A business deduction is a key financial concept for freelancers. It refers to an expense you can legally subtract from your business income to reduce your taxable profit.
What is Business deduction?
A business deduction is an ordinary and necessary expense incurred while running your freelance business. The IRS allows you to subtract these costs from your gross income. This lowers your taxable profit, meaning you pay tax on a smaller amount of money.
Why is this important?
For freelancers, deductions are essential for financial health. They directly reduce your tax liability, putting more of your hard-earned money back in your pocket. Properly tracking deductions is a core part of running a profitable and compliant freelance business.
How does it work?
You track all business-related expenses throughout the year, like software subscriptions, home office costs, or marketing. When you file your taxes, you report your total income and then subtract these qualified expenses. You only pay income tax on the remaining profit.
Pros and cons
The main pros are significant tax savings and incentivizing business investment. Key cons include the need for meticulous record-keeping and the risk of an audit if you claim inappropriate personal expenses as business deductions.
Conclusion
Understanding and using business deductions is non-negotiable for freelancers. It turns necessary business spending into a financial advantage. Always keep detailed records and consider consulting a tax professional to ensure you maximize your eligible deductions correctly.
Ready to freelance?
Download the HFS Freelancers app and discover flexible shifts in your area. Or explore more terms in our knowledge base.
