Once you’ve met your goal of getting paid for your writing, you’re on the hook to report that income to the IRS. But, unless you understand the tax laws as they apply to freelance writers, you could be giving a larger share of that money to the government than is necessary. Here are six things every freelance writer needs to know before filing an income tax return.
1 – Who Gets to Claim Writing 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 get to 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, into the hobby classification. This means it will be up to the writer to prove that he or she is in the business of writing, if that tax return comes up for audit. Fail to do so and you could end up paying tax penalties.
Tracking income and expenses on 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, instead of the less restrictive Schedule C.
2 – What it takes to get the Home Office Deduction
If you use one or more rooms in your home exclusively for the business of writing, you may be able to deduct a portion of your home and household operating expenses. This includes a percentage of your rent or mortgage interest and property taxes, household insurance, utilities, maintenance and repairs. Any item used 100% by the business can be 100% expensed. Shared items are deducted proportionally, based on home office vs. entire home square footage.
3 – When to Write Off Research Costs
A writer gets to deduct travel and research expenses the same year that a publisher issues a signed contract accepting the manuscript. If that contract is cancelled, and you are unable to sell the manuscript elsewhere, those expenses are deducted when you abandon the project. If you use this research elsewhere, perhaps by changing the slant of your manuscript, those expenses would not be deductible until this final manuscript is accepted for publication, or abandoned.
4 – Where 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 business of writing should 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 producing 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 owed. If your total net self-employment income is less than $425 you will not owe any self-employment tax.
6 – How to prove you are in the Business of Writing
To show the IRS that you are in the business of writing, 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 the 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 should maintain a separate bank account for business income and expenses, keep a calendar in the car to track all business mileage, and can produce organized business records documenting income and expenses if called for an audit.