To all independent freelance writers, tax time may strike fear, or certainly dread, in their hearts. Freelance writers generally organize as sole proprietorships instead of other types of business organizations. They may have worked for many employers during the tax year. Freelance writers are going to have 1099 forms from a variety of organizations and have written articles, blogs, and promotional marketing materials for a number of businesses. Freelance writers have some unique and important tax issues to deal with.
Business or Hobby?
Do you write as a business or a hobby? The general rule is that you can say your writing is business if your writing income is greater than your writing expenses. The Internal Revenue Service (IRS) says that you must make money from your writing every 3 out of 5 years, else it is a hobby. If you keep good records and run your business professionally, you may be able to convince the Internal Revenue Service (IRS) that you are a business even if you repeatedly show a loss.
If you are a freelance writer, you are self-employed. This means that you must use Schedule C to list your income and expenses from writing. Schedule C can actually serve as a guide. It lists exactly which expenses are deductible and it does come with an instruction sheet.
Income and Expenses
What about business income? You should include proceeds from the sale of articles, royalties from books you have sold, advances you have received and any "kill" fees you have received. These items are treated as ordinary income on Schedule C. Report royalties on Schedule C also even though Schedule E is generally used to report royalty income. If you've won any writing contests, those proceeds are not treated as business income. Instead, you report those proceeds in the "other income" category on Form 1040.
Now for expenses. First, the cardinal rule is that if you are going to claim something as an expense, have a receipt. Keep that receipt with your tax return. Expenses can only be deductible if they are necessary to the conduct of your writing business. Instead of juggling little pieces of paper all year, it is a good idea to scan your receipts into your computer and keep a file of your receipts for that tax year.
Some expenses are very straightforward. These are advertising expenses, office supplies and expenses, rent or lease payments if you rent an office, purchases and repairs of office equipment, legal and professional services, and bank service charges. Take a look at Schedule C and the instruction sheet for more detailed information. Schedule C is a good guidelines with regard to what expenses you can take as a small business.
Home-office Deduction
Home office deductions have become more user-friendly. If you want to take the home office deduction, you must use a portion of your home only for your writing business and it must be the principle place for this business. This can range from a desk in a corner of your living room to an entire room of your house.
There are expenses that benefit your entire house such as the mortgage payment and utility payments. They are indirect expenses and must be reduced by the percentage of your home used for business. There are also expenses that are specific to your businesses, such as a dedicated telephone line, and you can take that entire expense as a deduction. When you sell your home and you've taken a home office deduction, you must report any depreciation you took as a capital gain. Many freelancers do not take the home office deduction because of this recaptured depreciation.
If you work out of your home and pass the tests so you can take the home office deduction, then you can also take a travel deduction for anywhere you drive or fly to conduct your business, buy office supplies, or conduct interviews. Keep a mileage log including the date of the travel, miles traveled, the business reason for the travel and, at the end of the year, the total travel for business purposes. You can also deduct a limited amount of meal and entertainment expenses. The amounts you can take for meals and entertainment will vary from year to year. Consult the instruction sheet for Schedule C for current information.
Health Insurance
If you are self-employed and have no health insurance with any other organization, you may deduct 100% of the health insurance premium that you pay as long as your health insurance is not through some organization and has been established for your business. You report it on Line 29 of IRS Form 1040.
Do You Need an Accountant?
Last but not least, if you are not comfortable with preparing your taxes yourself, employ the services of an enrolled agent, tax attorney or Certified Public Accountant. The cost of their services may be worth your peace of mind.
Four Things to Remember
Overall, a freelance writer should remember four important things all year long. Keep good records for income and expenses. Use Schedule C as your guideline for what is deductible. Pay estimated taxes every quarter to avoid a big tax surprise in April with interest and penalties. Save all tax returns for a minimum of seven years including receipts and other documentation. In the event of an audit, you will be prepared.
