What is the expense ratio for freelance engineers? I will introduce and explain things that can be recorded visually. Basically, you will have to pay all work-related expenses yourself. However, can miscellaneous expenses, including transportation expenses, be recorded as business expenses? For freelance engineers, managing money is an important task that affects their lives.
- What is the freelance expense ratio?
- Can transportation expenses be covered?
- Advantages and Disadvantages of Expense Recording
- Items that cannot be expensed
- Criteria for determining expenses
What is the freelance expense ratio?
When you work as a freelancer, you will incur various expenses such as accommodation and entertainment expenses, but if you list everything as an expense, you will be suspicious. Is there a way to prorate and save money? An appropriate expense ratio for freelancers is around 50%. For most people, around 60% is considered an expense. Although the exact expense ratio is not determined by law, this is the most common ratio. Consumables used for services (Internet, advertising costs, home business cards, stationery, etc.) can of course be expensed.
Sole proprietorship expenses
A sole proprietorship’s expenses (utility expenses, entertainment expenses, etc.) have an accounting department just like a company, and they don’t just throw it at you and have it done for free, so you have to deal with it yourself. It is essential to manage withholding tax, suica train fares, invoices, receipts, etc. by business partner and date. You will not be paid in cash, so you will need to acquire the knowledge and be able to calculate it yourself. How you manage your expenses is also important in order to save on taxes. If you are busy with work and feel it is a hassle, leave it to a certified public accountant or tax accountant. Money spent playing with family and friends cannot be used as expenses.
Affects tax payment
Tax payments, such as consumption tax, are affected by accounts and how expenses are recorded. One thing to keep in mind is that if you list too many expenses, your business will be noticed by the tax office. However, travel expenses and other expenses can easily be claimed as business expenses. Taxation also differs depending on whether you are a corporation (company) or an individual. Therefore, business owners should be careful when preparing documents. Think about how you will handle it yourself.
Is tax an expense?
As a basic rule, personal payments such as residence tax, income tax, property tax, and automobile tax for one year are not eligible for expenses. However, if the tax is related to business, it can be recorded as an expense. Stamp tax paid by the business is considered an expense. It would be a good idea to check with your tax office.
Can transportation expenses be covered?
Freelancers can record transportation costs for business meetings and consultations with clients as business expenses. However, it may be difficult if the transportation expenses have nothing to do with work. The condition for it to be recorded as freelance transportation expenses is that there is some connection to the “work”. In the case of freelance transportation expenses, you need to keep and secure all receipts and receipts yourself. Without evidence, there is nothing to prove. Generally speaking, transportation costs include the following:
entertainment and accommodation expenses
Travel expenses and lodging expenses can be expensed as well. As with travel expenses, this should be work-related. Business trips may be required depending on the nature of the work. In that case, it can be treated as an expense. Of course, you need to keep the proof, such as a receipt.
Opening preparation costs
Expenses incurred for opening a business can be treated as “opening preparation costs.” Participation fees for seminars you attended to become a freelancer, meetings, website server fees, etc. can be recorded as start-up expenses. There are no particular restrictions on the period that can be treated as business start-up preparation costs.
I think most people use computers for business. Items used in business are treated as “depreciable assets” rather than start-up preparation costs.
If you are an engineer, office supplies, utilities (electricity, gas), water, PC and communication costs, and if you work from home, rent can also be treated as expenses. Furthermore, if you purchase books (such as programming books such as python), you can also deduct them as expenses. In this case, of course, the main focus is whether it’s work-related.
Advantages and Disadvantages of Expense Recording
The following advantages and disadvantages occur when the expenses are increased.
have less income
The more expenses you deduct from your sales, the lower your taxable income and the higher your take home income. The amount of taxable income is the amount after deducting expenses and various deductions from sales.
If the expense ratio is high
If the percentage of expenses is high, there may be an investigation. As explained above, even if the expense ratio is high, it should be kept at around 60% at most. Please refrain from fraudulent use of expenses as it may mislead the tax office. In the worst case, there can be penalties.
Items that cannot be expensed
Please note that there are some items that cannot be claimed as expenses. Of course, not everything can be expensed.
Private expenses cannot be expensed. Expenses such as family trips and trips with a lover are obvious, but it is impossible to make them expenses.
Health checkup fee
Optional costs for health checkups, such as medical checkups, are not included in expenses. These expenses are deductible for social insurance premiums.
Income tax and inhabitant tax are not included as expenses.
Criteria for determining expenses
As a sole proprietor, you must decide for yourself whether or not it can be claimed as an expense.
The cost of making money in business
When you are a freelancer, you are running your own business. You will need to prove that the expense is for making a profit for your business. You cannot record the cost of eating and drinking with friends and having fun chatting with them as an expense. Even if you buy books, etc., if you purchase them for your own hobbies or study, they are not recognized as expenses.
Expenses are recorded annually
Expenses are recorded annually. Expenses incurred in a given year must be booked and declared in that year. It is not possible to record several years’ worth all at once.
Pointed out by the tax office
In some cases, filing a tax return is not the end of the process. When recording expenses, it is assumed that the expenses are directly related to generating profits for the business, but there is a possibility that the tax office will investigate. Although the probability is low, it is said that system engineers are likely to be targeted. This is because it is a high income. Always have documentation available to prove that the expenses are related to your business.