Writing is a business. Businesses pay taxes and claim deductions. Legitimate ones.
As a writer, you’ve got to prove to the IRS that you take writing seriously. That means that you are not a hobbyist and that you can justify expenses because you have created a paper trail of receipts, contracts, invoices and the like.
The following article excerpt is one of the best summaries I’ve read about writers and taxes. Even if you don’t claim writing income or deductions this year, the information will prepare you for the years you do.
- The original article is long and detailed, and so you’ll see a bunch of ellipses.
- This piece was written in 2010, so some things have changed.
- Further, the piece doesn’t constitute financial advice. For that, work with an accountant or — if you are a masochist with time on your hands — go to the IRS site.
© 2010 Writer’s Digest
by Bonnie Lee
Self-employment taxes (why it pays—literally—to know this stuff)
… If this is your first time dealing with self-employment income, you might be shocked at what you owe. It’s going to be a lot more than you imagined! Let’s say you’re in a 15 percent tax bracket. You’re paid $1,000 for an article you’ve written. You get your 1099 form and take it to your tax professional. If you have nothing to deduct in expenses against that $1,000, you’ll find yourself with a tax bill of $150 in income taxes (15 percent). But because you’re self-employed, you’ll owe another $150 in self-employment tax (15.3 percent)—$300 altogether. You just vaulted into the 30.3 percent tax bracket. Yikes!
… There’s no way around paying the self-employment tax. Those dollars fund your Social Security and Medicare. When you work for wages, Social Security and Medicare taxes … are withheld from your paycheck, and your employer matches the deduction … But when your pay status is that of an independent contractor, no taxes are withheld from your pay. You’re the boss as well as the employee, so you must pay both sides.
The good news is that because self-employment tax is based on your net profit, you can reduce it by taking deductions against your income. Let’s use the same example of a $1,000 payment for an article you’ve written. Say the topic required you to travel 100 miles to cover an event. You can deduct the cost of mileage, admission, research, meals, lodging and any other “ordinary and necessary” business expenses you incurred in order to complete the assignment. You can likely add in a bit for office supplies, and if you qualify, you may be able to deduct home office expenses …
Hobby-loss rules (How to tell if your writing is an occupation or a hobby)
… The IRS leaves it up to each individual to make an honest determination of whether his writing activities are a hobby or a business. You make the decision as you file your tax return.
But the IRS gets a big scowl on its face when it sees five or more years of losses from a business activity. It’s inclined to audit and disallow the losses if it feels an individual is attempting to write off her hobby …
Here are some ways to prove business intent so you may enjoy losses against other income:
- Keep business records, either on an accounting software program or on spreadsheets.
- Maintain a separate checking account for transactions related to writing. (This not only proves business intent, but will make it easier to track income and expenses.)
- Attend classes and conferences to improve your skills.
- Advertise, network, seek new clients and keep a journal of these activities.
- If you plan to deduct vehicle expenses, keep a mileage log.
- Keep a phone log of business-related calls.
- Obtain any required licenses and insurance.
- Give your business a name.
- Chart future projections and plans to turn the activity into a profitable enterprise.
By following the above guidelines, you’ll demonstrate a profit motive and be more likely to convince an auditor you’re serious about the business of writing …
Deductions (How to determine what qualifies)
… The list of what can or cannot be deducted is short. One reason there is no definitive list is because of the variance of expense requirements from one industry to another. What is reasonably deductible for one may not fly for another …
When it comes to writing, you may encounter some or all of the following deductions: office supplies, computers, copiers, printers, telephones, travel, meals, entertainment, self-publishing and print-on-demand costs, trademarks and copyrights, domain name expenses, costs of book-launch or book-signing events, advertising, marketing and promotion, vehicle expenses, postage, bank charges and outside services—to name a few. If these expenses are related to the business of writing, they are deductible.
Let’s examine some areas of deductions that have specific IRS guidelines and can be tricky to defend.
You can deduct a home office if you use the space exclusively and as your principal place of business.
Exclusive use: The area cannot be used for personal pursuits, only writing projects. That said, the space needn’t be a full room. If you have a desk and computer set up in your bedroom, you can deduct the area used as an office …
Principal place of business: You cannot have another space outside of your home (like a rented room) where you pursue your writing projects …
Travel, meals, entertainment
If you travel quite a bit for your writing business, you should maintain a travel file of notes, correspondence and any other documentation that will demonstrate to an auditor that the trips were for business rather than personal pleasure …
Just be prepared to defend yourself. Keep all of your notes and your finished or unfinished project(s) in case you ever have to prove your point to an auditor …
The term “listed property” refers to the acquisition of capital assets such as vehicles, computers and cell phones. Most self-employed people use these items on a personal level as well as for business, so you need to track the percent of business versus personal use. You then apply the percentage of business use to the cost and operating expenses, and use the result as a basis for your deduction. Of course, the IRS expects you to keep logs to verify those