Paul Koullick from Keeper joins me to talk about tax write-offs that freelance graphic designers might miss. Find out if you’re forgetting any of them and find out what you need to know about estimated taxes.
Paul Koullick is the co-founder and CEO of Keeper, which helps freelance designers save money on taxes, effortlessly. In his free time, Paul loves to train for marathons and spend time with his family in San Francisco.
Colleen Gratzer: Welcome to the podcast, Paul. I’m so happy you’re here.
Paul Koullick: Thanks for having me, Colleen. I’m glad to be here.
Colleen: Sure. Well, as you know, taxes can be very complicated for freelancers, so I thought it’d be great to have you on here so you could help me break it down for them.
Paul: Absolutely. Yeah. That’s that’s true. Taxes are very complicated for freelancers. It all stems from the fact that we may not think about ourselves this way, but as freelancers, we’re considered small business owners by the IRS even if we’re doing it part time.
That comes with a few key complexities that don’t happen in W2 work. The first one, of course, is that your taxes are not being withheld from your paychecks. This one most people know, but sometimes you find someone who forgot about it and then you get hit with a big tax bill at the end of the year.
Second thing is that there are a lot of expenses that you have as a freelancer that are tax write-offs, and trying to remember them all at the end of the year when you’re filing your taxes is very tricky. So it’s important to track them throughout the year.
Colleen: Absolutely. Let’s talk about some of these expenses.
Paul: Yeah. The way the IRS defines “tax-deductible expenses” for freelancers is that they have to be both “ordinary and necessary” for their line of work. While that’s a nice broad statement, it actually doesn’t give you a lot of context about what actual things that you buy are going to be considered write-offs.
One of the most common misconceptions is which expenses are included and which expenses are not. So at Keeper, we spend a lot of time thinking about this and we review the latest legislation and cases, and we have a team of accountants that basically write these rules into our software. So we spend a lot of time thinking through this and we worked with a lot of freelance designers to a point where we have a good stance on what we believe are are the definitive list of tax write-offs that these freelancers can claim.
Some of the very obvious ones are going to be software expenses that are just required to do the job, whether that’s Photoshop or Adobe Creative Cloud or whatever other design software that’s being used. That’s obviously a requirement and an ordinary expense for a freelancer.
Paul: So those are simple and those are typically recurring, so they’re easy to find at the end of the year. Where it’s more of a gray area is expenses that are both personal and work related.
Colleen: Yes, for sure.
Paul: So some of the really common ones here are electronics. For example, you might be using your phone for work. In fact, it’s unlikely that you aren’t using your phone for work. So both the purchase of your phone and the phone bill and all associated phone expenses are going to be partially tax deductible.
Colleen: Yeah, even the taxes on the phone.
Paul: That’s right. Yeah.
Another one that a lot of people forget about is when you go out with a friend for a meal. You know, people usually remember to claim certainly when it’s a client’s meal. But if you are discussing work and your industry, and you are getting ideas from this person that you were grabbing a meal with, that is actually also a meal for work as long as it’s not “extravagant,” which the IRS defines as, as, as being over the top for clients, entertainment. Meals for work are a partial tax write-off.
Colleen: Yeah. You’re supposed to report—to your CPA or an accountant that you’re using—100% of that cost, but you only get like 50% of the cost to write off.
Paul: That’s right. That’s right. There’s all these little rules that are associated with different types of categories of expenses and what percent of them you could write off. And meals, you’re right. Meals are about 50%.
Then the other category I wanted to mention was working from home. So I think especially for freelance designers, you know, it’s probably not worth getting your own office because a lot of the work you do is from a monitor at home. If you have a dedicated workstation in your home or apartment, you can claim the home office tax deduction. This one is commonly overlooked because people think that they need to have a separate room in their home in order to qualify for this. The reality is not all of us live in homes; some of us are living in apartments.
Also you know, even if you just have a desk with a monitor on it that you use for work, that is also a home office.
Colleen: Yeah. I actually have a dedicated office space, but then I have… I actually used part of another room for storing all of the boxes of portfolio work for over the past 20-some years. So I actually count that as part of it too.
Paul: Absolutely. Yeah. This is a very important tax write-off because living is expensive. Homes are expensive. You can actually claim a portion of all of your home-related expenses whether that’s part of your rent or utilities, power, water, electricity, and especially your wifi bill.
All of those are partially tax deductible according to the percentage of your home that you use for work. So that’s a massive source of tax deductions right there. So that’s the home office tax deduction.
One other thing I’ll say about that is sometimes people like to use the simplified method. There’re basically two ways to claim the home office write-off. One is by taking a dollar amount for every square foot. And the other is to take a percentage of all these actual home-related expenses.
I will mention that for most of our customers, we’ve noticed that it’s much more profitable to claim the the actual expense method here rather than the simplified per-square-footage method. We wrote a big blog post about this, but, in short, unless you’re living in basically a townhouse in the countryside, it’s very unlikely that the simplified method will be better because it’s a rule that was written a while ago by the IRS. And it really doesn’t favor urban living and folks who have smaller homes or a more expensive rental property.
Paul: Yeah. The second category here that I want to mention is actually transportation. A lot of us drive a car for work and it’s easy to forget to claim, you know, whether it’s a gas fill-up or car maintenance or even the registration fees with the DMV.
All of those things are also partially deductible. As freelance designers, we probably don’t drive as much as certain other types of contractors, but it’s important to remember to claim this deduction because it’s worth a lot of money.
I will also mention that, like the home office, car expenses, you can also claim as miles.
Colleen: That’s what I do. Yeah.
Paul: Yeah. That’s a reasonable way to do it if you can build that habit around tracking miles. But like the home office expense, we found that tracking actual car expenses is oftentimes more profitable than tracking miles.
Paul: It depends on… of course, the type of car you have and how much you actually drive to work. The rule of thumb that we’ve defined as that if you drive less than 20,000 miles a year for work, then claiming the actual car expenses is going to be more profitable. So another little tidbit from what we’ve learned at Keeper.
Colleen: I don’t know about a lot of people, but I’ve never really used those booklets that come with the checkbooks, you know, to balance your checkbook. So I’ve saved them up over the years.
Paul: Right. Right.
Colleen: I keep one in each of our cars. So if I need to write off mileage, I pull that out and I just write down the mileage. And then at the end of the year, I go and sit at my desk and I type them all in and, you know, add up what I need to.
Paul: Right. No, and a lot of people do that. You know, if you’ve built a habit, then that’s fantastic. What I’ve seen especially true for people who are newer to the industry is that they’re not used to having built those habits, you know?
Paul: For those folks, what we hate to see is when they just don’t track anything at all and are leaving thousands of dollars on the table at tax time.
Colleen: Yeah, so true. I mean, I took a business trip to Miami and I drove for that. That was a lot of mileage!
Paul: So really it’s all about tracking these expenses, however it works for you.
Colleen: OK, so what about business travel expenses?
Paul: So if you leave town for work—and the IRS has a rule of thumb here—basically if it’s more than a hundred miles away as the crow flies. “For work” could mean whether it’s a client meeting or a conference anything like that, then all associated expenses are going to be tax write-offs as well. Let’s see,
Colleen: Unless it’s for your full time job and they’re reimbursing you.
Paul: Of course. Yeah. Yeah. And to be clear, these are all… when I say for “work,” I mean for your freelance design work.
So, that’s one of the perks of being freelance is that you can write all these things off as a W2 employee, you can’t. Even if it’s very unlikely that you’ll have more of these expenses, then the standard deduction as a W2 employee, but as a 1099, as a freelancer, then all of this is important to track regardless of how much you make.
With respect to travel, the transportation—planes, trains and automobiles, the lodging—and then one that people often forget is meals. Anytime that you’re traveling, if you go out to eat, that is also going to be partially deductible because the idea is that it would be much cheaper for you to cook at home, but because you have to travel for work, you had to pay this money.
Okay, great. So there’s also some small, well seemingly small, everyday expenses that I see that really add up, you know, at the end of the year, like supplies, for instance.
Paul: Right. Absolutely. Yeah. Freelance designers especially, a lot of the things you have in your home office—such as notebooks and sketch pads, pens and pencils, all of those—all of those are work-related supplies that are tax deductible. As well as things that are digital products like website hosting fees, stock photos, all those things that sort of help you do your job throughout the year.
Colleen: Oh yeah. Even domain names. plugins, themes. Yeah. Those really add up throughout the year.
Paul: Yeah. It’s always going to be, you know, a couple of dollars here, a couple of dollars there, yeah.
Over the course of every month, our typical user that uses Keeper saving about $173—in savings, not just in tax write-offs—at the end of every month.
Colleen: Oh, wow. That’s great.
Paul: So that’s a little rundown of the tax write-offs that are important to track throughout the year. I think the key here that I want to convey to your audience is that this stuff adds up and it’s really hard to remember at the end of the year.
We recommend tracking this throughout the year: setting up a system, whether that’s a spreadsheet or a log in your car, as you have, Colleen, to make sure that come tax time, it’s not 11:00 PM on April 14th and you’re trying to put together your spreadsheets. Ultimately, what happens is that people just overpay and that’s what we hate to see.
Colleen: Right. I mean, it takes a lot of time. I track all my stuff throughout the year, but it still takes me a good couple of weekends before tax time just to prepare everything for my CPA.
Paul: Yeah, and that’s not uncommon.
Colleen: OK, great. So now that we’ve covered a lot of the tax write-offs that some freelancers might be forgetting about, let’s switch gears and get into quarterly estimated taxes.
Paul: You know, I was freelancing as well and I just remember hating quarterly taxes. They are really tough.
Colleen: Well, I hate all taxes.
Paul: True. But you know, it feels like at the end of the year that you can go to TurboTax and it’s a little bit easier. But quarterly taxes are just, you either have to have a CPA who does them for you, or it’s just this excruciating process where you have to go download the little calculation sheet from the IRS and essentially do your own taxes and then you have to pay online and pay your state, pay your federal.
Now, because of the fact that they’re so complicated, a lot of people don’t do them. Unfortunately, there is a penalty. The penalty is about 9% of the amount that you underpaid, essentially, that you haven’t paid during each quarter, which adds up. So if you owe like $5–$6,000, that’s $500 of a penalty that you’re paying in a year.
Colleen: That’s a lot!
Paul: You know, it’s not nothing. So what we recommend is that people, even if they don’t have an accountant, is that people do file and make a payment for quarterly taxes. One thing we’ve tried to do at Keeper, we try to make it really easy. So we’ve built this free tax calculator that’ll basically tell you exactly how much you need to pay both for federal and for state. It’s available online even if you don’t have a CPA or don’t want to pay for one.
Colleen: So, Paul, your app called Keeper helps freelance designers actually keep track of all this. I actually tried it out and I thought it was really cool because it wasn’t all just automated. There was a human component to it with someone actually sending me a text to say, “Hey, is this a business expense?”
I mean, I’ve been doing this a long time, so I know what my business expenses are and they’re on a separate card. But trying this out, I found this could be really helpful to somebody that doesn’t already have these habits, like you said, of knowing what you can and cannot write off. So do you want to talk a little bit about that?
Paul: Absolutely. I think you, you hit it right on the head with Keeper. We’re trying to build a tool for folks who are new to freelancing. What it does is essentially, you know, it couldn’t be simpler.
You link a bank or credit card account and Keeper monitors purchases that you make. Every time you buy something that might be a tax write-off, we’ll actually send you a text message, a simple yes or no question. Then if you tell us that yes, you know, this software or this you know, the supplies purchase was work related, we’ll go ahead and add that to your tax file, we’ll categorize it for you, we’ll help you file at the end of the year.
So it’s really designed to make it dead simple for people who are new to freelancing, new to what tax implications there are to freelancing and to make it really, really simple. Cool.
Colleen: Cool. And since my audience is all over the globe and not just in the United States, I want to make a disclaimer and that is just, you know, be sure to check with your accountant in your jurisdiction to see if any of these write offs and any of these other tax things that we’ve talked about apply to your situation.
Paul: That’s right. Yeah. And a disclaimer all around. We are a U.S. tax-based products. All of our recommendations are for the U.S. tax code and not international.
Colleen: All right, well thanks so much for coming on the podcast, Paul, It’s been very helpful.
Paul: Fantastic. Yeah. Thanks so much, Colleen. It’s a pleasure.