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There are a lot of responsibilities when it comes to working as an independent contractor. One of those responsibilities is managing your business’s finances. Whether you choose to have a separate or combined business bank account, banks charge fees for various services. There are charges for maintaining a business account, wire transfers and the occasional overdraft.
The silver lining? Many of these fees may actually be tax-deductible as long as they are for your business bank account. If you received any banking fees on your personal bank account, they can’t be counted as a write-off.
When we talk about deducting bank fees as a freelancer, we're essentially looking at charges that come up when doing business. If you have a business account, monthly maintenance fees or charges for wire transfers might be part of your monthly charges. The good news is that, in many cases, these fees are considered business expenses and can be claimed on your tax return.
To be eligible for this deduction, these fees must have a clear connection to your freelancing business. If you're paying fees for personal banking or unrelated expenses, those might not make the cut. So, the first rule of thumb is to ensure that the fees you're looking to deduct are directly tied to your freelancing business.
The IRS says the bank fees must be ordinary and necessary business expenses. An ordinary expense is an expense that’s expected or typical in your line of business. A necessary expense is something essential for your work. Paint brushes and water paints are an ordinary or typical expense for a freelance artist and are necessary for the work. But a Netflix subscription wouldn’t be considered necessary.
Monthly bank fees are considered an ordinary and necessary expense and, therefore, tax deductible. Some banks charge a monthly fee depending on the bank and your account type.
In the hustle and bustle of freelancing, it's not uncommon to encounter situations where accounts dip into negative balances. Any fees incurred due to overdrafts or insufficient funds, while not ideal, may be eligible for deduction.
Imagine you're en route to a photo shoot as a freelance photographer and suddenly realize you need film. You swipe your credit card, but charge an overdraft fee since the funds were never deposited into your account. However, this fee is tax deductible as the overdraft was directly related to your business.
Sometimes, banks charge fees for transferring money to another account. The fees associated with these transfers, whether sending or receiving, could be considered part of the cost of doing business and may be deductible.
Charges incurred for everyday transactions, such as checks, withdrawals or electronic transfers, can add up. These transaction fees are typically seen as business expenses and may be eligible for a deduction.
If you frequently use ATMs for business-related transactions and incur fees, these costs could be considered part of your business expenses and potentially deductible.
If you typically accept payments by credit card, the associated processing fees are considered deductible.
If you incur excessive bank fees, you can bet the IRS won't allow these to be written off. Let's say you tried to deduct $10,000 in bank fees. The IRS will probably send you an audit notice and deem your bank's charges more than just ordinary or necessary.
In case you’re unfamiliar with Schedule C, this form is attached to your Form 1040 tax return and is used to report itemized deductions for independent contractors, gig workers, sole proprietors and self-employed individuals. You’ll add your business expense deductions on this form, including any bank-related expenses.
It can be confusing to track which expenses were for business and which were personal expenses. This is where FlyFin can make things easier. A.I. can help you track your spending and expenses all in one place and find every possible deduction. CPAs will review and file your tax return. Leave the taxes to FlyFin!
FlyFin CPA Team
With a combined 150 years of experience, FlyFin's CPA tax team includes tax CPAs, IRS Enrolled Agents and other tax professionals, offering users the most comprehensive tax advice and preparation.