One of the best things I ever did for my freelance writing business was hire a bookkeeper.
I’ve got a good head for numbers, and I usually made As in math.
But every time a task related to accounting edged toward the top of my to-do list, I had to stifle a yawn. My energy level would plummet.
Excel. Ugh. QuickBooks? Ugher.
My first bookkeeper studied accounting in college and has worked for a wide range of business types and sizes—everything from large corporations to small businesses; freelancers like myself to non-profits.
She told me that when she received the first big envelope of receipts she felt “giddy.”
I most definitely do not feel giddy when thinking about cleaning up somebody else’s accounting mess.
Clearly, she was the right woman for the job, and by hiring someone who was BETTER at accounting than I am, I freed myself up to focus on the things I’m good at: writing, marketing, and selling.
Sometimes you have to spend a little money to better play to your strengths.
Even so, because I was able to spend more time on high-leverage tasks, my increased productivity (and billing) more than offset the monthly cost of bookkeeping fees.
For a professional to keep my books also makes an audit by the IRS less likely. (I’ve written before about how one of the three smart reasons to spend money is to reduce risk.)
Yes, I recommend that you hire other people to be better, smarter, faster than you are at certain necessary business activities.
I also recommend that you learn accounting and tax basics so that you aren’t flying totally blind. Nearly every day I must carefully consider when and how to make a purchase so that I can minimize my tax liability. That’s my job, not my bookkeeper’s or CPA’s.
It’s worth doing, too. Minimizing my tax liability maximizes the cash I keep in my pocket.
Which brings me to an important point. Many, many conversations with freelancers about business finances have led me to this conclusion: MOST freelancers miss out on MOST tax write-offs.
Either through ignorance or sheer laziness, they put money in Uncle Sam’s pocket that could have legally kept.
Admittedly, it’s hard to remember all of those write-offs, come to tax season. It’s harder to keep track of all your receipts and keep organized records of spending. It’s hardest to navigate the quagmire of tax law.
Spoiler Alert: You can download this entire blog post as a guide at the bottom. That way, you’ll have it on hand when you need to file your freelance writer tax return. Savvy?
Word to the wise: Hire a CPA in addition to your bookkeeper. The good ones have tax planning questionnaires that help you identify and take advantage of every relevant tax credit and write-off.
You may not care much about business accounting practices, but I bet you do care about keeping more of your hard-earned cash and spending it on things that really matter to you.
And that’s the crux of this whole conversation about freelance writer taxes.
First things first, do freelance writers pay taxes?
Yes. At least the ones who don’t want to get in trouble with the IRS.
You’ve heard the old saw: The only certainties in life are death and taxes. You will pay taxes on the income you earn from freelance writing business.
You can feel like you shouldn’t have to pay taxes. You can also feel like you can fly off a tall building. May I recommend the non-suicidal route?
Paying taxes is one of the privileges that comes with living in this fine, imperfect country called the United States.
How do you keep track of business expenses?
Chances are, you’ll track expenses in a variety of ways and develop a somewhat sane system over time.
I’ve tried all of the following:
- Excel spreadsheet or Google sheet
- Cloud-based accounting software like QuickBooks, FreshBooks, or Xero
- Expense Tracker Apps like Expensify.
Ultimately, I bought the bullet and started paying a bookkeeper monthly to organize and categorize all of my business expenses.
Well, by the time April rolls around, I can’t remember all of the details about my own expenses. For example, my bookkeeper recently asked me to give her more information about a $3,000 charge on my AMEX credit card.
My response? “Uh…”
Figuring out what the charge was took me thirty minutes. Just imagine if I’d waited longer!
Your memory may be better than mine, but I end up spending a lot less time on my bank/credit reconciliation if I do it while all the expenses are still fresh in my mind.
If you plan to keep track of your own business expenses, then use QuickBooks or FreshBooks. And do all of your bank reconciliation during the first week of each new month.
Or if, like me, you want your bookkeeper to do the tracking and reconciliation, then ask him/her to send you any questions about specific transactions and expenses during the first week of each new month.
Read what Uncle Sam has to say here: https://www.irs.gov/businesses/small-businesses-self-employed/deducting-business-expenses.
What type of business entity should you choose?
For more than six years, my business was a sole proprietorship. I tracked my expenses and itemized the deductions on my Schedule A (Form 1040) on my tax return. (Is that enough IRS mumbo jumbo for you?)
From a tax perspective, Austin L. Church was an individual doing business (DBA) as Bright Newt, which was the name of my business at the time.
My social security number served as my Federal Employer Identification Number (FEIN), and I was able to use my SSN to set up a business checking account without any trouble.
Other than that “DBA” nuance, which sometimes appears on documents, my business entity wasn’t distinct from me. I didn’t pay corporate taxes or anything like that. All revenues and taxes passed through Bright Newt to me.
In terms of taxes, other entity structures—including C-Corp and some LLCs—work differently.
I decided to register a single-member Limited Liability Company (LLC) because I wanted more liability protection.
If a client were to sue me, that protection would make it difficult for the other party to seize my personal assets—for example, my family’s personal savings account. Or our house.
Other than that liability protection, the credibility that comes with an LLC, and using a new FEIN instead of my social security number, not a whole lot has changed on the tax front. Revenues still “pass through” Wunderbar LLC to me as an individual.
The specific rules governing business entities vary from state to state. So I recommend that you find a good business attorney and barter a blog post or some web content for his/her advice.
Picking an entity structure is primarily about protecting your assets, both business and personal, and minimizing your tax liability.
What type of entity structure makes sense for you at this stage? That will depend on your financial situation and business goals, but most CPAs would probably recommend a sole proprietorship, assuming you have no business partners or employees.
If you have very few assets at this point in life, then certain entity structures will be overkill. You only need an armored car if you’re a target.
You can always form a new entity later. A common misconception about legal entities is that they are etched in stone. Forming a new entity costs money, sure. But that’s just another part of doing business.
What should you pick for your freelance writer tax business code?
The IRS uses “Principal Business” or “Professional Activity Codes” to classify sole proprietorships. True to their name, the codes describe your primary business activity. They are based on the North American Industry Classification System (NAICS).
You start by selecting the category that describes your primary business activity, and then you select the sub-category or activity that best describes “the principal source of your sales or receipts.”
You’ll end up with a six-digit code that means something to the IRS (and naturally, nobody else), which you will enter on your Schedule C or C-EZ on Line B.
As you could probably guess, you won’t find a code for “freelance writer.” That would be too easy.
Several categories and subcategories come close, so you can select whichever one you prefer. For example, you could pick “711510 – Independent artists, writers, & performers,” which you will find below “Performing Arts, Spectator Sports, & Related Industries.”
Because I get paid to write copy and content for businesses, I think one of the options under “Other Professional, Scientific, & Technical Services” is more accurate: either 541800 (“Advertising & related services”) or 541990 (“All other professional, scientific, & technical services”).
If I recall, I chose 541990 because I provide a mix of marketing, writing, and business development services.
Just in case some other freelancers and creatives happen to be reading this, here are some of your codes:
- Technical writers could choose 541600 (“Management, scientific, & technical consulting services”).
- Photographers could choose 541920 (“Photographic services”).
- Filmmakers and videographers could go with 512100 (“Motion picture & video industries (except video rental)”), under the “Motion Picture & Sound Recording” category.
- Developers could choose 541510 (“Computer systems design & related services”) under “Computer Systems Design & Related Services.”
- Designers have it easier than the rest of us freelancers: 541400, “Specialized design services (including interior, industrial, graphic, & fashion design)” underneath “Specialized Design Services.”
How do you figure out what taxes you will have to pay?
As a general rule of thumb, I recommend that you set aside 30% of what you make for taxes.
Not setting aside enough has come back to bite me more than once. When your freelancing business starts generating real cash, it’s hard to keep your fingers out of the honeypot.
“It’s finally happening!” you think.
You might start to feel a little bit of pride in your bank account.
The last thing you want to do is gut it so that you can pay your estimated quarterly taxes.
Should you still pay your estimated taxes quarterly?
Few things in business are more discouraging than having your best year then realizing at tax time that you don’t have the cash to pay what you owe. Your triumphant year ends in a whimper.
You either have to get on a payment plan with the IRS or use a credit card.
To avoid this scenario, I made several adjustments:
- Dividing my anticipated tax liability by twelve and adding that number to my monthly operating expenses
- Adjusting my sales goals to account for that higher target
- Tucking away the monthly tax allotment in a SmartyPig savings account where I can’t see the money
- Not touching those funds under any circumstances
Point #2 deserves special emphasis. Let’s say you want your “take home” pay from freelancing to be $4,000 per month.
Beyond your salary, you also need $500 per month for everything from business lunches and gas to website hosting and saving for a new laptop.
The $4,500 total represents your net, or after-tax, revenue. You really need to earn more than that because you may owe upwards of 30% of your gross revenues in state and federal taxes.
You need to make $4500 to pay your operating expenses and salary.
You can expect to pay 30% of your revenues in taxes.
$4,500 is 70% of $6,428.
Your monthly sales target should thus be closer to $6500, not $4,500.
Uncle Sam will come for his slice of your pie sooner or later. By setting aside more than enough dough for your tax return, you can reduce stress and anxiety throughout the year.
How do you figure out your estimated quarterly tax payment?
Each year’s quarterly payments are calculated base on your total tax bill the year before. In other words, the IRS assumes you will make the exact same amount of money and have the exact same amount of deductions and credits.
The problem is that that almost never happens.
You can respond to fluctuations in earning in several ways:
1) Send in your quarterly Form 1040-ES with a check for the amount on the voucher while at the same time you put whatever is left over from the 30% that month in savings
2) Work with a CPA to determine exactly how much your estimated tax payment should be based on your up-to-date financials. If your earnings go up one year, your quarterly payment should exceed the estimate shown on the Form 1040-ES from the year prior.
3) Make your best guess, send in a check for your estimated payment, and prepared to take a hit the following April—i.e., any extra taxes owed along with penalties for underpaying
Why does it seem like freelancers pay so much in taxes?
Freelancers have to pay self-employment tax on money they earn.
Officially known as the SECA tax (Self-Employment Contributions Act), self-employment tax is a freelance writer’s version of FICA (Federal Insurance Contributions Act), which employers and employees must pay.
You will pay SECA on your net earnings from self-employment. Self-employment tax has two parts, Social Security and Medicare:
- 2.9% for Medicare – You will pay the 2.9% in Medicare tax on every dollar you earn. Reference “IRS Tax Topic 554: The Self-Employment Tax”—aka, your next beach read.
- 12.4% for Social Security – In 2016, this percentage applied to the first $118,500 of earnings. You don’t pay tax on any self-employment or W2 income beyond that.
But the news isn’t all bad. When you calculate self-employment tax, using Schedule SE, the IRS allows you to reduce self-employment income by 50% before you apply the tax rate.
This TurboTax article has some good examples of the math.
If you have a 9-to-5 job and are a W2 employee, you pay 50% of FICA, and your employer pays the other half. Employees rarely think about this because most companies take these taxes out of each paycheck and send them straight to the government.
No wonder so many freelancers get confused!
Unless you looked really closely at your tax return, you never knew FICA had two halves. You certainly never had to shell out the full 100%.
As a freelancer, you are both the employer and the employee. Instead of your boss calculating and withholding taxes for you automatically each month, you become responsible for paying them yourself—and paying the employer half that you never had to think about as an employee.
This situation may seem unfair, but it’s not. More money may come out of your pocket, but you aren’t paying more in taxes.
You’re simply responsible for the other hidden half that your employer always paid.
You have to focus on the upside. Yes, you pay 100% of Social Security and Medicare—aka, self-employment tax—but you also get to keep any profits left over after you pay expenses and taxes. If you have a great year, you can give yourself a big raise.
We freelancers must think like business owners, not employees. We’re not victims. When we grow our businesses, we will owe more taxes: twice as much as our friends who have W2 jobs.
What are the most common deductions for freelancers?
You can deduct the costs of printed promotional items with your name on them (e.g., t-shirts and hats), marketing collateral (e.g., business cards and brochures), sponsorships, and online and digital advertising (e.g., Facebook ads and Google AdWords banner ads).
You can also deduct special events intended to promote your business, as well as the food and entertainment costs associated with them.
(Yes, you can write off the clown you pay to show up at the party at your new office space.)
Sole proprietorships and single-member LLCs record these expenses on Line 8 in the Part II Expenses section of the Schedule C form. Other types of entities enter these advertising expenses elsewhere.
Apps & Software
You’ll be happy to know that you can deduct the cost of software and online tools that you use to run your business.
Notable examples include Evernote, ConvertKit, SmarterQueue, LinkedIn Premium (Now why would you go and do a thing like that?), Dropbox, Sketch, Adobe Creative Cloud, and my favorite writing app Ulysses.
In addition, you can deduct the cost of your internet service as either an office expense or utility, though working from a home office will require that you calculate the percentage of work-related usage and apply that number to total cost of the service. You can’t claim the whole amount.
Finally, don’t forget domain registration fees and website hosting. I’ve written at length about the part your freelance writer website plays in a healthy pipeline. You can deduct most internet-related expenses on Schedule C.
Do you use your vehicle for business purposes? If yes, you have two options:
- You can stick with multiply the number of business-related miles by IRS mileage rate for that year (e.g. $0.56 per mile) and enter the total on Form 1040; or
- You can itemize gas and other expenses, including insurance, depreciation, and repairs, on Form 4562.
My 1998 4Runner has never required significant maintenance, so up to this point, I have written off miles, not transportation expenses.
Remember this one important exception to tracking mileage: You cannot include the miles burned commuting to an office in your total.
Tons of apps like Expensify make it fairly easy to track mileage.
Interest & Bank Fees
Who wants to talk about credit card debt? Not me.
But I do occasionally have debt on my business credit card. Sometimes you just have to go to that conference.
By all means, pay off that card each month, but if you do carry a balance, be sure to write off any interest you pay.
You can also deduct the cost of bank fees and interest on loans, though if the loan was also part personal, you can only write off the interest on the business-related part of the loan.
You can claim fees and interest on Line 16 of your Schedule C.
Meals & Entertainment
We all have to eat, and it makes sense to schedule some business meetings during lunch.
Business-related meals must meet these three criteria:
- You or one of your employees was present
- The meal related directly to “the active conduct of your trade or business”
- The meal wasn’t “lavish or extravagant”
You cannot treat your favorite client to a weekend in Vegas and write-off the trip. But assuming the purpose of your lunch meeting was to discuss business (and potentially get business), you can write off 50% of the total.
The good news is that there’s no hard-and-fast rule that says, “To get the 50% deduction, you have to pick up the tab.” You can pay only for your meal and still get the deduction.
You can deduct 50% of the meals meant to “entertain” clients.
You can deduct 100% of food purchased for employees.
Just be sure to write down the name of the person you were with somewhere on the receipt. Then, keep either the hard copy of your receipt or a digital version that you have captured using a scanner app like Expensify.
The total deduction for meals and entertainment goes on Line 24b.
You can find more details about Line 24b here.
When you hire other freelancers—that is, “independent contractors”—to do work for your or for your clients, you can write off these costs on Line 11 (Contract Labor) of your Schedule C.
You paid a web designer friend to redo your website? Deduct her design fees.
You paid a web designer friend to redo your client’s website? You wrote the new web content and managed the project? Deduct her design fees.
Note: If you pay your designer more than $600 of the course of the year, you must send her a 1099.
The IRS gives business owners, including freelancers, an annual allowance for wear and tear, deterioration, or obsolescence of property.
Most of us make a living, using our cellphones, laptops, other tools (like cameras), buildings, machinery, vehicles, furniture, equipment, and some intangible property, including patents, copyrights, and computer software.
This income tax deduction allows us to recover the replacements cost. In order to qualify for this deduction, you must own the “property,” and you must use it for income-producing activity.
The thing itself must have a useful life of more than one year. In other words, you CANNOT deduct a piece of property if you use it and get rid of it in the same year.
For example, the IRS allows you to claim depreciation on your new iPhone as an “unreimbursed business expense” if you use it regularly for freelancing.
You can also elect under Section 179 to expense part or all of the cost of a new cellphone you purchased for your business. Form 4562 will help you calculate any depreciation. You enter the total for depreciation on Line 13 of your Schedule C.
As you could probably guess, that’s not the only wrinkle. The IRS came to the rescue and created an award-winning piece of literature (kidding) that they call “The Modified Accelerated Cost Recovery System” (MACRS). It is the “proper depreciation method for most property.”
Geez. Are they trying to make our brains bleed? Think back to the least interesting text you have ever read. Well, that yawn factory is about to lose its number one spot.
No matter where you are in your freelancing career, your time should be more valuable than your money. Go land some new writing gigs, and pay a CPA to be your brain in this department.
Regardless, you will report depreciation on Form 4562 (Depreciation & Amortization).
Domain Registration & Website Hosting
I already alluded to these two expenses in the Apps & Software section.
Many common expenses have designated lines on the tax schedule, but some, including your domain registration and website hosting, don’t fit into a particular category. To deduct these expenses, list them on Line 48 of your Schedule C. You will then include them in the total on Line 27.
Education, Professional Development & Memberships
From time to time, you may buy a course, guide, or some other resource to improve your skills. You can deduct any education costs related to making yourself and your business more valuable.
You can also deduct the cost of conferences, classes, seminars, and webinars—any event where your goal was gaining business knowledge and or developing your marketable skills.
In addition, if you belong to a paid Mastermind or group that helps you with your freelance writing career, you can deduct membership fees.
Obviously, there’s a fine line you have to walk here. An expensive dog training manual may enable you to train your dog. Training your dog may make you happy. Being happy may make you feel as light as a butterfly and ready to do your best work.
Nice try. What you learn from the manual doesn’t create tangible value for your business the same way buying an advanced course on SEO or copywriting creates value.
The IRS puts it this way: “It can be qualifying work-related education only if it maintains or improves skills needed in your present work.”
To deduct qualifying work-related education, put the total amount on Line 21 in your Schedule A (Form 1040) or Line 7 of your Schedule A (Form 1040NR).
Hardware & Office Equipment
There’s clearly some overlap here with the Apps & Software and Depreciation deductions. If you’re a freelance writer, then you’ll need any number of devices and software tools to serve your clients.
These fall under the umbrella of “office equipment”:
- Desktop computers
- Tech hardware
- Online subscriptions
Be honest. If you don’t really use your Netflix subscription for business purposes, then don’t deduct it. Knocking your taxable income down a few bucks isn’t worth increasing the likelihood of an audit.
In like fashion, if you own more than one computer, then don’t try to deduct both. That will be a hard sell to the IRS because it stands to reason that you use at least one computer, part of the time, for personal stuff—e.g., buying movie tickets or gorging on Harry Potter fan fiction. (You know who you are.)
But subscriptions to web apps like Focus@Will or SmarterQueue do help you serve your clients, and therefore they deserve a place on your tax return.
You’re generally safe as long as you can prove that you needed the stuff to stay relevant in your industry.
For example, if you get paid to write movie reviews, you could, in fact, write off your Netflix subscription. I take back what I said earlier.
Note well: You have the choice to spread the deduction over the number of years the IRS considers to be the useful life of the item—though they may not agree with your opinion—or you can write the entire cost off in one fell swoop as a Section 179 deduction of up to $500,000 (at the time of writing).
For many freelancers, the Holy Grail is working from home. You can wriggle into your flattering jodhpurs and Kelly Kapowski sweatshirt (sans neck) and really thrash a client’s web content.
But just because you can crank out new product descriptions on your kitchen table doesn’t mean that you can count your kitchen as a home office.
Don’t fret. The IRS has published a thorough, 35-page, um, treatise, on business use of your home under the memorable title of Publication 587.
(Let no non-U.S. citizen say that we lack for originality!)
In order to qualify, you must use part of your home “exclusively and regularly” as your principal place of business. And your cozy writing nook must pass muster in three areas: exclusivity, regularity, and precedence.
Kitchen table? No. Desk in a corner of your bedroom? Tentatively yes.
Exclusivity means that you must use your work area only for business activities. Your work area doesn’t need to have a “permanent partition”—what a relief; that would be getting awfully close to a cubicle. “The area used for business can be a room or other separately identifiable space.”
As for regularity, you must use your home office in a predictable fashion—think, during regular business hours. You don’t have to chain yourself there forty hours a week, but you yourself know the difference between regular and irregular. Regular is how often you eat. Irregular is how often you go to the gym. (Just kidding.)
And in terms of precedence, you can work from other places—namely, the coffeeshop where you go to procrastinate. However, you should spend most of your time doing your most important tasks at your home office.
Now that you’re crystal clear on the requirements, write that sucker off. The IRS gives you two options for the deduction: Regular and Simplified.
Yay. More choices.
With the Regular option, you can write off expenses like mortgage interest. For example, in Box 1 on Form 1098, let’s say that you entered $10,000 of mortgage interest. If your home office comprises 10% of your home, you can deduct 10%, or $1000, as part of your home office expenses.
With the Simplified option, you measure the approximate square footage of your workspace and multiply that number (up to a maximum of 300) by $5. Check out the Simplified Method Worksheet contained in Publication 587 mentioned above.
You will use Form 8829 for the Regular method.
Report the deduction on Line 30 of Schedule C of Form 1040. Whether or not you must complete and attach
If you used the Regular method, you will attach Form 8829 to your return.
Worth noting is that if your home office deduction causes your business to be in the red, then the IRS may disallow some expenses or require that you carry them over to the next tax year.
Is that clear as mud? Excellent!
I strongly advise you to use the Simplified option AND to enlist the services of your friendly neighborhood CPA.
Speaking of home offices, you can also claim your renter’s or homeowner’s insurance.
Assuming your freelance writing business had a net profit, you can also claim any medical, dental, or long-term care insurance premiums on Line 1 of Schedule A of Form 1040.
But wait. There’s more!
Freelance writers can claim additional premiums paid for liability, workers’ compensation, malpractice (How dare you write that thing you wrote!), or coverage for fire, flood, storm, and theft.
- Health insurance – Page 1 of Form 1040. Check out this TurboTax article, “Deducting Health Insurance Premiums If You’re Self-Employed.”
- Long-Term Care Insurance Premiums – The amount you can claim as medical expenses on Schedule A of Form 1040 is limited. Publication 502 can give you all the gory details.
Legal & Professional Services
Hopefully your visits to lawyers are few and far between. I did hire one to help me set up and register my LLC.
Of course, you already know about my fondness for bookkeepers and CPAs.
These professional fees, including tax return preparation, which are directly related to running my business, I will cheerfully deduct the cost of these services on Line 17 of my Schedule C.
Self-employed freelancers can deduct all of their health, dental, and long-term care insurance premiums–that is, if you are NOT eligible for health coverage through your spouse’s employer.
You can claim medical care costs on Schedule A (Form 1040).
Your can deduct for all of your office basics—printer cartridges, paper, staplers, books, pens, and postage to name a few.
Might I recommend my favorite pen, the Pentel EnerGel Alloy, for your writing pleasure?
Just be sure to hang onto your receipts so that you can calculate the total at the end of the year. You’ll put it on Line 18 (Office expense) of your Schedule C.
A freelance writer can also deduct the cost of newsletters, journals, magazines, and other subscriptions, including any publications to which you hope to sell an article. All of these subscriptions serves your writing business.
Sole proprietors and single-member LLCs will use Line 22 (“Supplies”) on Schedule C for this.
But what about all of your other deductible items, such as computers, software, web servers, printers and equipment? If you’re not 100% sure how to deduct your new standing desk, then talk to a CPA. The IRS has extensive guidelines on the depreciation of business assets, and how you write off their depreciation depends on a number of factors, such as whether you expect to make a lot more money freelancing in the future.
You’re a freelancer writer. You decide to write a book about horseback riding. And shooting a traditional bow. And shooting a bow on horseback.
You can deduct your riding and shooting lessons, as well as the tools like Call Recorder and Screenflow that you use to record and edit interviews.
Whatever you pay a research or virtual assistant to help you is deductible as well.
The IRS generally considers the costs of research and experimentation as capital expenses. However, you can elect to deduct these R&D costs as regular expenses in the first year you incur them.
Individuals (including single-member LLCs, which are disregarded entities) will use Schedule C of Form 1040. Add your research costs in Part 5, so that you include them in the total on Lines 48 and 27a.
Partnerships will use Form 1065. Corporations will use Form 1120, and S Corps will use Form 1120-S.
Repairs & Maintenance
When your laptop, camera, or some other piece of essential equipment breaks, you must repair it in order to stay in business.
You can deduct the cost of these repairs on Line 21 of your Schedule C, but you cannot deduct the value of your own labor.
The IRS specifies that “incidental repairs and maintenance” are those that don’t add to the property’s value or appreciably prolong its life. (I take that to mean that repairs, in this case, simply make your equipment operable again.)
Whatever you spend to restore or replace property you must capitalize. You can find the capitalization rules in Publication 538.
Most freelance writers don’t have access to a retirement plan like a 401k through an employer. Paying to set one up doesn’t make sense in most cases.
Have no fear: You can still save for retirement and invest.
For starters, you can contribute to a traditional or Roth IRA. How much you can put in each year depends on your age and income.
You can claim certain contributions on Form 1040 and reduce your tax bill.
Here are the specifics:
- Contributions to a traditional IRA are tax deductible on both your state and federal tax returns.
- You cannot deduct contributions to Roth IRAs. Though you must contribute after-tax dollars, your earnings and withdrawals are generally tax-free.
- If you are self-employed, you can set up a retirement plan called a SEP IRA. Think of it as a stand-in for an employee’s 401k designed for business owners. Based on your income, you can contribute up to $53,000 annually (at the time of writing), and you can deduct every dollar.
Double win. You reduce your tax bill while saving for retirement.
Taxes & Licenses
In their great munificence and wisdom, the IRS allows you to not pay tax on tax you paid. (Wrap your mind around that one.)
Unless otherwise noted, most of the taxes listed below you will enter on Line 23 of your Schedule C.
Real Estate Taxes – Good news… You can deduct real estate and personal property taxes on business assets.
State Tax (on Gross Income) – I live in Tennessee where we have no state income tax. But if your state hits you with tax on gross income, then you can write off tax on your gross freelancing income.
Property Tax – This applies only to the property where you conduct business. If you qualify for home office deductions, you can write off a percentage of the property tax you pay on your house. To determine your deductible property tax, multiply what you paid in property tax by the percentage of your home that you use for a home office. For example, if your work space comprises 10% of the total square footage, then you can write off $200 of your $2000 in property taxes. That $200 will convert from personal itemized deductions to business write-offs. You may need to adjust that number if you only had your home office for part of the year. For example, let’s say you started working from home on July 1. You could only claim half of the total deduction: $100. You will record property taxes, along with other expenses for business use of your home, on Form 8829.
Special Licenses & Fees – Most freelancers don’t have to have to maintain special professional licenses in the same way that attorneys and investment advisors do. But if you do pay for annual licenses and regulatory fees to your state and/or local governments, then you can usually deduct these or amortize them.
State & Local Sales Taxes – If you collect sales taxes from your freelancing clients, then you will include the total amount of your gross receipts (or sales) on Line 1 of your Schedule C. You will then deduct total sales tax collected on Line 23.
Federal Unemployment Tax (FUTA) – Employers must pay a tax called the Federal Unemployment Tax Act (FUTA) on employee wages. These taxes come straight out of the employer’s pockets, not from an employee’s paycheck. So when you have a freelance writing business, you ARE the employer and the employee. You can deduct FUTA.
State Unemployment/Disability – You can also deduct any contributions to your state’s unemployment insurance fund or disability benefit fund, assuming that state law designates them as taxes.
Self-Employment Tax – You can deduct one half of your self-employment tax (i.e., Social Security & Medicare) on Line 27 of Form 1040.
For example, a $1,000 self-employment tax payment reduces taxable income by $500. In the 25 percent tax bracket, that saves you $125 in income taxes. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.
Your legal entity matters in this situation. Though setting up an LLC costs money, an LLC—one taxed as an S Corp and one where you are the sole owner and employee—can lower the amount of self-employment taxes that you owe.
If you were to divide your income between your “base” salary and any extra profit shares, you would pay self-employment tax on your salary but not on the rest of the profits.
(Note: To be taxed as an S Corp, you must file form 2553.)
Phone & Internet
You can deduct the cost of your Internet and phone bills as utility expenses even if, like me, you use the same utilities for business and pleasure. The catch is that you can only write off a percentage.
Estimate the percentage of usage time spent on business activities and then calculate the total write-off.
For example, let’s say you pay $100 a month for your wireless plan and $100 a month for Internet. You spent 75% of your usage on business. $200 times 75% (or .75) comes out to $150 for business utilities each month.
You cannot deduct the first phone line into your residence, only additional costs incurred reasons or a second landline based on the percentage of business use. You include this deduction on Line 25 of your Schedule C.
You include your cell phones expenses on Part 5 (“Other Expenses”) of your Schedule C. You itemize your other expenses there as well and write the total amount on Line 27a of your Schedule C.
Unless you’re living in the Stone Age, you use PayPal, Stripe, Shopify, Etsy, or another online payment platform to receive payments. These platforms charge fees to process transactions. You can deduct these fees.
Add them up and include them on Line 27a of your Schedule C.
Many of my “colleagues” are Internet friends with whom I interact on Facebook, Twitter, and Slack. Meeting up with them in person at conferences always feels like a family reunion.
The smiles and hugs have the added benefit of business travel write-offs, including the cost of conferences themselves, along with airfare, hotel rooms, Uber rides, car rentals, and food. You can even write off dry cleaning, you slouch.
You can deduct all of lodging and mileage expenses for business travel but only the standard 50% for meals, as I explained above.
A long weekend at a Marriott for a two-day freelancing conference probably won’t trigger an audit. But an entire week at a ritzy resort might raise an eyebrow. (The IRS only has one eyebrow.)
It’s fine to build a personal vacation around business travel, but you can only claim the portions of the trip that were truly business related—that is, the length of conference and networking events or time spent doing actual freelance projects.
Of course, one of the appeals of freelancing is how blurry the lines get between work and play. A good rule of thumb is 50%. If you spent half the day learning, meet current or potential clients, and working, then you count that day.
Perhaps this should go without saying, but you can only take travel related deductions if you are—ahem—out of town. Your body must leave the geographic area where you live—also known as, your “tax home”—and you must be gone longer than a day. Going to a conference and back home again in a single day typically doesn’t qualify.
Travel write-offs go on Line 24a on your Schedule C with the exception of meals and entertainment, which go on Line 24b instead. (Reference the Meals & Entertainment section above.)
I’ve gotten stiffed by a few clients over the years, but less often than you might think. My practice of requiring a non-refundable deposit before I add a project to my production queue has also helped to offset what would have been bigger losses.
Regardless, you can deduct unpaid invoices as long as you first claim them as income. They count as “bad debt” in the eyes of the IRS, and you put the total on Line 6 of Schedule C of Form 1040.
Now that I’ve given you a banging headache, you’re probably ready to collapse into a heap and weep for your mama.
Despite my snarky tone throughout, I don’t believe the IRS are the bad guys. They’re just trying to administrate tax law.
Tax law is the root problem.
As you have just experienced firsthand, it is complex. The dense, esoteric language muddies the water, and your money is at stake.
I wrote about freelance writer taxes from my own perspective as a full-time freelancer with a single-member LLC. (I have no income from a W2 position with an employer.)
I cannot in good conscience offer cookie-cutter advice because your tax situation may look very different than mine based on any number of variables already discussed:
- Entity Structure (sole proprietorship vs. LLC vs. corporation)
- Other Income (e.g., your full-time W2 position or investments)
- Your Office
- Your Health
- Your Non-Deductible Expenses (Reference Publication 529.)
- Type of Freelancing/Writing
- Marital status & Dependents
- Business partnerships
- Tax “Home” (State or country where you live and work most of the time)
It’s easy to see how accountants make a full-time job out of this. By the time you read this, chances are, some new law will have gone into effect. Some nuance about how to deduct travel expenses will have changed.
The odds seem stacked against many freelance writers. You either have to invest many hours in navigating these treacherous waters or invest hard-earned dollars in hiring an expert to captain the ship in your stead.
It’s not that I think you couldn’t figure it out. Of course you could.
But consider the the opportunity cost: You only have some many hours in the day.
While you’re trying to keep up with changes in tax law, the cost-benefit analysis of different entity structures, and the actual record-keeping and math for two or three dozen credits and deductions, you could have been building your freelance writing business.
Any time spent on bookkeeping and tax prep is time not spent on the activities that directly generate profit and drive growth.
You already know I recommend hiring an accountant to do your books and a CPA to prepare your tax return. CPAs have to take 40 hours of continuing education each year to stay licensed!
Hire a professional to keep your books and prepare your taxes. You’ll enjoy freelancing more.