(c) 1998 Mona Vanek
*Note, Changes continue to be made regarding writer's income taxes. Always review the most recent tax laws.
- Federal publications: http://www.irs.gov/businesses/index.html
- Forms, etc. are here: http://www.irs.gov/formspubs/index.html.
While tax laws are always changing, some things remain constant and I'll share what we learned in a week-long online forum as Len answered our tax questions.
Whether you're a beginning writer or a well established one, incorporated or not, doesn't make a difference. Assuming writers have a "trade or business" from writing, a writer is the business and the internal revenue code requires reporting all income relating to that trade or business.
- If we're operating as a sole proprietorship we normally report income and expenses on Schedule C. Business income includes gross income of less than $500 derived from any source, and net income of less than $400 from a Schedule C sole proprietorship business.
Play by the rules, but play smart. Don't overlook reporting any expenses associated with earning that income. The intent of any business is to make money - ie: earning income that is more than expenses.
- Instead of thinking you're giving the IRS "extra" income by reporting smaller fees we receive, remember that we are also "giving" the IRS extra income by "not" reporting all the expenses of earning those small fees.
- The IRS) is always concerned that someone is using filing as a sole proprietor to write off hobby expenses.
- They expect writers to do everything they can to prove it is a business
- There is a rule that if a writer has a loss in 3 out of 5 years in a business the IRS could consider the writer's work to be a hobby and not a business.
- Have business cards
- Have a separate bank account
- Register the business as a DBA (get the forms at a county courthouse or city hall)
- Have signed contracts with clients
Some of our team worried about being on the bench, so to speak, while occupied writing a book, leaves them showing losses for 10 years.
- In that case, our coach said that having excellent documentation can be critical.
There is a 3 year statute of limitations from the date of filing so the IRS can go back 3 years in the payer's tax records.
- Keep all records for 3 years.
- Penalties result from not keeping adequate records and for disregarding rules and regulations.
- Whether one writes and sells as an avocation -- a hobby, according to the IRS -- or as a business (justified by the criteria outlined) a writer must assume hobby or business income is taxable in the eyes of the IRS.
- Since our name is the name of the business, instead of using our social security number as the tax ID number, get a SS-4 Form (available from the IRS) to request a taxpayer ID number.
- When you make over $600 from one client the client sends you an earnings statement at the end of the year, and reports it to the IRS.
- Get Employer Identification Number (EIN) by filling out an application for form SS-4, and substitute that for your SSN.
- Give the publisher this taxpayer ID number.
Our coach advised that we play honestly. We don't need to know if our income was reported on a 1099 Form or not. Smaller publications don't necessarily ask for a SS or tax ID number, or send a tax statement to a writer.
- If we're not a corporation, there is a "de-minimus" rule that only payments made to the writer in excess of $600 need be reported to the writer and to the IRS on a 1099 Form.
Playing by the rules also means keeping copies of all the queries sent and all the rejections received to prove that we're working at being a freelancer, even if we're not making a major profit yet. It's also good for analyzing our game plan to make a profit from writing.
As long as we are earning year to year, there's no reason to show a profit motive, but keeping good records is a wise business practice.
If a writer is in a non-tax situation and is audited by the IRS, good records prove their motive is making money, not using writing as a tax dodge so,
- Print hard copies of e-mail queries, manuscripts and rejections or assignments
- Get telephone rejections confirmed in writing
- Save copies of tapes with voice mail editor rejections of our proposals
- Keep assignment letters from publishers
- For example: If the writer's conference we attend in New York, or the trip to Manhattan to meet with other writers and also to do some sight-seeing, has an agenda, is organized, documented, and is not sightseeing oriented, both are deductible. If we write an essay about it but the essay never sells, save the manuscript and the rejection slips, just as for any other writing.
At a minimum, writers want to meet with a Certified Public Accountant (CPA) for an hour just to understand what is deductible, what kind of records should be kept, etc., he counseled.
While we writers report what is ordinary and necessary to our business, it's not only where to put figures but how to put them that requires expert knowledge to get it right to the writer's best advantage.
Advising clients and helping them communicate with the preparer, is part of a tax expert's job.
- Schedule C is essential, but there are also depreciation forms, fixed assets accounting, royalty forms, and others.
- Self-employment tax, assuming they have income on Schedule C.
- FICA (Social Security for self employed) is reported on Schedule SE and represents roughly 13% of net income.
Special plays were laid out by our coach, like reinvesting our writing income into our business, by paying legitimate business expenses that are deductible; these result in our having less taxable income.
- For example, lets say we need money for training, etc., or we must loan money to our business from our personal checking. That's one example of why having a separate checking account for the business may make record keeping easier.
- Royalty payments, just like other business income, goes on Schedule C, but attach a note that the income is a royalty. Make copies of the royalty form and the checks, and attach them, too.
- When "paid in complimentary copies" as income (Example: I write reviews of CD-ROM programs and receive free CD-ROMs and manuals. OR: I edit a regional history for a historical society and they give me a copy of the $75 first edition) if reported, use wholesale value.
- If money is earned in December but not received until the following January, the income should not be include the income in this year's taxes even though the 1099 says it was earned. It's called constructive receipt -- if a writer receives the check the following January and it need not be report in the current year's tax. It goes in the next year's tax report.
As a business, estimated taxes must cover 90% of liability, based on last year's income. If the ultimate tax liability BEFORE withholding and estimated taxes is below $500 a writer need not pay any estimates during the year. If not, they are required to make estimated payments on a quarterly basis.
- For example, if our tax liabilities for 1998 amounted to $2000 and we had no withholding we had to have made sure that we made four equal estimates of $450 each.
- For example, lets say our 1997 tax liability before withholding and estimate was $5000 and we have $1000 withheld from W-2 income. In that case, to avoid any underpayment penalties we should have made estimates of $1000 each quarter -- the $5000 liability from 1997 less the $1000 we expect to be withheld in 1997 and the resulting amount divided by four.
Using a record keeping system (like QuickBooks) allows a writer to split checks into multiple categories when necessary.
- Example: I work as a freelance editor for a magazine and have expenses (long distance calls, copying, mailing, etc.) which the magazine reimburses me for, including my expenses and fee on the same check. I want the reimbursed expenses not to end up looking like income. I make up a category for reimbursable expenses and record them there.
- For instance, that's also how to report $10 paid by a charitable organization for writing a press release. Also report the deductions to offset that income separately in the expense portion of Schedule C on the 1040.
LG: Line 21,
"Other Income, can be used. Put our net amount on line 21. (Example -- if we have received $1,000 but the net after expenses is $300, put $300 on the line) and write a notation to tell them the difference is expenses to the hobby.
"The IRS provides various tax forms as an outline for tax reporting. We CAN add attachments to our tax return for anything necessary that isn't provided for in forms.
"Say we and our spouse file jointly and tax payments covers 90% of the joint tax liability. Even if the income from our business exceeds $500 annually, if our spouses' withholdings combined with yours are large enough to cover any tax liability and thus we receive a refund, we have no obligation to pay any estimated taxes.
"What we are doing in that case is giving the IRS an interest free loan that will be refunded via the overpayment.
"If we are getting large refunds year after year we should consider adjusting our withholding accordingly. Some people love getting a large refund, but we are giving uncle Sam an interest free loan and we aren't even able to sleep in the Lincoln bedroom."
Q. I am writing a book so I've been writing fewer articles this year. Can my expenses be carried over to another year when I will make more?
"This is a complex situation. In general we report the expenses associated with the book in the year incurred. However we can use the income forecasting method whereby we allocate the expenses over the number of years we expect the book to sell."
Goldberg advised staying away from this method because once used, a writer must use it from then on for books. He wasn't an expert in that area, though, and advise us to seek someone who specializes in that field.
- For example, if we incur $5000 worth of expenses this year and want to use the income forecasting method and expect the book to be sold over 2 years, we would offset $2500 of these expenses from prior years against the income earned from the book.
Goldberg provided many answers to vexing tax questions of concern to writers.
Using the knowledge gained from his answers makes it easier to approach a tax expert with the right information for tax preparation or to do taxes without incurring writer's block.