How to Prepare for the Tax Consequences of Being a Self-Employed Writer
By Eric Taylor CPA, EA
[Note: This information is meant to provide you with a brief overview of how self-employed people are taxed and your responsibilities. You should always consult a tax professional as all situations are unique and laws change constantly.]
As a self-employed writer, you have responsibilities (or burdens) imposed on you by the Federal government. You are required to keep track of how much money you make and pay the correct amount of income tax — plus social security and Medicare tax (FICA) — on that income. (Depending on where you live, you might have state and local income taxes as well.)
So… how much are you going to owe? And how do you figure it all out? To start with, you’ve got to keep very good records of both your income as a writer and your expenses.
1. Keep track of your reportable income.
You pay taxes based on the net income you earn. Net income is your total income less your expenses. Anyone who pays you more than $600 in a calendar year is required to report it to the IRS (on a form 1099-misc). However, this does not relieve you of reporting all income earned — from writing fees, royalties, etc. — including amounts not reported to the IRS.
2. Keep track of your deductible expenses.
According to the IRS, deductible business expenses include “the ordinary and necessary expenditures directly connected with or pertaining to the taxpayer’s trade or business.” These requirements are extremely subjective and flexible. If you can provide a good argument, with documentation, you should be able to deduct most expenses. For writers, these typically include office supplies, research materials, telephone, Internet connection, and travel directly related to a job. Large, capital expenses, like a computer or office furniture, can be depreciated (deducted over 3-7 years) or deducted immediately, depending on which is more advantageous for you.
3. Make sure you can meet the IRS’s “profit motive” requirement.
When they first start out, many new businesses have more expenses than income. This is uncommon in the case of writers, since most of the “expense” of writing is your time and effort. However, you should be prepared to prove that your writing business is a “for-profit” activity, because if the IRS determines that it is not, your expenses could be disallowed or reduced.
These are the factors that the IRS will consider: Do you conduct your writing in a businesslike manner? Do you offer services to others? Do you have complete and accurate records? Do you depend on the writing income? How many submissions did you make? How much time do you spend writing? What is your expertise in the field? Do you have prior successes in writing for profit?
The more positive responses you have to these questions the better off you are — even if you are spending more than you earn. So keep detailed records of submissions, rejections, paid work, finished unsold copy, and anything else that will show you were acting in a logical businesslike manner.
4. Be prepared to pay your estimated taxes in advance.
Remember that it is up to you as a self-employed writer to pay your taxes on time, keep accurate records of your business activity, and report it properly. You must pay your estimated taxes for the year in advance, in four quarterly installments due in mid-April, mid-June, mid-September, and mid-January. When you file your taxes the following April, you reconcile what you paid in with what you actually owe.
The IRS will automatically provide you with payment vouchers and envelopes to pay your quarterly estimated taxes every year. But to get started, go to the IRS website — www.irs.gov — and download Form 1040-ES, along with instructions on how to calculate your payments. A good rule of thumb is to calculate 20% of your total income.
[Eric Taylor is a CPA and Enrolled Agent specializing in business taxation and business development. He is the author of Great Escape Publishing’s The Writer’s Tax Guide, which explains where you can save… what the IRS really needs to know… how to make the most of those deductions for travel, meals, entertainment, home office, and more.]
[Editor’s Note: Learn more about opportunities to profit from your travels (and even from your own home) in our free online newsletter The Right Way to Travel.]