Note: this post was updated in late January of 2014 with new info from Carol. Happy tax season!
We freelance writers need to take advantage of all the possible tax deductions and make the best use of good tax management practices. Luckily, Carol Topp, a Certified Public Accountant and the author of Business Tips and Taxes for Writers, shares her
Best Freelance Writing Tax Reduction Tips
1. The business use of the home office deduction is simplified in 2013.
If you use a part of your home regularly and exclusively for business, you can deduct the expenses of running your home office. The deduction involves lots of calculations and record-keeping, but Congress and the IRS created a simpler option: the square feet of your home office x $5. You’ll see it on Line 30 of Schedule C.
This new method reduces the record keeping needed to calculate the home office deduction. In comparing the new method to the old, I found my deduction decreased by $32, but considering the time savings, I’m using the simpler method on my 2013 tax return. Taxpayers can still use the older, more complicated method, if they wish.
2. Use a separate checking account for your freelance writing business.
Why? It actually simplifies your life by keeping all your business transactions separate from your personal expenses. It’s less likely that you’ll forget a business expense if it is in a separate checking account instead of being mixed in with the grocery and cable bills.
3. Keep a mileage log for all your freelance writing activities.
I used to use a calendar and Google maps to create a spreadsheet as a mileage log. It worked well for several years, but this year I’m using an app on my iPhone. There are several including Trip Cubby, MileBug, and Track My Drive. Some offer features such as GPS tracking. Several apps are free, but most cost from $.99 to $4.99.
For a comparison of mileage apps visit http://appadvice.com/appguides/show/Mileage-Tracking-Apps-For-iPhone.
4. If you travel away from home, use the daily per diem rates for meals instead of your actual expenses.
The standard rate of $46/day for meals is set by the General Service Administration which has higher per diem rate for high-cost cities. On the day of traveling to and from home, you can only deduct 75% of the per diem rate, but it still adds up.
For a recent trip to Orlando (with a per diem rate for meals of $56/day) my per diem totaled $196, a lot higher than my actual expenses of $94.97. Self-employed taxpayers cannot use the per diem rates for lodging, so use actual expenses for hotel costs.
5. Books, magazine subscriptions, conference fees, and on-line classes related to your business can all be deducted as professional development.
Most freelance writers deduct them as Other Expenses on their Form 1040 Schedule C.
6. If you sell books or other products, count your inventory near the end of the year.
You’ll need an accurate value of your inventory to correctly calculate Cost of Goods Sold on your Form 1040 Schedule C. I counted 24 copies of Business Tips and Taxes for Writers in my inventory at year end, but my records in QuickBooks showed I should have 28 copies. I probably gave away some books as review copies without recording it in QuickBooks. The software allowed me to enter the correct amount of inventory and made an adjustment so my records match my physical inventory and my tax return will be correct.
7. Use software such as Freshbooks, Outright, Wave, or QuickBooks online to automatically download your bank transactions while you sleep.
This saves you the tedium of entering data. Using a cloud-based accounting program works best if you separate your personal and business checking accounts. (See #2). More importantly, the software creates easy-to-read financial statements. Taking the time to look at your Profit and Loss statement will help you control your expenses and better manage your business. Warning: Freshbooks was designed for freelancers who invoice their time, but cannot handle inventory very well.
8. Hire a CPA.
You may fear that paying a professional to prepare your taxes will cost a lot, but freelance tax returns can be quite complex and tax preparation is not the time to do it yourself. If you insist on preparing your own tax return, have a CPA review your return at least every other year. If the CPA finds an error or an omission of a deduction, he or she can help you amend your tax return up to three years after the due date.
John’s Two Cents
It’s critical for freelance writers and other self-employed people to pay close attention to tax rules and regulations, and that’s why Carol’s advice — and her book — are so important.
For example, I missed out on deducting expenses I incurred when writing my first trade paperback in the early 1990s, Best Short Hikes in and around the North Sacramento Valley. Why? I didn’t know enough about taxes to even know that I should file a Schedule C.
And for the same book, I reported royalties the first year it was in print using a form for royalties from gas wells and other such situations — wrong!
Over the years I learned much more about taxes and deductions for freelance writers. I started using TurboTax several years ago, but I strongly advise people to consider hiring a tax professional like Carol.
Note: for my specific methods, see this post: How I Do My Taxes.
About Guest Post Author Carol Topp…
Which of these methods do you use – or will use now that you know about them? Have any questions about specific deductions or how to record and report income and expenses? Ask away!