It’s that time of year, though if you’re reading this column for advice, you’d better get hopping. The deadline looms. It often amazes me how scary some people find taxes. Granted, I’m not normal. I started filing my own separate return after I’d finished training as a lawyer, which requires a class in taxation, so I was a little overprepared to do my 1040EZ. Nowadays, I sometimes do my taxes and I sometimes have them done, but it’s *very* important that you know how to do them yourself. Many a time I’ve seen people rave about how great their tax prep professional is because “he just gave us a bunch of worksheets to fill out and then he was done.” If you aren’t laughing now, I hope you will be by the end of this post. So lets start with the basics.
When do you pay your taxes?
If you are making a substantial income from writing, you need to be paying your estimated taxes to the IRS. The specific cutoff is that if you are expected to owe more than $1000 come tax time, you need to have paid that in advance. Here is the page where the IRS walks you through how to calculate your estimated taxes and when to pay them. It includes links to the forms you’ll use, and this system applies to anyone self employed, unless they’ve incorporated themselves. Incorporation is a whole other topic, and if anyone wants me to discuss it, just ask in the comments below.
Paying estimated taxes is essentially the same as employers withholding part of your paycheck and sending it to the IRS. Then, by April 15th every year, you file your tax return where you calculate how much you actually owed, and either pay the difference or receive a refund.
What kinds of tax documents will you need to report your income on your return?
Again, we’re staying basic here. Most of you will know that the document you get to report your income from places like Amazon.com, Smashwords, etc. is a 1099. Anyone who’s ever worked as a contractor knows the 1099 form. It’s a piece of paper on which the company who paid you tells the IRS how much they paid you, and you enter that amount as income on your tax return and file the 1099 with the return.
Now let’s talk about the other kind of document you sometimes get for writing income:
No document. That’s right, a significant portion of your income sometimes will have no documentation from whomever paid you. Writers who sell a lot of short stories to various markets deal with this all the time. They get the money via check or PayPal and that’s it. When you get no document, you need to keep track of the amounts you receive yourself, and this can take a bit of work, especially if you receive a lot of small payments. You will need this in order to properly fill out your tax return.
Schedule C, learn to love it.
All your miscellaneous income, of any kind, you report on the Schedule C of your tax return, assuming you file a 1040. If you file a 1040EZ, then you’re just taking the standard deduction and this doesn’t apply. Income you need to report on the Schedule C includes income you don’t have 1099’s for. Now there are a lot of myths out there about what you “don’t have to pay taxes on,” and they’re all myths. Cash payments are taxable. They’re just hard to track so you likely won’t be caught dodging your taxes. Barter is also taxable – and there’s a very persistent myth that it’s not. If you get paid in something other than cash, the cash value is taxable. Again, though, this is very hard to track. Just let’s be clear, in these situations you are legally obligated to pay the tax, even though many people don’t pay and very few people ever get caught for it. (If you have a rant against taxation you’d like to post in comments, may I kindly redirect you to your nearest political party or lawmaker, as I’m neither and ranting here won’t really do much on that score.)
You will also want to report your expenses with your writing business, and here’s where things get interesting.
What can you deduct as writing expenses?
People like to have a field day with deductions, sometimes, i.e. buying jet skis and slapping an add for their company on the side and counting them as a deduction. Writers can get pretty creative too, but bear in mind that the IRS has very little sense of humor here. What they’re on the lookout for is people calling their hobbies businesses and using them to shelter income. Filing a return is you stating, under oath to the US government that while engaging in a business, this is what you made and this is what you owe, so do think twice before deducting all your groceries as “food in your workplace cafeteria.”
When in doubt, read the IRS’s instructions here.
Some people skip doing deductions altogether, reasoning that they write on a computer they would own anyway, print on a printer they would own anyway, and thus don’t really have anything, but it’s worth taking a second look. Did you pay someone to make you a cover? Deduct it. Did you hire a blog tour operator? Also a straightforward deduction. Did you travel somewhere to give a reading or signing? To go to a convention? Even if you’re the kind of person who would go to conventions anyway, if you went as a guest and as a writer, it’s deductible.
Another gray area worth a second look is research expenses. Now, ideally you take a trip to where your book is set, interview people in who know things you need to know for your plot, and then the resulting book earns more than what you spent. Sometimes, though, you’ll do a side trip while on your family vacation, or you’ll call an expert who’s also a friend and end up chatting about a mix of topics. Often your book earns less than what you expended, and you don’t want the IRS to think you’re dodging taxes by calling your writing hobby employment. You always have to make a judgment call, but it’s worth taking time to tally up things like fees to get copies of documents or fares to go on an informational tour. These can be pretty clear cut and easily pass muster on the Schedule C.
In other words, even if you consider yourself a hobbyist, if you’re making income and you spend money that you wouldn’t have spent but for that book you wrote, you can deduct it. Don’t sell yourself short.
Don’t be afraid of tax forms
The 1040 can be filled out by just about anyone. As intimidating as it may look, it is made to be filled out by hand. The IRS provides a series of worksheets in order for you to calculate your income. You then plug the answers to the worksheets into your 1040. Even easier is to use software like TurboTax, which does the same thing, only faster. I know H&R Block is running a huge ad campaign about the $1 billion dollars that people who did their own taxes didn’t claim, but be sensible here. If your tax professional hands you a bunch of worksheets and makes your return based on those, guess what? You just paid someone to take your answers and plug them in the corresponding spots on the return. It’s certainly worth letting H&R Block review your return for free this year; they only charge you if they get you money. Don’t let this kind of ad campaign though, or general prevailing attitudes drive a wedge between you and management of your money. Even if you hire someone, make sure that you honestly feel you could do it yourself. Otherwise, you don’t know if you’re being ripped off.
If you have questions, feel free to ask them below!
I’d be interested to read your thoughts about incorporating as a business. A friend of mine who also works as a full-time freelance writer said he had heard that incorporating as a business and then paying some of his money to himself as the owner in the form of dividends could avoid some of the self-employment tax issues. It sounds more complicated than I’d like, but on the other hand, a way to legally reduce one’s tax burden is always interesting.
I’ve always thought that the hardest part of taxes was keeping track of my expenses and figuring out what counts in what category. It’s never made sense to me to pay an accountant to file my taxes, because I figured I’d still be doing the hardest part myself.
Some particular headaches/questions:
– I work both as an informational writer/editor under contract to various clients, and also as a creative writer. I’ve wondered if there are any issues with me treating these as a single consolidated business for tax purposes (i.e., filling out a single Schedule C that includes all income and expenses from both aspects of what I do). Honestly, I’ve been surprised at how much overlap there is between the two (e.g., creative contacts that wind up presenting informational writing opportunities), and I haven’t seen any rules in this area. Is there anything I should be looking at related to this?
– You mentioned 1099 forms. There’s a minimum amount you have to make in order for your employer to be required to send you a 1099-MISC form, if you’re doing contract work. I don’t know if that applies to publication royalties. Yet another reason why it’s important to track your own income.
– Computers and related hardware: as best I can tell, you have to (a) amortize your cost over a period of years specified by the IRS, and (b) find a way of figuring out what percent of your use is business. My wife informed me years ago that the time spent calculating all this was not worth whatever reduction of taxes it might bring.
– Similarly, we’ve never felt comfortable doing the whole deducting-office-space thing, simply because no part of my home is dedicated solely to business purposes. Everything is multi-use.
– Finally, business lunches. My recent reading of the law in this area suggests that I can count half the cost of these, but only (a) if I’m more than 100 miles away from my home traveling on a work-related trip (in which case it counts as a travel expense), or (b) if I pay the cost of someone else as part of a business lunch (in which case it counts as an entertainment expense). In other words, a lunch where I go out with members of my writing group but we all pay for our own meals doesn’t count. Does that sound right to you?
And by the way, I acknowledge that you are not giving me legal advice, etc. I’m simply interested in your thoughts.
Hi Jonathan,
A lot of those questions, I’d just send you on to the IRS site to answer. I don’t ever deduct meals, so I’ve never looked into that. The one question you have that is very easy to answer is that you can of course combine your two types of writing as one business. Businesses are not required to do just one thing. Look at Anheuser Busch (beer, show Clydesdales, and marine parks) or Coors (beer and laboratory porcelain).
To deduct items, it really is easiest if you have equipment/space solely dedicated to your business. For this reason I don’t deduct things like my computer, but one of my formatters recently bought a computer specifically for formatting, so that’s a clear deduction. I only deducted office space when I had a home office, used only for work. I don’t recall having to amortize the cost of my computer and such when I was a lawyer, but I may misremember or the rules might have changed. I always associate amortization with convenience, it’s something accountants can do to achieve a certain tax outcome, but I was always under the impression that you could expense it outright. That is a question for an accountant or a tax attorney, though.
What your friend is doing for incorporation is a little bit complicated, and not the best place to start a discussion on corporations. If you incorporate, I strongly suggest doing so in a form that is tax invisible. The easiest of these is the LLC – that’s what I have for my formatting business. That way you have the limited liability of a company but you only pay taxes on your income once. A regular corporation pays taxes when it earns money, and then you pay again when you pay it out to yourself. Using a corporation to convert income into dividends is likely only useful if you make good money at your business. Most self employed people and most writers don’t make enough to incur that much of a tax burden.
I’m now a full-time freelancer and have all my business income/expenses go through one LLC corporation (with an election to file as an S Corp), even though my activities are all over the board in the broad area of writing, editing, and publishing. I estimate I save an extra $700 on every $10,000 of profit, through the corporation structure. Also, I paid an accountant to set it up and do the first year of bookkeeping and tax returns, and then I’ll see if I can handle it from there with TurboTax. Technically, I’m now an employee of Zarahemla Books LLC (I just used that name because all the banking, licenses, etc. were already set up), which pays me like any employer and does payroll with the government like any other business (my accountant handles all that).
I simply deduct half of expenses for things like cell phone, computer equipment, Internet, etc. It seems reasonable that I use about half for work, half for personal. And I just deduct the cost of computers when incurred. I think you can do that, under a certain amount.
I deduct my own lunches when I am meeting with other business contacts (and yeah, you put in the full amount, but the IRS only lets you deduct half). If I pay for someone else’s lunch, I count that as paying them a professional fee and deduct it in full (that might be sketchy, but it hardly ever happens anyway).
I deduct a small business office of about 50 square feet. It’s the portion of a room where I always work. When I’m not in there, maybe a kid occasionally sits there, and I think the dog sleeps there sometimes at night. But I use it all day every day for business; I almost never sit there for leisure. And now the IRS has a standard home office deduction so you don’t have to keep records, which I understand used to be a big burden with home offices.
Another really important thing is mileage. I think I got over $1,500 in deductions last year for business mileage. I count driving to a business lunch, driving to the bank to deposit business checks, office supply store, airport, client meetings, research, classes I occasionally teach, everything I can. I use Google Maps to find out the exact mileage I drive and keep a detailed spreadsheet. Worth it.
I recommend the accounting services of http://mazumaaccounting.com/. They’re based in Draper, Utah, but you never have to meet them face to face and they have nationwide clients. They do everything via mail, email, online, and phone. Good customer service, good interface, good follow up. I paid them to set up my corporation, and like I said I’m paying them for 2014 bookkeeping and tax returns. My new corporate structure saves me way more in taxes than I’m paying for their accounting services, because yeah, as a corporation, half your income is regular taxable but half is dividend that avoids the 15% self-employment tax. That’s huge if you’re making $50,000 or $75,000 (on $75,000, that saves you over $5,000 a year in self-employment tax). But I can save another $1,200 a year by taking back the bookkeeping and tax return chores after they show me how to do it this whole year. (Yeah, it’s a flat $100 monthly fee, which includes the bookkeeping, the payroll, and personal and corporate annual tax returns, if you pay the monthly fee all year.) To set up my corporation with the state and feds, including as an employer, they charged me $250.
That’s my story, anyway.
Yeah, this is all useful once you’re making real money and supporting yourself, and really the best advice here is to get professional help. You should always understand the process, and have a handle on the concepts, but once you’re making tens of thousands of dollars, you want trained professionals handling the details.
I think enough benefits to get an accountant and set up a corporation start kicking in at about $20,000 annual profit. At that point, you save $1,400 a year on taxes, which more than covers the accountant fees. And like I said, once you have an accountant set it up and do it for a year, so you see how the corporation tax returns work and everything, I think you could take it back and do it yourself on TurboTax.
I make most of my freelance income from corporate work, so even if I deduct more expenses on the creative side than I make, the corporate side absorbs it, so overall I still look like a legitimate earning business.
Thanks, Emily. I’m saving this for future reference.