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I'm a freelance writer who works from home. My internet fees should count as business expense and be deducted from gross, but the question becomes how much? Since I also use internet for entertainment etc, how can I prove myself when I say 50% of the internet fee should be deducted?

Sometimes when I'm too busy, I outsource my work or hire a content editor for my freelancing business. I hire those subcontractors from UpWork. Obviously, those should be business expenses, but I can also easily use UpWork for personal purposes. Again, how to prove and differentiate?

Lastly, what happens if something goes wrong? Maybe I overestimated my business expenses or did a wrong calculation. How will the IRS know/prove something is wrong and what are my penalties?

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    You might want to consider talking to an actual CPA
    – 0xFEE1DEAD
    Commented Mar 15, 2023 at 13:47
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    It's like having a phone line. It's just a fixed overhead.
    – Stewart
    Commented Mar 15, 2023 at 14:51
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    You should consider whether it's worth your time to track an expense like this. If for example, you are paying like $100 a month for internet and claim 25% of it as a business expense. You are claiming $300 a year in expenses. If you pay a 20% tax rate, then all the work you put into tracking it only saves you $60 a year on your tax bill. I don't know what you charge per hour for your service, but if your profit is say $30 an hour, then you are losing money if you spent more than 2 hours on this.
    – user4574
    Commented Mar 16, 2023 at 2:03
  • My grandmother ran a dog kennel business out of her house and she would deduct a percentage of the bills based on the percentage of the total square feet the business used.
    – NathanOliver
    Commented Mar 16, 2023 at 12:33

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My internet fees should count as business expense and be deducted from gross

Says who?

Since I also use internet for entertainment etc, how can I prove myself when I say 50% of the internet fee should be deducted?

You can measure how much content you've downloaded or uploaded for your business and how much was not and prorate the costs accordingly. Alternatively you can measure how much time you spent using the internet for your business out of the total subscription period and prorate accordingly.

but I can also easily use UpWork for personal purposes. Again, how to prove and differentiate?

I'm guessing you get itemized invoices from these freelancers?

Maybe I overestimated my business expenses or did a wrong calculation

If you're "estimating" your business expenses then you're doing something wrong.

How will the IRS know/prove something is wrong and what are my penalties?

They'll audit you, and depending on what they find the penalties may be from 20% (accuracy related penalty under Sec. 6662) up to 75% of the income you've concealed (Sec. 6663 - fraud). For fraud you may also face criminal prosecution (under Sec. 7201, 7206, 7207, etc).

The audits may be random (you just got unlucky and selected for examination), or triggered by various "red flags" on your return, or due to information the IRS got from somewhere else (someone else's audit, tips, banks flagging suspicious transactions, other law enforcement referrals, etc).

How will the IRS know/prove something is wrong

They don't have to prove anything. You're the one who's required to prove the correctness of your return.

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    In practice the IRS are not going to object to the fraction of your internet fees as long as they are reasonable.
    – DJClayworth
    Commented Mar 15, 2023 at 5:39
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    Probably worth noting that, in the case that they have found that you have overpaid, you will get paid back. I had that happen once where the audit was triggered, and I received a nice letter indicating that I'd accidentally paid too high of a rate on my claimed taxes (I forget the details, but I think I reported more income than I actually received), and that I was getting money back. I don't remember if it was issued as a check, or as a credit to the next year's taxes.
    – Sean Duggan
    Commented Mar 15, 2023 at 16:20
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    While people tend to associate audits with them trying to punish you, it's really just trying to get everything correct, with a small side of punishing people who are caught actually trying to cheat (or look like they're trying to cheat).
    – Sean Duggan
    Commented Mar 15, 2023 at 16:21
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    All these comments are true. Audits are often times not even noticed, you may receive a letter requesting some information, or may not even that, if everything looks right and matches the other records (1099s, W2s etc) then you may not even notice you've been audited. But some items on the return may trigger closer examination and maybe even potential full audit including bank statements and personal interviews. All depends on how "bold" and "creative" you end up being on your return.
    – littleadv
    Commented Mar 15, 2023 at 16:49
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    @user253751 that's why you hire a professional if you don't know what you're doing... Ignorantia juris non excusat
    – 0xFEE1DEAD
    Commented Mar 15, 2023 at 21:53
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Sometimes when I'm too busy, I outsource my work or hire a content editor for my freelancing business. I hire those subcontractors from UpWork. Obviously, those should be business expenses, but I can also easily use UpWork for personal purposes. Again, how to prove and differentiate?

You have a couple of options:

  • two different UpWork accounts. One for your business, one for your personal stuff. Never mix them.
  • Document each task. Be able to document that this was work related. Don't just have a line in a spreadsheet, have a ton of other documents gathered at the time of the task to show it was work related. Keep the documents so that if audited you can prove it.

In fact do the documentation, even if you do have two accounts.

Lastly, what happens if something goes wrong? Maybe I overestimated my business expenses or did a wrong calculation. How will the IRS know/prove something is wrong and what are my penalties?

Don't estimate expenses. Claim what you can prove.

If you made a mistake and it is discovered by you, or the IRS, you will be expected to pay the difference. Depending on the situation you may face interest and penalties. The more you can show it was a mistake, the better off you are.

They might not know what is wrong until they do an audit. They might know if you skipped something that another taxpayer mentioned on their tax form. If you forgot a source of income, but the other person sent you a 1099, the IRS would not see reference to that money and would want to know why. In other cases you should have submitted a 1099 for somebody else and failed to do so.

Once in the audit, they will want to see the proof. The more documents that you have from the time of the expense, the more they will accept the proof.

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The two-word answer is "itemized receipts".

A friend of mine keeps a set of file folders where she throws every possible receipt she gets during the year, after noting on it which parts are tax-related. At the end of the year she can add those up, put the data into her tax forms, and toss the file into the file drawer to be referred back to if there's an audit -- or if/when she sells the house, since maintenance/improvement costs add to the cost basis when figuring tax on the profits from that and thus can be partly reclaimed.

It's up to you to decide how much effort you want to put into record keeping. Not everyone thinks it's worth the effort for small amounts and smaller deductions. But if you haven't got documentation to substantiate the cost, don't claim it.

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