If you started a recruiting, HR consulting or staffing firm this year, you probably spent money before your first placement fee arrived. Job boards, software, a website, legal fees and a lot of small subscriptions add up. The good news is that most of it is deductible. The catch is that how and when you deduct it depends on a few rules, and on whether you kept the records.
This guide covers the questions new firm owners ask us most. It is general information, not tax advice for your situation.
Can I deduct what I spent before I had any revenue?
Yes, with a rule to know. Costs you pay before your business is open for business are treated as startup costs. In your first year you can deduct up to $5,000 of startup costs, and any remainder is spread over 15 years. The $5,000 amount shrinks dollar for dollar once your total startup costs pass $50,000.
Costs you pay after you are open, such as monthly software and sourcing tools, are ordinary business expenses and are deducted in full in the year you pay them. Pinning down your start date therefore matters. It decides which bucket each expense falls into.
What counts as a deductible expense for a recruiting or staffing firm?
Expenses that are ordinary and necessary for your business usually qualify. For a new firm, that commonly includes:
- Job board and candidate-sourcing subscriptions
- Applicant tracking, CRM and other recruiting software
- Website, domain, email and marketing costs
- Legal, formation and licensing fees
- Business insurance, such as general liability or professional liability
- Accounting and bookkeeping fees
- Professional memberships, training and certifications
- The business share of your phone and internet
- Business travel and client meetings, with meals generally limited to 50 percent
I paid for things on my personal card before the business account existed. Do those count?
They can. Expenses you paid personally for the business are still business expenses, as long as you can show what they were for. Download the card and bank statements and the electronic receipts now, before they are hard to find. Platform fees for tools like Indeed are a common example. We separate these from personal spending and record them in the business books.
Open a dedicated business bank account if you have not. It makes everything above easier, and it keeps your personal and business finances clearly separate.
What about a computer, a phone or office furniture?
Many small purchases can be deducted in full right away under the IRS de minimis safe harbor, which generally covers items costing $2,500 or less per invoice or item. Larger purchases may be deducted through depreciation or a first-year deduction. Which route is best depends on your income this year and next, which is why we look at the full picture before deciding.
Can I deduct a home office?
If you use part of your home regularly and exclusively for your business, you may qualify. There is a simplified method based on square footage and a regular method based on actual costs. A desk in the corner of a shared room usually does not qualify, so be honest about how the space is used.
How are placement and direct-hire fees taxed?
Placement fees are business income. If you are a single-member LLC taxed as a sole proprietor, the income and expenses go on Schedule C of your personal return, and the profit is subject to self-employment tax as well as income tax. Because no one withholds tax from a placement fee, you may need to make quarterly estimated payments. A fee that arrives late in the year can change your tax picture quickly, so plan before it lands.
If you only received a first check in the fourth quarter, you may be able to avoid a penalty by meeting one of the safe harbor rules for estimated payments. We check this with every new client.
Should I pay recruiters and sourcers as contractors or employees?
This is one of the most expensive mistakes a growing firm can make. If you control when, how and with what tools someone works, the IRS may treat them as an employee even if you call them a contractor. Misclassification can lead to back payroll taxes and penalties. Before you bring anyone on, decide which relationship fits, and track what you pay each contractor so the year-end forms are simple.
When does an S-corp make sense?
Usually when your profit is steady enough that the self-employment tax savings outweigh the added cost of running payroll and filing a separate business return. For a first-year firm with modest profit, it is often too early. We revisit the question each quarter as placements come in.
What should I do this month?
- Write down the date you started operating, since it decides how costs are treated.
- Download bank and card statements for every business expense you have paid since you began, including personal cards.
- Open a business account if you do not have one, and stop mixing personal spending into it.
- Estimate your income for the year and ask whether estimated payments are due.
- Decide how you will pay anyone who helps you.
If you run an HR, recruiting or staffing firm and want a CPA who already works with firms like yours, see our page on accounting for HR, staffing and recruiting firms, or book a free 30-minute discovery call.
This article is general information and is not tax or legal advice. Rules change and depend on your facts, so confirm your situation with a qualified CPA.