Once you’ve set your goal of getting paid to write, you’re ready to report that income to the IRS. But unless you understand the tax laws that apply to freelance writers, you could be giving the government more of that money than necessary. Here are six things every freelance writer should know before filing a tax return.
1 – Who can claim deed income as business income
Occasional income from writing, according to current IRS rules, does not put you in the business of being a writer. At tax time, the only writers who can take full advantage of business deductions are those who actively market their writing for a profit.
That’s because IRS rules put creative activities, like writing, on the hobby classification. This means that it will be up to the writer to prove that he or she is in the business writing, if that tax return ever gets audited. If you don’t, you could end up paying tax penalties.
Tracking income and expenses when writing income is the same whether you’re reporting hobby or business income. However, hobby income is reported under miscellaneous income on the 1040 tax return where expense deductions are limited, rather than the less restrictive Schedule C.
2 – What is needed to obtain the Home Office Deduction
If you use one or more rooms in your home exclusively for your writing business, you may be able to deduct a portion of your household and household operating expenses. This includes a percentage of your rent or mortgage interest and property taxes, home insurance, utilities, maintenance and repairs. Any item used 100% by the company can be spent 100%. Shared items are deducted pro rata, based on home office vs. square footage of the entire house.
3 – When to cancel research costs
A writer can deduct travel and research expenses the same year that a publisher issues a signed contract accepting the manuscript. If that contract is canceled and he is unable to sell the manuscript elsewhere, those expenses are deducted when he leaves the project. If he uses this research elsewhere, perhaps by changing the slant of his manuscript, those expenses will not be deductible until this final manuscript is either accepted for publication or abandoned.
4 – Where the royalty income goes on your tax return
Although there is a specific place on the Schedule E tax form to report royalty income, someone in the writing business must use the Schedule C tax form to report their royalty income. This allows you to take full advantage of all deductible business expenses incurred while generating that royalty income.
5 – Why freelance writers have to pay self-employment taxes
Anyone who is self-employed is responsible for paying Medicare and Social Security taxes on their net income. This is true even if you are reporting your writing income as hobby income. After deducting all allowable business expenses, you will need to enter your net business income on Schedule SE to calculate the tax due. If your total net income from self-employment is less than $425, you will not owe any self-employment tax.
6 – How to show that you are in the Writing Business
To show the IRS that you are in the writing business, and not just dabbling in a hobby, a writer should keep a daily business journal. Entries should include all marketing efforts, sales calls, manuscript submissions, time spent writing, and events or promotions attended to encourage sales of your written materials.
Proper record keeping also shows the IRS that you are operating as a business. According to the IRS, a business owner must maintain a separate bank account for business income and expenses, have a calendar in the car to keep track of all business mileage, and can produce organized business records that Document income and expenses if an audit is requested.