Are Upwork Fees Tax Deductible for Self-Employed Individuals?
Understand how Upwork fees fit into your business expenses, how to track them, and what to consider when reporting them on your tax return.
Freelancers and self-employed professionals using Upwork often face service charges deducted from their earnings. Understanding how to deduct these costs on taxes is essential for maximizing deductions and reducing taxable income.
Tax rules allow certain business expenses to be deducted, but proper categorization and reporting ensure compliance with tax laws.
Classification Under Business Expenses
Upwork fees qualify as deductible business expenses because they meet the IRS definition of “ordinary and necessary” costs. An ordinary expense is common in a trade, while a necessary expense is helpful for business operations. Since Upwork charges fees on earnings, these costs fit both criteria and can be deducted from taxable income.
These deductions are typically reported on Schedule C (Form 1040) under “commissions and fees” or “contract labor,” depending on the freelancer’s work. A graphic designer earning all income through Upwork might list these fees under commissions and fees, while a consultant hiring subcontractors through the platform may categorize them under contract labor. Keeping classifications consistent across tax filings helps prevent discrepancies.
Other Upwork-related costs may also be deductible, including:
– Membership fees for premium plans
– Connects purchased to submit proposals
– Advertising or promotional expenses incurred through the platform
Since these expenses support business operations, they generally qualify as deductions.
Tracking and Organizing Costs
Accurate record-keeping ensures deductions are properly claimed and substantiated in case of an audit. Accounting software like QuickBooks Self-Employed or Wave automates expense tracking by linking to bank accounts or PayPal transactions, reducing the risk of missing deductions.
Separating business and personal finances simplifies tracking. A dedicated business bank account or credit card isolates Upwork-related costs, preventing personal expenses from being mistakenly deducted. The IRS requires clear documentation of business deductions, so maintaining separate accounts reinforces compliance.
Regularly reviewing financial statements helps freelancers identify spending patterns and adjust budgeting. If Upwork fees make up a significant portion of costs, adjusting pricing strategies or service offerings may improve profitability. Freelancers paying estimated quarterly taxes can also use these insights to project taxable income more accurately and avoid underpayment penalties.
Document Retention
Freelancers must keep records of Upwork-related expenses for at least three years from the date a tax return is filed. In cases involving substantial errors or omitted income, records may need to be kept for up to six years. Storing receipts, invoices, and transaction statements ensures compliance with IRS requirements.
Digital recordkeeping prevents loss or deterioration of financial documents. Cloud storage solutions like Google Drive, Dropbox, or OneDrive securely store expense records, while apps like Expensify or Dext automate receipt scanning and categorization. Keeping digital backups of Upwork fee statements and payment confirmations ensures records remain accessible if needed for verification.
Bank and PayPal statements serve as supplementary documentation. Since Upwork transactions often involve multiple financial intermediaries, maintaining a well-organized trail of deposits and withdrawals helps establish a clear connection between business income and expenses. A freelancer receiving payments through PayPal should retain both the PayPal transaction history and associated bank statements to verify business-related cash flow.
Reporting on Tax Returns
When filing taxes as a self-employed individual, Upwork fees should be reported on Schedule C (Form 1040) under the appropriate expense category. Proper classification reduces taxable income and ensures tax filings align with IRS expectations. Misclassifying or omitting business expenses can overstate taxable income, increasing tax liabilities.
Deducting these expenses also affects self-employment tax calculations. The Self-Employment Contributions Act (SECA) tax, which includes Social Security and Medicare taxes, is assessed on net earnings after business expenses are deducted. Lowering net income through legitimate deductions reduces the 15.3% self-employment tax liability. For freelancers earning substantial income through Upwork, careful expense management can significantly impact overall tax obligations.