UPDATE: You can now buy Andrew Stern’s ebook Z Art of Taxes to answer all your freelance tax questions! Meanwhile, check out these free tips below:
Every year when it’s time to do my taxes, I pull out my bag of receipts (groan) and open an new Excel spreadsheet (double groan). First I sort all my receipts according to categories: dining, office expenses, supplies, advertising, etc., and then I list those categories in my spreadsheet and start punching in the numbers. It’s not a fun time of year, and many of you may be going through this right now.
For those of you working as freelance writers, editors, web designers, etc., tax practitioner Andrew Stern in San Francisco has graciously offered to answer (by e-mail) some of the questions that plague me each time I sit down to do my taxes. His answers are brief, but extremely helpful:
Writerland: As a freelance writer/editor, can I deduct my cell phone bill?
Stern: It’s problematic as it is very hard to determine what % is for business, but everybody does.
Writerland: Do I have to keep a log to show exactly which calls are for which expenses?
Stern: Everyone estimates, but best is to have two phone lines, one business, one personal.
Writerland: Can I deduct home office rent?
Stern: Absolutely yes—according to total living space square footage and business use square footage or number of total rooms and business rooms. (Writerland note: You deduct the percentage of your rent that is equal to the percentage of your square footage used for business.)
Writerland: Food/drinks I buy while I’m writing at Starbucks?
Stern: No, food/meals only deductible when conducting business meetings.
Writerland: Dining bills? What if I buy my lunch and eat it in my office?
Stern: No, see above, and anything that is deductible you must have verification.
Writerland: What kind of verification?
Stern: Receipt, logbook entry showing who was there, who they are, what was discussed.
Writerland: Is a meeting between two writers to discuss each other’s work (like a writer’s group meeting) considered a business meeting?
Stern: No, not ordinary and necessary; two writers could talk anytime. Best reason for a business meeting—pursuit of revenue—clients, potential clients, referrals, potential referrals.
Writerland: Clothing purchased for work?
Stern: Absolutely not, clothing is deductible only if it CANNOT be worn anywhere else, i.e. uniforms.
Writerland: Medical expenses?
Stern: Medical expenses are deductible only to the extent that they EXCEED 7.5% of your adjusted gross income (bottom number first page Form 1040) and if you can itemize your deductions on Schedule A, unless you are self-employed and have a health savings account, then you can deduct up to 43K per year by using the HSA as a conduit.
Writerland: Are there any limits on business gifts? (Wine, books, etc.)
Stern: Yes, one can gift $25 per person per year for business.
Writerland: Is parking deductible? If I have to pay for a garage to park near the office I rent to write, is that deductible?
Stern: Commuting expenses are not deductible, including parking.
Writerland: Are transportation/parking expenses to interview someone deductible?
Stern: Yes.
Writerland: What is the minimum I need to earn as a freelance writer before I should itemize my expenses?
Stern: No minimum, when you are in business you report income and deduct all expenses that are “ordinary and necessary” to your profession.
Writerland: What if I have income from various sources? Say I write articles and sell knit hats. Can I deduct my writing expenses from my knit hat income?
Stern: Indirectly yes, because your tax return eventually is one big pot, but directly no, as you have to separate business activities, which cannot be combined together.
Writerland: What if my expenses are for writing a book I haven’t sold yet? How/when can I deduct those expenses?
Stern: You are supposed to capitalize these expenses as a production cost, then they are deductible over a 3-year life by electing the safe harbor, 50% year 1, 25% years 2 & 3.
Writerland: Do all freelance writers need to pay quarterly taxes?
Stern: If they have profits, yes, otherwise they will be charged an underpayment penalty.
Writerland: When should a writer form an S-corp rather than filing a Schedule C?
Stern: When their profits (not gross) consistently exceed $150K to $200K, otherwise being incorporated costs more than it saves.
Writerland: What records or receipts do writers forget to keep track of?
Stern: This is not exclusive territory for writers, all taxpayers have problems with record-keeping.
Writerland: What can writers do ahead of time in order to prepare to do next year’s taxes?
Stern: Track your entire financial life using a personal finance program like Quicken, use bank account or charge cards to pay for everything, get receipts for everything.
Writerland: Is there a book, website, or tax software program you would recommend for writers to prepare for tax time?
Stern: Quicken, but no book, it hasn’t been written. I want to write a book for self-employed artists. Who wants to be my ghost writer?
Writerland: Can I do my taxes on my own using tax software like TurboTax or TaxCut, or should I hire a CPA?
Stern: If self-employed, you are always better hiring an tax pro, but that is not necessarily a CPA. We are tax practitioners, not CPAs.
Writerland: How much does a tax pro typically charge for a freelance writer’s taxes?
Stern: $300 to $600.
Andrew Stern’s contact information is below if anyone is looking for a tax professional.
Andrew Stern/Stern & Associates
4630 Geary Blvd Ste 303
San Francisco CA 94118
Vox 415-668-3130
Fax 415-668-2450
Aww, I hope you feel better soon!
And this is a great post, I remember it from before (and bookmarked it back then).
Thanks. I sure am looking forward to the day when my income's high enough that I have to turn myself into a subchapter S corporation!
Thanks, Kristan! I can't believe I'm sick gain. I just got over it two weeks ago.
Travener – Me, too! But I do file a Schedule C, so I have to itemize all my receipts. Thank God I'm done for the year already.
So I can deduct the cost of the sweats I wear to write in? I sure can't wear them ANYWHERE else.
Thanks for all this good info.
About that virus. About a week after I was pretty much over the first Virus from Hell, it came back–for about three days. I sank into a pit of despair. But by the fourth day it was entirely gone and now, I'm actually well. It happens. Hang in there.
[…] This post was mentioned on Twitter by Josie Schmolke, Victoria Evans. Victoria Evans said: Writerland » Tax Help for Freelancers http://bit.ly/eNa8il […]
Anne – UGH! Yours came back, too! Although mine is very mild compared to the last month's. Mostly headaches and fatigue this time but the cough and congestion aren't nearly as bad. I think my kids and I are passing it back and forth. My son has it the worst right now. So glad to hear you are feeling better!
Great info! And very timely for me since I've been researching this. By the way, one thing I have learned as well is that writers can deduct BOOKS as an expense because it is our job to read and stay current with what's out there. I verified this with my agent and was beyond excited. If I had known being a writer meant buying books were tax deductible, I would've started this whole writing thing a long time ago, lol.
You mean like fiction that you read to stay current in your genre?
Hey Roni – ABSOLUTELY writers can deduct books and fees for attending conferences and subscriptions to Publisher's Lunch, etc. I also deduct my website fees (hosting and domain renewal), office rent, postage, editing services, classes, etc. Thanks for stopping by!
I too deduct all of this stuff. Now every time I buy a book on graphic design, it's doubly pleasurable because it's a tax deduction.
Hi, Meghan,
Sorry to hear that you are ailing again. I hope that your kids are feeling better too.
I have a question, but no worries if you don't the answer. Do you know if you'll you be flagged if you are a highly unsuccessful freelancer who's expenses are greater than the income earned? And what if this sort of the thing has been going on for several years?
This is a question that has come up a few times and no one seems to have a direct answer!
Hmm. That's a good question, Eunice. This is the first year my expenses have been higher than my income. I think you're allowed to take a loss for three years before it's flagged, but I don't know whether that's affected by filing jointly with someone who is making a profit. Let me ask Andrew and get back to you!
Eunice, here is Andrew's answer to your question:
Despite the rumors and half-truths that float around out there, there is nothing in tax code that states you must show a profit. You could have a loss in business for many years in a row. BUT … you must be able to prove that it is a “for profit” activity if ever asked. See attached.
At audit, if you have not shown a profit for 3 out of the last 5 years, be prepared to defend the issue that you are engaged in a business for the purpose of realizing a profit. It definitely gets more difficult to prove this as the years pass by as you must have a reasonable expectation that you could have a profit in the given year.
If for example you had a business that had losses for 5 years in a row, and you were audited for the loss in year #6, and you did nothing different in year 6 to try to generate revenue than you had in the previous 5 years, how would you prove that you had a reasonable expectation that year #6 would be profitable?
And here is the "attached" definition of a For-Profit Endeavor:
Is Your Hobby a For-Profit Endeavor?
The Internal Revenue Service reminds taxpayers to follow appropriate guidelines when determining whether an activity is engaged in for profit, such as a business, or is engaged in as a hobby.
Internal Revenue Code 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule”.
You may need a clearer understanding of what constitutes an activity engaged in for profit and the tax implications of incorrectly treating hobby activities as activities engaged in for profit. This educational fact sheet provides information for determining if an activity qualifies as an activity engaged in for profit and what limitations apply if the activity was not engaged in for profit.
Is your hobby really an activity engaged in for profit?
In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business or for the production of income. Trade or business activities and activities engaged in for the production of income are activities engaged in for profit.
The following factors, although not all inclusive, may help you determine whether your activity is an activity engaged in for profit or hobby:
• Does the time and effort put into the activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge needed to carry on the activity as a successful business?
• Have you made a profit in similar activities in the past?
• Does the activity make a profit in some years?
• Do you expect to make a profit in the future from the appreciation of assets used in the activity?
An activity is presumed for profit if it makes a profit in at least three of the last five tax years, including the current year.
If an activity is not for profit, losses from the activity may not be used to offset other income. An activity produces a loss when related expenses exceed income. The limit on not-for-profit losses applies to individuals, partnerships, and S corporations.
Hi Meghan,
Do you know if if poetry contest reading fees are deductible? They are part of the expense of my generating income but don't seem to fit any category in the deduction list in Turbotax.
Thanks.
I would think yes, Pat. I am NO TAX EXPERT, but I file I Schedule C with my expenses outline in Parts II and V: Under Part II, I have advertising and legal and professional services, under Part V (Other Expenses) I have postage, books and trade dues, web hosting, gifts given, etc. I *think* poetry contest reading fees could go under either professional services or trade dues.
Great repost Meghan. This was very relevant to me this year as it was the first year I needed tax help. I saw a fantastic CPA who tripled my return. So glad I did!
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