How to Deduct Cell Phone Bill on Taxes
There are many tax deductions for independent contractors. A commonly-missed one is cell phone bills. There's a good reason why many freelancers and business owners forget to deduct their phone bill... Many time, contractors use their phone for personal use AND business use bundled together in one monthly bill. How to deduct cell phone bill on taxes is a mystery that we are here to solve.
What does a tax deduction mean?
Before you can decide whether or not your phone is a tax deduction, you need to know what the words “tax deduction” mean. Accounting lingo can be so confusing!
Simply put, a tax deduction is the same as a tax write-off for business expenses. Anything that you can deduct from your income to reduce your tax bill qualifies as a tax deduction.
As a self-employed freelancer or independent contractor, you have more tax deductions available to you because you can deduct business expenses that were incurred and not reimbursed. Whereas, for a traditional W-2 employee this is not possible. AIR FIVE!
Your cell phone bill is one such business expense that you normally use to carry on your day-to-day freelance operations. The great thing is that deducting your cell phone doesn’t require you to spend any extra money -- you would already be paying your cell phone bill anyway! Tax win-win.
Can I deduct 100% of my cell phone bill?
In most situations, your cell phone is only partially deductible because of personal use. However, if you purchase a separate mobile phone and cell phone plan for business use only, this would be 100% tax deductible.
For most freelancers or independent contractors, I do not recommend going this route because it would require you to spend hundreds of extra dollars per year, AKA less money in your pocket. However, getting a separate business cell phone could make sense to some people who see their business calls as a distraction from their personal lives.
How do I separate my phone bill from personal use and business use?
Good question! Your personal cell phone use cannot be a tax deduction. Therefore, you must prorate your cell phone bill to account personal usage.
However, most of the time your personal and business usage varies from week to week. That being said, the Internal Revenue Service (IRS) guidelines state that you must determine a methodology to divide the total cost between the business-related and personal parts. From there, you will only deduct the business parts as a tax deduction.
Cell Phone Deduction Example:
Let’s say I use my phone for business purposes from 9AM to 5PM on Monday through Friday, that’s 40/hours per week. Let’s say my normal waking hours are 8AM to 10PM (14/hours per day).
First, I will take the 14 waking hours per day and multiply it by 7 days per week. That equals 168 hours. Then, I will divide that by the 40 business hours per week (40/168). That gives me a percentage of about 24% business use, and 76% personal use.
If my phone bill is $100/month, I can take a tax deduction of $24/month (24% of $100) or $288/year.
This proration can also be applied to your internet (or Wifi) expense as well. Often, internet expense is another commonly forgotten tax deduction that can save you hundreds in taxes, while not costing you any extra money out of your pocket.
Can I deduct my family plan?
Yes, you can deduct the portion of your family plan cell phone costs that is business usage. The easiest way to determine this would be to obtain an itemized version of your monthly cell phone bill.
This will allow you to determine which charges are directly related to your cell phone, and remove the charges that are related to family members. From there, you can prorate the shared charges like sales taxes and fees amongst each family member.
After obtaining your individual cell phone cost, you will perform the same exercise from the example above where you prorate YOUR portion of the bill among personal and business usage.
However, keep in mind that you can only deduct cell phone expenses that you pay for. So if a family member is paying for your cell phone and you are NOT reimbursing them, you would not be able to take the tax deduction.
What documentation do I need?
Documentation is important to retain for every tax deduction you take. However, don’t over-think the documentation piece of things and let it scare you out of taking the deduction.
Your documentation should cover two things:
- Evidence of your monthly cell phone charge - your bill or bank statement should cover this.
- Documentation of your proration calculation.
In practice, a super simple way to gather this documentation is to take your cell phone bill, print it out, and write your proration calculation on the top. Make sure to digitize this document so you don’t have to retain the physical piece of paper.
Where do I take the deduction?
As a freelancer or independent contractor, the IRS classifies you as a sole proprietor or small business owner and you are required to add Form Schedule C to your tax return, Profit or Loss from Business.
Using this form, you will report all of your business’s income and any write-offs of business expenses, such as cell phone deductions, qualified rent, home office deduction, and more.
One of the most confusing parts of being a freelancer is doing your own taxes, so I recommend leaning on a tax filing software designed for freelancers to do the hard work for you. The right tax software will walk you through how to fill out Schedule C, so you don’t have to worry about whether or not you filled it out correctly.
You can consult with a tax expert or preparer if you are still unsure.
How to deduct cell phone bill on taxes doesn’t have to be difficult! With the help from this post and an expense tracking software, you can easily be prepared for tax-time while maximizing your tax savings.