Writing off Bad Debt for Freelancers
Bad Debt and Freelancers
Of course, you'll want to consult with a local accountant and tax preparer, plus research IRS Publication 525.
Some businesses (including lone freelancers who may choose to fall under sole proprietorships) are allowed to write off uncollectible invoices as a "business bad debt" according to IRS Publication 525.
However, the IRS only allows this write-off for businesses that use the accrual method of accounting (versus the cash method of accounting).
Don't run away yet! Those are actually simple terms. Writers (and other business owners) who use the accrual method "report their income as they earn it." That is, when you're done with your project, you have "earned" the money, even if you haven't seen it yet.
The cash method, though, is what many- if not most- freelancers use. This simply means that you don't count your dollars until they're actually in your pocket.
Once again, freelance businesses (and businesses in general) can only write off uncollectible invoices if their business is based on the accrual method of accounting.
Not sure how your business finances are kept? Again, be sure to speak with your accountant or tax advisor, and to consult IRS Publication 525.
Another Answer: Prevent Bad Debt to Begin With
Of course, your best bet is to do everything possible to protect yourself from non-payers. Some ways to do this include:
- Always get a signed contract from your client
- Requiring a down payment and milestone payments throughout the project
- Checking your client's reputation online
As always, this information is presented simply as a tutorial, and you should always contact your accountant or tax professional with questions about your business.