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.
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.
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!
