As those who follow the blog know, my day job is writing about taxes. I’m not an accountant, so any advice you see here you should damn well confirm with a professional before acting on it, but these are areas where the Byzantine leviathan of our tax code does intersect with the writing life in ways you should consider.
First, when I say writer here, I’m assuming the self-employed variety. I was that for twenty years, but I’ve been in-house now for the last, Jesus, it’s been nine years already.
Withholding your piece
If you’ve been on your own for a while now, you already know this, but if you’re new to freelancing in any fashion (and even a novelist is essentially a freelance content provider for a publishing house),it’s the first, hard lesson. Nobody withholds your taxes for you, but you still have to pay them, and before the April 15 filing.
See, the IRS doesn’t just let you wait until your return is due to pay your taxes. You have to pay them as you go. For self-employed individuals, that means filing Form 1040-ES each year by April 15th, June 15th, September 15th, and January 15th (or thereabouts, the dates move around due to weekends and holidays). If you become self-employed during the year, you start at the next applicable deadline.
But how much should you pay in withholding? Paying 100 percent of your total tax liability from the prior year (110 percent if your adjusted gross income in the prior year was greater than $150,000) is a safe harbor. So you can pull out last year’s return, divide the number on line 61 by four, and you’re good to go. No penalties, no interest. Keep in mind, though, this is just your withholding. If you are going to make substantially more money one year, you will still owe the difference between any quarterly withholding and your final tax bill come filing time. If you will make substantially less, then you will be unnecessarily over-withholding your taxes throughout the year, giving the Feds and interest free loan and hurting your own cash flow. So it’s still a damn good idea to estimate, as closely as possible, your annual earnings as you go along.
You also need to keep in mind that, as a self-employed person, you owe more taxes on your income that you do as an employee – the dread self-employment tax. You see, when you are an employee, your employer has to pay half of your FICA, the taxes that go to Social Security and Medicare. But now you are both employer and employee, so you pay both halves. Currently, that comes to an additional 6.515% that you wouldn’t be paying were you an employee. That figure is a little lower than normal because of the current payroll tax cut, which may or may not expire shortly, depending on politics. There is an upper limit on the Social Security portion of FICA taxes, $110,100 currently, so the majority of, but not all of, the self-employment tax goes away once your AGI exceeds that threshold (you still owe the Medicare portion).
Here’s a withholding trick to keep in mind if you are a writer with freelance income, but who also has a day job, or if you freelance full time, but you have a working spouse and you file a joint return. The Feds only care that the proper amount is withheld – they don’t care by whom. So, you can increase the withholding on your day job paycheck, or your spouse’s paycheck, to cover what you would need to withhold on your self-employment income and you’re done. No need to file the quarterly returns.
OK, what about deductions?
Writing off the room you watch internet porn in
A biggie is the home office deduction. If you have a dedicated space in your home used for your self-employment activities, you can deduct a pro-rata share of the appropriate household expenses generated by that space. So, you take the square footage of that space as a percentage of the total square footage of your house, and you can claim a deduction for that percentage of your mortgage principal and interest, appropriate utilities and so on.
A few notes. First and foremost, the space really does have to be dedicated to your business pursuits, so if you write at the kitchen table, you’re not eligible to take a home office deduction because you also eat there, prepare meals there, and so on. The less distinct the space, the harder it is to claim the deduction. For example, suppose you stick your desk in the corner of the living room and you want to claim a home office deduction. You can’t claim the whole room, not unless you never entertain there, watch TV there, do pretty much anything else there on any sort of regular basis. Could you claim the footprint of your desk, or some smaller area around that? You could try, but be advised that home office deductions are a common red flag for audits, and the IRS may take a dim view of your reasoning. If you are going to try to claim a portion of a room, you might want to think about walling off that area with bookcases or something to support the claim that the area is used exclusively for business.
Note, too, that I said appropriate utility expenses. Even if you have a wet bar in your office, I wouldn’t try to deduct part of my water bill.
Also, remember you don’t get to deduct anything twice. So that portion of the mortgage interest you’re writing off for your home office? You have to remember to subtract that from your itemized mortgage interest deduction. So why bother, you ask? Remember, you get to deduct the principal, too, and anything that reduces your self-employment income reduces your self-employment tax and income tax. Post AGI deductions, like your itemized deductions, only reduce your income tax.
There is way more to say about home offices – tax treatment of repairs, all sorts of things. If you are considering taking a home office deduction, you need to research it thoroughly and may want to consider talking to a tax professional. Make sure that the amount of the deduction will be worth the recordkeeping hassle and the added audit risk.
Writing off your gold-plated zip drive
OK, what about other stuff, computers and such like? Section 179 allows you to write off, in the calendar year purchased, the entire amount of equipment used in your self-employment activities. For 2011, you could write off up to $500,000 of such expenditures. Frankly, if you’re a writer, you’ve got the income to write off that kind of dough, and you’re reading my blog for tax advice, you’re a fucking idiot. The point is, for almost any freelance writer, equipment can be written off in the calendar year purchased without worrying about getting into depreciation schedules. Just take the whole amount. Again remembering that your total deductions can never exceed your self-employment income. (Well, almost never. In the tax code there are exceptions to almost everything, but if you figure never, you’ll be right well in excess of 99 percent of the time.)
This can create a planning opportunity. Suppose its December. You’ve had a good year. You know you’re going to get whacked with a sizable tax bill. You also know you’re computer’s getting a little long in the tooth. You’ve been thinking that the piece of drywall you have laid across a couple filing cabinets may not be the best desk in the world. The dog pissed on your office rug and you can’t get the smell out. Now’s the time to get that new stuff. Even if you buy it on new year’s eve, you can write it off against that year’s income.
How about that trip to the Manila brothel?
What about other deductions? What about research?
If you incur travel expenses to research a work, then those expenses are fully deductible AGAINST THE INCOME THAT THAT WORK GENERATES. That’s a vital distinction. You can’t take a trip to Tahiti and write it off figuring you’ll real quick write up some crappy Tahiti novel that you’ll keep in a drawer to show the tax guy if the deduction is ever taken. So there are timing issues you’ll need to talk about with a tax pro concerning when you can claim research deductions in light of when income from the work those deductions generate is received.
Now, travel to the various cons writers love, speaking engagements, book signings and such like? Yep, you can write those off in the year incurred to the extent that you have writing income.
That “to the extent part” matters. If you made $27.32 cents this year on your self-published opus on Amazon and that’s the extent of your writing income, then that’s also the extent of deductions you can take against it. So, before you line up that book signing at the indie store in Honolulu figuring you can now write that whole trip off, first make sure you will have enough writing income in that calendar year to be able to do so. Oh, and if you’re bring your spouse? No, you don’t get to write off their expenses, too. It’s your writing income, not his or hers.
Now, there are some occasions in business where, depending on your choice of entity and other facts and circumstances, deductions and/or losses can be carried forward or back to other tax years, but I’m not even going to open that can of worms. Get an accountant.
Books? Movies? I’ve heard of writers claiming everything they spend on such entertainments as “research,” since they can claim, at a minimum, they are checking out the competition. I’ve asked tax guys about that and gotten varying opinions. Some say yeah, they’d do it. Some say it’s a pretty aggressive play that they bet would get disallowed in whole or in part in the event of an audit, but they wouldn’t expect any abusive position penalties, so it’s worth a shot. A couple have told me that, if they were a tax examiner, they’d consider that abusive and would go for the throat. So you’re on your own on that one.
OK, that’s the top of my head stuff. Gee, Dan, I hear you saying, you must have a big freakin’ head. Shut up. But what about the rest of you? Got any freelance tax tips you want to pass along?