As a freelancer, will you soon be visiting a client, a seminar or a trade fair? If so, you need to know how to correctly account for your professional travel expenses. This article teaches you all about travel expenses, how to bill business trips correctly, and what the four types of travel expenses are.
- What are travel expenses for freelancers?
- How can you prove travel expenses?
- What travel expenses can I claim?
- How to calculate travel expenses
- How to settle travel expenses with your clients
What are travel expenses for freelancers?
If you have to undertake a trip or travel somewhere in order to exercise your profession, the costs that are incurred because of it are what are known as travel expenses. These can be client or customer visits as well as training or trade fair visits.
Can an independent contractor claim travel expenses? Yes! As a self-employed person, you are responsible for ensuring that your travel expenses for business trips are proven, correctly documented and billed in your bookkeeping. Because only what is recognized by the tax office can be claimed for tax and, depending on where you live, there are a number of rules that need to be observed.
How can you prove travel expenses?
In order to be able to deduct travel expenses from taxes, it is important that it is demonstrated that the travel was necessary and of an operational nature.
You can prove your travel expenses in pretty much the same way you prove your other expenses to the tax office – by keeping a detailed and accurate record. For example, in the US, it is necessary for you to have documentary evidence such as receipts or bills. If you can’t obtain a receipt or a bill you need to have evidence that shows the amount, date, place, and essential character of the expense.
As is in the US, in the UK, you need to keep a record of all your expenses (fuel, parking, transport fares) and put the total amount on your Self Assessment tax return. Even though you don’t necessarily have to send in your proof, you need to keep a record for the HM Revenue and Customs (HMRC) if asked.
What travel expenses can I claim?
Generally, you can claim for any costs which relate to travel for business purposes and not for travel undertaken for private or personal reasons. However, depending on where you live, the expenses that you can claim may differ.
In the US, according to the IRS, you can claim expenses such as airplane, train or bus fares, lodging, dry cleaning and laundry, and non-entertainment-related meals whereas in the UK, you can also claim on things like parking fees, congestion charges and tolls, and business mileage.
Travel expenses in the US and the UK:
|Airplane, train or bus fares, lodging, dry cleaning and laundry, and non-entertainment-related meals.||Mostly similar to the US but also includes parking fees, congestion charges and tolls, and mileage.|
How to calculate travel expenses
How much can you claim for travel expenses? This depends on where you live and work, but generally, the tax office in most countries distinguishes between four different types of travel expenses:
- Subsistence costs
- Accommodation costs
- Transportation costs
- Other travel expenses
Not every single pound or dollar that you spend towards meals while travelling is going to be reimbursed. This can quickly lead to 5-star restaurants and lavish cafes and so to avoid this, in the UK, the HMRC has provided a list of meal allowance rates for different cities and countries. These work like a per diem and work on the concept that if you travel often, you get assigned a set amount that you can spend on food and lodging each trip, rather than on a case-by-case basis.
In the US, you have two choices – you can use the actual meal method, which involves keeping track of what you spend for each meal, which can be a lot of work or you can use an alternative method provided by the IRS which involves deducting a set amount for each day of your business trip. The amount of the allowance varies depending on where and when you travel.
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Claiming accommodation costs is relatively easy. Freelancers can book and claim accommodation costs in full, provided the costs are substantiated. In addition, accommodation costs are also pre-tax deductible, but at the reduced VAT rate.
Costs for air, bus or train travel can easily be claimed upon providing the tax office with a receipt.
However, if you are using your car or public transportation for business-related purposes, you can claim the expenses that arise because of it but only once you know exactly what expenses lie under the transportation category.
If, for example, you are travelling to a specific office or place where you work as a freelancer and perform your daily work related tasks, then the cost of commuting there will not fall under transportation costs. However, if you’re travelling to meet a client or for a seminar or a training course, costs incurred then will be considered as a business travel expense.
In the UK, you can claim on things like toll charges, car parking charges, and car mileage where you can either claim a fixed mileage rate for each mile you travelled or work out actual expenses with the use of detailed records of business and private mileage.
Similarly, in the US, you can either deduct actual expenses or use the standard mileage rate provided by the IRS.
Mileage rates in the UK and US:
|Fixed mileage rate – As a freelancer, you can claim fixed mileage rate as 45p for the first 10,000 miles and then 25p per mile thereafter.||Standard mileage rate – As of 2021, the standard mileage rate in the US is 56 cents per mile for business purposes.|
Other travel expenses
Additional travel expenses are all the costs that do not fall into the previous categories, but which nevertheless relate to travel. These can include the ticket cost for entry to the trade fair, costs for using the Internet in the hotel, phone bills etc.
If no official receipt is issued, freelancers can issue a receipt themselves. This must include the total, all partial amounts (e.g. unit prices), a reason, the date and the signature of the freelancer. In addition, the VAT must be declared and an explanation of why the receipt was written must be given. This is the only way to submit additional travel expenses for taxes.
💡 If you travel more often on business and pay in cash, it may be worth keeping a cash book.
How to settle travel expenses with your clients
If you undertake a trip on behalf of a client, you can charge your clients the expenses associated with it. However, it is important that you discuss this with your client in advance. If the client agrees to cover the costs incurred, you must decide on a suitable billing method. There are three variants for this:
- The total expenses for the trip are calculated in advance and included in the price. It is important here to list the additional costs transparently and to justify them to the client. Set the costs on a rather generous basis so that in the end all additional expenses are covered and you do not have to renegotiate. This may seem more expensive in the end, but it also means a lot less paperwork. This variant works best when the travel costs are manageable.
- Bill the expenses at the end (sales tax included) or;
- Have the customer pay the travel expenses individually. Freelancers first list the expenses in their accounting and then reset them to zero after being reimbursed by the client
Remember, the only way to benefit from tax privileges is to comprehensively record and document all of your travel expenses. Do you travel often as a freelancer? If so, we hope this article was helpful!