Sunday is April 15, but thanks to the Washington, D.C. observance of Emancipation Day on Monday, we all get an extension – that’s right, your taxes have to be mailed by midnight on the 17th. Hurray, we procrastinators all get one more weekend to finish this annual ritual.
Before I make another pot of coffee and get back to work on mine, I’ll share a few observations for the freelance writer (requisite disclaimer: I’m not an accountant, just a working chump spouting the tidbits I’ve picked up from others over the years). See the IRS's remarkably helpful website for more details!
Item one: are you a freelancer? (Known to the IRS as an Independent Contractor)
If you get paid for your work, but you don’t have a regular employer who withholds taxes from your checks, you are (this is not the official definition which involves whether or not you or your employer determine what you do, which could totally describe the publisher-freelancer relationship but doesn’t change the fact that we’re not employees . . .)
Income from your freelance work (checks from publishers, speaking/school visit fees, freelance editing jobs, etc.) should be reported on Schedule C. (You could just call it “other income” on Form 1040, but then you can’t deduct your expenses.) Schedule C enables you to subtract your writing-related expenses from your writing-related income. The net (profit or loss) gets added to any regular “wage” income you report on Schedule 1040. If you received more that $600 from any one publisher, they will have sent you a Form 1099, and copied the IRS with that information, but even if you didn’t, you’re responsible for reporting what you received. And, sadly, you’ll probably have to file Schedule SE (for Self-Employment) which hits you for the FICA/Medicare taxes that your employer would have withheld from your check and matched, if you’d been employed. (Note: income from royalties – which is generally for work you completed in previous years-can be reported on Schedule E instead of on Schedule C; that way you DON’T pay the employment taxes on it. But if your other writing income isn’t enough to offset your Schedule C expenses, put your royalties on Schedule C instead. Don’t report the same income in more than one place!)
This brings us to Item two: what is deductible?
Basically, you can deduct the costs of doing business from the income generated by the business. So supplies, like stamps for mailing manuscripts and paper and ink for printing them are writing expenses. Groceries are not. Many things in between those two may be, and in that area you will hear lots of opinions, most of which are worth about what you pay for them, so take these next points as general information, not gospel (did you know that the IRS does not guarantee the accuracy of answers you get from their help desk?)
Note that if you are submitting your work in the hope of getting paid but haven’t actually sold anything yet, you may still be in a position to file Schedule C, and you might want to, since it allows you to deduct your expenses. Make sure you have really good records of those expenses and evidence to prove that you have been trying to sell your work (a reason to save your rejection letters) because the IRS can ask you to prove that this was a business and not just a hobby. The difference is that the expenses of a hobby can offset income from a hobby but can’t be set against your other income (or your spouse’s, if you file jointly). If your business shows a loss, that amount will reduce the total income on which you pay. The rule of thumb is that your business/self-employment should show a profit 3 out of 5 years, but it’s always a good idea to have the records you need to prove your deductions, just in case.
Computers, cameras, and peripherals: These are all in a category the IRS calls “listed property.” You can deduct* the costs of these items from your business income if they are used exclusively in your business. But Uncle Sam knows full well that most of us use the same computers for playing Minesweeper and cameras for taking pictures of Susie’s birthday party that we use for writing Nat Geo articles. So when we claim these kinds of expenses we have to specify what percentage of the use of the items is for business – and whether or not we have written evidence of that use. Only the “business use” winds up being deductible. So if you bought a printer and about 60% of its work is printing your manuscripts and the other 40% is your kids’ homework, you can deduct 60% of its costs from your income. (*We used to depreciate things like computers over several years but that seldom makes sense anymore. If you just bought a new computer and your writing income is small this year, you could try it and see if it's worth it.)
Professional development and dues: The IRS recognizes as deductible the costs of education related to your work, as well as dues for professional organizations. So membership in SCBWI is deductible, as are Author’s Guild dues. Writer’s conferences, yes (but see “Travel,” below); “how to write children’s books” courses, maybe (the IRS does not allow you to deduct the cost of training for a new career). Annual market guides and subscriptions to writing magazines also fall into the “professional development” category. Membership in specialty organizations may also be deductible if they are related to your work, but this is one of those “don’t push your luck” categories: just because your picture book protagonist brings a fistful of flowers to grandma does not mean you can deduct either your membership in the Massachusetts Horticultural Society or your ticket to the Boston Flower & Garden Show. But if you write gardening advice for Women’s Day and Real Simple, you probably can and should. This leads us to:
Research: Costs for researching subjects you are writing about are deductible expenses. This includes books, magazines and fees for online subscriptions to sites like Highbeam and Newspaper Archive. Depending on what you write about, you may be able to justify memberships in the Museum of Science or your state Historical Society – always keeping in mind that if you are audited, you will need to prove how that expense was work-related. You will meet people who deduct all kinds of fun things and call it research. Don’t think the IRS doesn’t realize this. Which points to another interesting category of deductions:
Travel: Business-related travel is an area loaded with the potential for padding, and so it is one of those things that the IRS looks at closely. This does not mean you shouldn’t take those deductions if they are legitimate, it just means you need to keep good records. For writers business-related travel includes travel for research, travel to the above mentioned professional conferences and classes, and, potentially, travel for presentations such as school visits. Remember that you cannot deduct expenses someone else paid, so if you were reimbursed for your hotel room, that doesn’t count. And keep the “business use” rule from computers-and-cameras in mind: don’t try to deduct your whole family vacation on the basis of one stop at a museum related to your work-in-progress. (Your own entrance fee, however, is deductible.) In addition, even on a purely-for-business trip, only part of your “living” expenses are deductible: because you would have needed to eat even if you were at home, right? The IRS has a whole publication on the subject of travel expenses.
Another deduction you’ll hear writers debating is the Home Office deduction. This can be a very important consideration for those of us who work exclusively out of our houses, as it allows you to deduct a portion of such things as your phone and internet lines, your heating and lighting bills, and even your rent or mortgage and property taxes as business expenses. Again, you need to be able to prove that the square footage you’re designating as your “office” actually exists and is set-aside for work. And you need to keep track of some of these deductions because you can’t deduct them again when you’re calculating your basis when you sell the house. The Home Office Deduction (“Expenses for Business Use of your Home”) is reported separately from other deductions and, perhaps most importantly, is reportedly a huge flag that increases your chances of being audited. Nevertheless it is one you should consider, particularly if you are making a substantial income from your writing.
And that, finally, leads to a subject you’ll sometimes hear mentioned:
Health insurance: Health insurance premiums are NOT deductible on Schedule C. Since 2010, if you are not eligible for any group health insurance you can deduct your costs for health insurance (up to your net Schedule C profit) on your Form 1040, and you may be able to deduct the remainder on your Schedule A--remember, only a percentage of Schedule A deductions reduce your taxable income). (Incidentally, if you’re sensibly investing in a Self-employed retirement account, that gets deducted on the 1040 as well.) However, employee health benefits are a fully-deductible expense for corporations. For this reason many experts will recommend that freelancers incorporate (as what are known as 1120-S corporations, S for “Single Proprietor”). In that situation, all the income and expenses belong to the corporation, which then pays you, the employee, and provides you with a W-2 or a 1099. This is way too complicated a subject for this blog and it’s obviously too late to do this for 2011, but if you are paying for your own health insurance it is probably worth looking into.
Finally, since you don’t have an employer withholding taxes from your income and sending them along to Uncle Sam every quarter, he expects you to make those quarterly payments yourself, based on an estimate of your annual income. (If you wind up owing less than $1000 in self-employment taxes at the end of the year, you don’t have to pay quarterly estimates.) Don’t worry if you didn’t do this for 2011, the requirement only kicks in after the year after you owe more than $1000.
Head swimming? Most of the commercial tax-preparation software products can handle Schedule C and do a reasonable job. And the cost of the software is deductible.
Have a fun week!