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 for 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…
Carol Topp, CPA is the author of Business Tips and Taxes for Writers. Her blog, TaxesForWriters.com, has more tips and sample chapters from her book. She tweets at @CarolTopp and #TaxTips4Writers.
Your Take
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!
John said he incorrectly reported his book royalties on the form for gas wells. It’s easy to get confused.
Form 1040 Schedule E has “royalties” in its title, so it’s natural for authors to think that royalty income should be reported there. But the IRS (and court cases) have been clear that royalties for a creative work are reported on Schedule C Profit or Loss from Business.
The Schedule E is for royalties from gas, oil and mineral properties, copyrights, and patents.
What’s the difference? Business profits on Schedule C are subject to Self Employment (SE) tax (Social Security and Medicare), while income from royalties on Schedule E are not subject to SE tax.
Carol, that was one of those nightmare tax days. It was the early 1990s: no tax forms on the Internet an no easy way to figure things out without a professional.
I remember scrambling to get forms at the library and hoping I was doing it correctly. Obviously I didn’t!
Hi John/Carol: Timely and very helpful. I have been using an online software for taxes that is reviewed by a tax consultant. I very much want to move to someone doing my tax returns.
Carol, do you have suggestions for finding a reasonably-priced professional? Kind of like businesses ask for a reasonably-priced professional writer. 🙂
Carol,
Thanks for sharing these great tips, and right on time.
I use a CPA to prepare my taxes, but her work is only as accurate as the data I give her. Since I just returned from a 3-day workshop, I especially appreciate your tip on using the per diem rate for meals instead of the actual expenses.
Like you, Carol, I’ve discovered discrepancies in the end of year inventory, probably because of giving away copies that I didn’t note. It’s time for me to finally invest in Quickbooks or other software.
Flora, you raise the very important point of having accurate data. I think too many people don’t keep good track of expenses, or they don’t organize them correctly.
I’m curious: how many of you use software to organize all your freelancing financial information?
If so, what software do you use?
I’ve been a big fan of Outright for over a year now. I’d be lost without it in my freelance business. Anytime someone asks me what financial software I use, I always say Outright!
Cathy,
To find a reasonably-priced tax professional I recommend you visit the Find a Local QuickBooks Expert website:
http://tinyurl.com/a4ols9b
QuickBook experts are usually CPAs or accountants and many do tax returns and specialize in small business accounting.
You enter your zip code and you’ll get a list of experts to call. You can even narrow the list by checking the Income Tax Prep box under the Services you need” tab.
You can also try your state society of CPAs. Most have a Find a CPA feature.
Thanks, Carol. I appreciate the tips.
Hi John,
Further to the point about home office expenses, in case some people aren’t aware of this, you can also write off anything related to the upkeep of your office, such as a vacuum cleaner, repairs of that vacuum cleaner, window coverings, window screens, fans, heaters, Windex, and all kinds of things.
Apparently even coffee can be written off as an office expense.
On a side note, John, in item #2, did you mean “freelance writing” in the title, or is it okay to say “freelancing writing”? 🙂
Thanks for catching the error in the title of #2. I fixed it.
Coffee as an office expense? I’m not an expert on all of these office-related deductions.
Yes, coffee as an office expense.
I used to write off those big 5-gallon jugs of water, too, when I had a water dispenser, but now I’ve got a reverse osmosis system, so will write off the purchase of that instead.
Anything you see in an office supplies catalogue is fair game, too.
Then again, as one may deduce by my spelling of the word “catalogue”, I am Canadian, and these rules may not apply to the States.
(Correcting myself: “…as one may deduce from* my spelling…”)
Canadian! You might be able to deduct coffee as a home office expense there, but I don’t think you can in the United States.
I was told by my tax guy that, in the U.S., coffee, water, snacks, and the like are only deductible as a home office expense if you regularly have clients meet in your office. Basically if it’s an item you buy to provide to clients (or employees), it’s probably deductible. But, if you’re just working from home and drinking coffee while you work, it’s not.
Lauren, I agree with your tax guy. Sounds like he knows his stuff and can explain it clearly as well. He’s a keeper!
John,
I use WindowsMail for email. I wanted to print your article from Carol Topp. Anne does all the tax work for our little family of two but always sends it to Scott Hoffman, CPA. I was surprised when I printed it because it took 12 pages and a recurring error made reading all of it most difficult, if not impossible.
The Topp article took only three pages.
All pages, but the first, included two boxes, one on each side obliterating the text behind it. Both boxes are framed with a single thin line. They are both about 1/2 inch wide and about 2 1/2 inches tall. The left box has the words “in share” at the bottom with a number “6” above it. The right box has “follow me” at the top. Under that is “8+” and below that are two icons that look slightly familiar.
Is that something you can control or is it coming from my computer?
Many thanks for your work.
Bill
Sorry for the problem Bill. It’s probably due to your having increased the font size on your computer.
Try decreasing the font size (ctrl – on Windows machines.).
Better yet: copy the text of Carol’s article and then paste it into a Word document. That way you’ll only get the text.
Thanks Carol. I’ve used TurboTax for years, without the benefit of consulting a professional, and I’ll admit there are times when I’ve put in data that I thought MIGHT be right, after going through the help and IRS help and still not quite getting it. I do wonder what kind of horror a pro would unearth.
I have been savvy with the breadth of deductions for home office, conferences, mileage, and incidental writing-related expenses, but I do fear that I may have botched some of the more arcane parts of the return. I always say every year that I will go to a pro, but as you mention, want to get a perceived savings by not.
Thanks for the cautions, and thank you John.
For me the biggest question is which expenses can legitimately be deducted on Schedule C. Sometimes there are gray areas.
Coffee as an office expense? I’m not convinced.
Meals eaten while away from your tax home or meals with a client/customer are tax deductions. I’d even allow coffee that you serve a client in your office is tax deductible, but coffee you drink while working in your home office is a personal expense not a business deduction.
If I heat up my micro wave lunch and walk into my home office to eat it, is that a tax deduction? No! It’s a personal expense.
I don’t know for sure on the coffee being deductible. That is what I have heard, but I don’t buy enough coffee to even bother saving the receipts.
Now I’m wondering if it is true and will ask my tax lady. 🙂
Carol, Steeny is Canadian. Despite the fact that some U.S. residents think of Canada as the fifty-first state, it is a separate country with its own tax laws.
Agreed! I’m pretty sure I would drink coffee whether or not I was working in my home office. I gotta have my caffeine! 🙂
Thanks you two… I use a pro – an enrolled agent – to do my taxes… the money spend on Kyle Kodra is so worth my sense of ease.
I got tired of Quicken’s constant updates and refusal to support older iterations and have recently switched to http://www.youneedabudget.com/. They believe, like I do, I need to stay involved with my money and not just trust auto-tracking etc. and they make it easy, plus I can download when I want.
Thanks for sharing You Need a Budget Anne.
Is it more for personal expenses and budgets, or does it also encompass the self-employed?
Anne, I, too, stopped using Quicken for personal finances; I still use QuickBooks for small business accounting.
I now use Ace Money Lite. http://www.mechcad.net/products/acemoney/free-personal-finance-software-quicken-alternative.shtml. They have a free version which allows 2 accounts. It’s pretty basic, but that’s all I need.
For my business, I use QuickBooks because I invoice clients and track inventory. Quicken (and other personal financial programs) can’t do that.
Great tips and true to form. I use a professional E.A. accountant. She’s saved me tons in deductions. I have two businesses, both self-employed, so she’s essential since I have no desire to do my own taxes.
And two years ago I connected with a very dear friend who’s a former accountant. She taught a class on bookkeeping for the self-employed that provided the “how-tos” on tracking mileage, expenses, income levels, etc. It’s priceless. Keeping it updated throughout the years cuts time into minutes when gathering stats for the accountant for taxes. All the information has been recorded, balanced and tracked. All I have to do is open my notebook, pull out the worksheet and transfer the totals to the worksheet then hand it to the accountant. What used to take hours at year-end now takes minutes. Of course, it requires the discipline of doing the daily tracking. But as a self-employed business owner that comes from experience.
What is an “E.A.” accountant?
I pay an accountant $125 Canadian to do my taxes. She’s saved me money, too, but more so, she’s spared me pain. Trying to figure out all those forms is agony to me!
I use SJD Contractor Accountants here in the UK, but they also encourage me to claim as many expenses as possible for my business.
Sure, I’m still losing money, but because you can offset any expenses against the tax you’d pay, I now get material things rather than just handing all my tax money to the HMRC. I just have to justify that the purchases are necessary for work… like my hifi which is ‘essential’ to the healthy working environment 😉
EA stands for a Enrolled Agent, a person qualified to represent taxpayers before the IRS.
EAs are similar to CPAs (who can also represent clients before the IRS) in that they must pass a test, but EAs focuses only on taxes, not accounting.
Thanks Carol, Mine does both.
I just purchased QuickBooks Pro and am in the process of setting it up–but now am questioning whether it will work for my situation.
I am an author and independent publisher who works with a national distributor. I see no issues with setting up titles into QuickBooks that I sell directly. However, when the distributor sells books, different discounts are given depending on the type of purchaser. I deal only with the distributor. Sales are paid out to us 4 months after they are made; returns retentions, if any, are paid to us 6 months after they are withheld, if available. Books are held in consignment at the distributor’s warehouse until sold, and any returns go back to the distributor.
Do you know of publishers who successfully use QuickBooks Pro as the accounting system for their businesses? Or is there another program that you recommend instead?
If I decide to keep the program, I believe I need to hire an accountant, or a QuickBooks expert to set up the system properly.
Judy,
Yes, QuickBooks can handle all of what you described quite well.
I don’t have a distributor, but I have 6 resellers and they have negotiated different discount rates. QuickBooks handles it all quite well. I can change the price and discount rates of any sale.
The returns are tricky, but QB can handle that as well. Let’s hope you never have returns. 🙂
I agree that you might need someone to help you set up QB and explain how to enter your transactions. It’s also nice to have a QB expert to call when you have questions in the future.
Appreciate the tips! I use an accountant, but as some others have said, the end result is only as good as the quality of information I supply.
It’s great to be aware of additional questions to ask, tools to use, and possible deductions to take a look at.
Thank you!
One of the most helpful posts I’ve read in a long time! I’m going to share this with the other writers at our bi-weekly meetup tonight.
Yeah Sarah… Have to spread it to others!
Sarah, Thanks for the kind words! Share away! 🙂
Carol, great post! I’m right now trying to unravel my taxes thanks to an informal partnership with another writer. She and I split both profits and expenses, but the PayPal account is in my name, so I’m the one who has to sort out the accounting.
Is there a simple way to do this?
Oh dear, I hate those “informal partnerships.” They can be so complex.
You *could* have formed a legal partnership and prepare a Form 1065 for partnerships, but most writers keep their businesses separate.
They let one person claim all income and all the expenses (sounds like that’s you!). That person pays the other “partner” his or her share of the profit.
I talked to Shawn Welsh who co-authored APE: Author Entrepreneur, Publisher with Guy Kawasaki. Shawn told me that they each maintain separate businesses. Guy handles all the income and expenses and Shawn gets a check from Guy every quarter. Easy record keeping for Shawn. If Shawn has any expenses of his own, he can claim them on his own tax return.
Here’s the tricky part: the Paypal account is all in your name, so you have to report that total to the IRS (especially if Paypal sends you a 1099MISC). You have to calculate the amount of a payment you give to your partner to settle up. If your “partnership” made a profit, you pay her. (You get to deduct as a business expense the payment you make to your “partner.”) If the “partnership” spent more than you made, she’ll probably owe you. Get it?
(I put partnership in quotes because in the eyes of the IRS and CPA’s you are not a legal partnership, but merely two separate business owners working jointly on a project. I really wish there were a better word to use than partnership to describe these working arrangements.)
I use QuickBooks since 2006 and have never used any upgrade because I did not need it. This is just a one time investment, and tax deductible.
I have a meeting with my CPA every year and he tells me what to keep track of if there are any changes in the coming year.
I also am organized in an llc, cost about $350 to get started, with a separate bank account.
I put myself on the payroll of the llc and pay social security on that to make sure that I have some retirement plan.
Might be a little work to start, but makes life a lot easier along the road.
Edward
Ha! I knew most of these. Which forces me to ask — are we going to see the followup article “The 8 Top Ways to Illegally Lower Your 2013 Freelance Writer Tax Bill” soon?
A penny saved…
You’re a smart guy, Tom. I think you can figure out the top illegal ways yourself!
John, I got tired of quickbooks updates and switched to You Need A Budget – http://www.youneedabudget.com/ $60 forever, or something close to that, it downloads from my credit union and the app for my cell is super easy to use… and their customer support actually exists and works.
Sounds good Anne. It does everything you need for your freelance writing business?
Great tips John! I’m sure plenty of writers are going to find some of these simplified options very helpful. I wasn’t aware yet of the change to the home office deduction calculations, so that’s great to hear!
I’ve always believed you should hire a pro and not try to be an expert in everything. But for some reason, I’ve had no luck with taxes. I hired 2 different CPAs over the years. First CPA was good and a nice guy, but ultra conservative. I don’t know if he had bad IRS experiences, but he wouldn’t let me take the home office deduction even though I qualified under all the rules and was totally legit to do so. He said it was a “red flag” with IRS and to avoid at all costs. Didn’t want me to include any business mileage expenses…said it was another “red flag”. I had to educate HIM about certain deductions and actually lost a few I didn’t know about. So after a few years, switched to another CPA a business owner friend recommended. I met him in person in early Jan so he’d have plenty of time, submitted all the total numbers with supporting docs – all “i”s dotted; “t”s crossed. He postponed working on it until April 10th, then palmed off the job to his son (who just started in the business). When proofing the return just before signing and sending, I found multiple errors he made and had to ask hin go back and fix at the last minute. Incredibly stressful.
So it’s now an annual DIY project. I HATE it, but figure as a successful copywriter, I know how to do research, proof and handle details. So TurboTax 2013 and a few glasses of wine are in my future yet again! 🙁
Very nice post on year end tax planning strategies. I have linked my year end tax planning article below. One other point is to consider a Keogh plan or a SEP or regular IRA to reduce your tax bill. Equipment purchases and the like at year end can be written off too. Please read my article for these and other planning ideas.
Number 8 is the most important, in my opinion. My CPA has saved me far more than I have paid him, plus it saves me tons of time and frustration.