000 in a year in self-employment money. You will pay taxes on that and also pay into your own social security, so it will seem like your taxes are higher than they would be if you were a regular employee. I usually rule-of-thumb estimate that I will pay 25% of my earnings to taxes. By the second year you are supposed to file estimated taxes and pay taxes quarterly. If you had, say, 5K worth of deductions, this would mean you'd be paying the taxes on only 15K. So even though you still had to pay for the computer or the health insurance or whatever, you wind up paying less in tax which ameliorates it a little but not entirely.

I would get a book and/or an accountant to guide you through the first year. Keep receipts and very good records. I use TurboTax to file and it just asks you a bazillion questions which can be helpful. In answer to your specific questions.

Therapy - unclear, but they are likely going to count as medical expenses. but you should read up on what that means and how that affects you specifically.
Health - Googleable term is "catastrophic insurance" and this will vary a lot based on what state you are in
Computer - this is a straightforward deduction usually and you can decide if you want ot let is depreciate over time or take it all as a one-time depreciation (again, read up on these terms if they don't make sense to you)
Rent - home office deductions are very tricky, very very careful if you decide to go this way and make sure you understand the rules.
Internet - I deduct a fraction of my home internet and you probably can too.

Other things I'd pay attention to: phone bills, postage, mileage if you have to travel for work, meals/coffee with clients, that sort of thing. Website? Advertising? Professional memberships? It's a tricky area your first time around but you gradually get used to the routine and learning the ropes. Best of luck.
posted by jessamyn at 7:51 PM on July 2, 2013

For rental deduction, at least in prior years, I've made sure I had a room designated for work. Currently I have my loft space designated as my office. It accounts for roughly 27% of the floor plan, therefore I deduct 27% of water, sewage, electricity and heat. In addition, I deduct 27% of my cable and 27% of my internet bill (nature of work means cable gets to be deducted as well). I deduct 30% of my phone bill based on usage. I have a log book, whenever I meet with a client anywhere other than home, I mark the date, time, location, one way mileage, and return mileage.

I am fortunate in that I have a CPA in the family and I was hooked up by knowing what and how to take things, as well as determining ahead of time whether it was more cost effective to depreciate my computer ahead of time or all at once.

Note, my office is my office. For it to qualify it can't be used as anything other than an office. I am not currently in my office writing this and goofing off. My son never comes up here to watch dinosaur documentaries.
posted by Nanukthedog at 8:25 PM on July 2, 2013 [1 favorite]

Your medical expenses are only tax deductible over a certain threshold. "For years beginning after December 31, 2012, you may deduct only the amount by which your total medical expenses exceed 10% of your adjusted gross income. " In other words, if your AGI is $50,000, and your medical expenses are $7,000, you could deduct $2,000, but if your medical expenses were only $4,500, you wouldn't be able to take any deduction for them.

I really think you need an accountant. Nearly all of my self-employed friends get professional tax advice, but especially when you're considering taking deductions for big chunks of your life expenses, you're just asking to get audited, and you want to make sure that you're doing everything absolutely by the books.
posted by decathecting at 8:29 PM on July 2, 2013 [1 favorite]

the money book for freelancers has a lot of good info for beginners.

there are so many variables based on WHAT your work is. read the irs documents, get turbotax, etc. if you're providing a service and not going to carry an inventory of products that you're selling, it's pretty simple.

things i deduct: office supplies, new computer when my old one died, taxi rides to in-house client meetings, web hosting for my work website, the money book for freelancers when i bought it, my business license; transit and hotel that one time i had to go to nyc for a fancy meeting

things i do not deduct: home office crap (because my office is a desk in my living room and that does not count as an office to the irs); internet (too hard to say what is personal vs. work and i don't want to fight them on it if it ever comes down to it); phone (i make like 5 work phone calls a month, the rest is texting with friends, so meh)

all of this will vary depending on what type of work you actually do.
posted by misanthropicsarah at 9:43 PM on July 2, 2013

Something to consider: if you have a choice about going freelance, it might not be the most propitious moment while you're depressed. Being freelance can be competitive – you need to be prepared to get out and hustle, and if you're not emotionally up to this you might not thrive.
posted by zadcat at 5:18 AM on July 3, 2013

A lot of this will depend on what industry you are in, thus the necessity of having good professional advice. Shelling out several hundred bucks on an accountant with specific knowledge and experience in your industry is well worth it.

For example, there are certain things I can deduct as a freelance performing artist (certain theater tickets, audio recordings & books, etc.) that someone who is a freelance graphic designer can't deduct. And vice-versa, I'm sure. The thing to understand is that none of this matters unless you are audited. So the name of the game is that you want to take deductions that are reasonable and not likely to flag you for an audit, and most importantly that you can justify and that will be upheld when you are sitting across the table from an auditor. This also is where the expertise and experience of a tax accountant familiar with your industry becomes important. For example, as a performing artist I am technically allowed to deduct the cost of my newspaper subscription because I need that to keep up with reviews, maintain cultural literacy in my field, etc. But my tax accountant will often say something like, "the IRS has a number they like for this sort of thing, and that number is called 'half.' As long as you deduct only 50% of the newspaper subscription, you will be okay. More than that, and you are likely to get in a nitpicking contest with the auditor." Okay. Good to know. 50% it is.

Looking at your contemplated expense categories, not all that many of them seem like they would be legitimately deductible. Therapy is a medical expense unless you are a freelance LPC or something like that, and being in therapy is a requirement to maintain your license. Medical expenses go on the schedule, but in my experience they have to be quite high before they make any impact on what you have to hand over to the government. Bicycle is a nonstarter. There are certain circumstances where you can deduct the mileage you drive for work in certain kinds of jobs (you can't just deduct your daily commute, for example). But you can't normally deduct the cost of your car. Since the mileage on your bicycle is effectively "free" (i.e., you don't pay for gas, etc.) I don't see how you could make a reasonable deduction. Also, you have to ask yourself how much you could possibly deduct and whether the benefit would be worth the risk. Computer is absolutely 100% deductible. Depreciate that thing over multiple years. Internet, you can deduct 50% (see newspaper subscription principle above) and be secure. Making a "home office" deduction is really risky in my experience, unless you have a dedicated room you can prove is used 100% for work.

Caveat: These are all general principles widely known to apply in my industry. They may not apply to your circumstances and industry. We can sometimes deduct things like Weight Watchers fees that people in other industries could never deduct. I am also not a tax accountant. All of the foregoing is simply offered as examples to demonstrate the necessity and good value of consulting a tax accountant with expertise and experience in your industry.
posted by slkinsey at 5:42 AM on July 3, 2013

I'll address Health Insurance.

What you want is a High Deductible Health Plan with an HSA. What's going to be available will depend upon where you live.

My employer has this, and while it's not as good as the old Blue Cross/Blue Shield I used to have back in the day, it's a pretty good. The idea is this: You pay a premium to the insurer and you get a card. In my case with my premium I get one annual physical with my GP with no co-pay, one annual visit with my GYN with no co-pay and an annual Mammogram. All of the tests are included. Anything over and above that, I pay for out of pocket until I reach my deductible amount of $2,200. Then my plan takes over.

Now, here's the fun part. The HSA. Health Savings Account. I have a special bank account where I make a monthly deposit. That deposit is TAX FREE! So any of the money I'm spending at doctors, dentists, etc is paid for in pre-tax dollars!

Find out what plans are offered in your area, price them out and pick the one you like. There are lots of banks out there that host HSA accounts, mine is in Chicago, First American Bank, and they have no fees for their HSA account. I have a debit card that I use for my perscriptions and any medical charges.
posted by Ruthless Bunny at 6:07 AM on July 3, 2013

N-thing advice to get a CPA. Best decision I ever made after going freelance.
posted by Shoggoth at 7:43 AM on July 3, 2013

I'll go against the grain and say, if the money is tight, this may not be the time for an accountant. If you don't have a lot of cash flow, getting your taxes perfectly right your first year of freelancing is not the most critical. Being wrong by 20% is a lot less important when your gross income is small.
Read the reccomended book, follow up on specific questions that you still have after doing some research into how deductions usually work, either here, or in other books, or on forums populated by freelancers of your variety. You might decide, after looking at the available information, that you don't want to figure this out yourself, and it's worth the expense of hiring an accountant, but don't do that automatically on the assumption that otherwise you will screw this up beyond belief and everything will be dramatically ruined. Do your best, and you might find that you're doing just fine.
posted by aimedwander at 8:39 AM on July 3, 2013

« Older What do I do now?   |   Job Longevity and Buying a House Newer »
This thread is closed to new comments.