Welcome to the world of the independent contractor.
You have all the freedom to set your own hours, regulate the flow of work that you take in and be your own boss. But with this freedom comes additional responsibility.
As a writer, you’re now your own HR, payroll, accounting, marketing and IT department.
Writer’s taxes is a very important money management role to embrace as a freelancer.
Let’s explore what you need to know.
Self Employment Tax
As an employee, employers don’t just offer you benefits. They pay half of your medicare and social security tax.
The rest is withheld from your paycheck.
But when you’re self-employed, you’re your own employer. No one helps you pay part of the bill. Plus you’ll owe income tax.
This can catch some freelance writers off guard. Your taxes will be as much as 1/3 higher than your office-bound friends’.
But don’t dismay. You also have deductions, credits and depreciation that you can claim to offset this.
The Hobby-Loss Rule
You work part time at as a grocery clerk. And you pick up articles to write from time to time. It helps you pay for the unexpected expenses. But most of the time, your grocery job pays the bills.
Is writing a job or a hobby?
It’s very important to know the difference.
A job is something that you do to try to make a living. Even if that income is very small at the start, if your goal is to make it a profitable business, then it’s a job.
If you don’t really need the money, work when it’s convenient or only do it because you love writing, it’s a hobby.
If it’s a hobby, then you can only deduct your business expenses from the income that you earned. If those expenses take the income down to 0, you can’t deduct anymore.
If it’s a job, then you can take a “loss”. That’s negative income. You spent more than you made.
Commonly Over-Looked Deductions For Writers
We can’t possibly cover all the deductions here, so here’s a list of commonly overlooked deductions that you need to know about:
- Depreciation – The declining value of a large asset like a computer
- Home office – The space in your home that you use exclusively for work
- Depreciation of your home – You can also deduct a portion of the value of your home
If any item is used for both personal and business, you can only deduct a percentage based on the amount of business use.
Commonly Mis-Claimed Deductions
- You can only claim a phone for your business if you have two phones or lines.
- Travel & Food must be related to the business, like meeting with a client. Not your daily lunch.
- Lounge outside while working? That doesn’t mean you can claim landscaping, pool chemicals or a new privacy fence. Sorry!
- You must subtract the value of your land before claiming home depreciation. Land, theoretically, doesn’t depreciate.
Quarterly Tax Payments
If you’re making money as a writer, then you need to pay quarterly payments to the IRS on April 15, June 15, Sept 15, and Jan 15.
They’ll give you a pass the first year if your income isn’t steady yet. But after that, expect penalties. You can pay the IRS online.
Doing Writer’s Taxes
Invest a little time to learn about taxes. It will help you pay what you owe and avoid surprises down the road.
Would you add any quick tips for writers doing taxes? Comment below.