According to Uncle Sam, you must report—and pay taxes on—any income you receive. When you operate as a business, not a hobby, you're entitled to deduct legitimate business expenses, reducing your tax burden at year's end. If you’re writing with the intention of getting paid for your work (and I hope you are), you have a profit motive in mind. You don’t have to be freelancing fulltime nor writing solely for the bucks to have a profit motive—the fact that you get some kind of psychic reward from your work doesn’t count against you. Going for the green is a factor the government considers when deciding whether you’re a legitimate business.
In fact, having a profit motive (and treating your freelance career like you have one) is more important than actually making a profit to the IRS. In other words, ending up in the red doesn’t mean your deductions will be disallowed. However, if you don't make a profit and you're audited, the burden will be on you to prove that you're conducting a business, not pursuing a hobby. So, what can you deduct?
According to the IRS, all "ordinary, necessary, and reasonable" expenses that relate to trying to make a profit in your business. For freelancers, that typically includes:
- PC or Mac used for business;
- Software/programs used for business;
- Office supplies (i.e. paper, business cards, pens, envelopes, and the ubiquitous Post-Its);
- Phone line used exclusively for business (your first or home line is not deductible);
- Membership fees for professional organizations;
- Postage and mailing expenses;
- Internet access; and
- Travel expenses related to business.
You may also be able to take a home office deduction if you use a section of your home solely and exclusively as your place of business. Having a home office still allows you to work in other locations—say at Caribou Coffee—but you most only use your home office for your writing work. Then you can take a percentage of your rent or mortgage interest and utilities as an expense at the end of the year as well.
Even if you're making little money, it's smart to keep track of your writing-related expenses and maintain receipts for them. Once you do start collecting nice fat checks, those receipts can help reduce your tax liability. Keeping track of them helps supports the fact that you're in the writing business, not a hobbyist, should you get audited. And if any questions arise about deductions, you’ll have proof of what you spent, and when, and why.
You may want to talk to a tax professional about how to set up a record-keeping system. Just remember it needn’t be anything fancy—I keep my expenses in a notebook and then store the receipts in a folder in my office. I don’t necessarily need a receipt for $5 worth of mailing expenses, but if I ever get audited, I should have no problem backing up my deductions.
And remember, you've got two weeks until your 2010 taxes are due, on Monday, April 18, 2011. I hope that 2010 was a great year for you and that 2011 is even better!
Very helpful post, Kelly. Along those tax lines, how much of your income do you set aside to pay your taxes with at tax time? I'm having a hard time determining what percentage I need to set aside and would love to know how you determine that number. Thanks!ReplyDelete
My first year, about 35% which was more than enough, considering biz expenses, etc. Since then, I pay quarterly, which is based on what I made the previous year. Hope this helps! :)ReplyDelete
I highly recommend visiting a local Small Business Administration office (or your local office's online website). The federal taxes are usually pretty straight forward, but depending on the state you are operating in, the local taxes can be killer! I purposely do not have a home office to deduct on my federal taxes because my state (SC) wants 10% of the depreciated cost of every furnishing and piece of equipment I use in my business. For me, this wasn't worth it tax-wise since my husband is military and we file jointly. SBA offers great resources of local tax laws for all small business owners, including freelancers. I'd also suggest you get an EIN as soon as possible, so that if you are writing online, you can submit the EIN in lieu of your social security number for a 1099 MISC form.ReplyDelete
Elizabeth, thank you so much for your thoughtful and informative post. Excellent suggestions.ReplyDelete