When People Are Companies: Tax Tips for Sole Proprietors

When you launch a career as a freelance writer in the United States, you’re also launching something else—a business. Most freelance writers operate as sole proprietorships, which is the easiest way to set up a business in most states. In fact, this sometimes doesn’t involve any business set-up hoops at all. However, filing freelance taxes is more complex than what is typical for an employee who receives a W-2. When you work for yourself, taxes become a whole new ballgame.

Freelance taxes are something you need to manage year round. After all, you don’t want to get a surprise bill in April for more than you had anticipated. While you do have to give attention to taxes more than once a year as a sole proprietor, the process doesn’t have to be difficult. With a little attention to detail, you can tackle your taxes and get back to doing what you love—writing!

Documentation Is Your Friend

Document, document, document—that should be your freelance tax mantra. Keep receipts for everything related to your freelance writing, from internet connection bills and coffees with clients to your computer. These expenses will result in deductions when you file your taxes. Deductions, like documentation, are your friends. After all, they decrease the amount of taxable income you have—and thereby the amount of taxes you have to pay.

Keeping documentation is important for a few reasons. Without receipts, you may overlook expenses and forget to deduct them when tax time comes around. In addition, documentation lets you back up your deductions if there is ever any question about your tax claims. Although audits are rare, self-employed people are slightly more likely to trigger red flags and receive a closer look from the IRS. If you have your documentation, then there is nothing to worry about.

Know Your W-2s from Your 1099s

For most people who are employed by a business, tax time means W-2s. Your W-2 shows how much you were paid and how much tax was withheld from your earnings. When you file taxes with a W-2, whether you owe taxes or get a refund depends on whether an excessive amount was withheld from your pay.

As a freelancer writer, most of the money you make will be reported using 1099-MISC forms. 1099s are provided by people who paid you over $600. These forms are essentially income statements. Since people who hire you as a freelance writer generally don’t pay any taxes on your behalf, the income you receive has not been taxed. 1099s indicate that someone has paid you X amount of dollars, and you haven’t been taxed on it yet.

Understanding the distinctions between these forms is an important part of doing your taxes. Keep in mind, however, that these forms may not accurately capture all of your income. It’s very possible that you have clients who have paid you for your work, but who haven’t paid you over $600. Those clients don’t have to send you a 1099, but you are still responsible for paying taxes on that income. You will simply have to report it yourself on your tax form.

A word to the wise—don’t think that there is no way for the IRS to know that someone has paid you if they didn’t send you a 1099. Those clients will likely claim the cost of your work on their taxes as a deduction, so there will be a paper trail. Trying to scoot by under the radar could trigger some very costly—and even criminal—consequences.

Say Hello to Schedule C

Schedule C is the most important part of your tax form as a freelance writer. This form is where you plug in all of your income and all of your deductions. This process will allow you to come up with your taxable income amount. Your Schedule C is where all of your documentation will kick in, as you write off as much of the cost of doing business as a writer as you can.

You can deduct most reasonable expenses that you incurred in your freelance writing work. This includes travel costs for work-related trips to see clients or attend industry conferences. You can also deduct expenses for entertaining clients, such as tickets to take a client to a sports match. In addition, you can deduct the cost of subscriptions or membership fees for professional organizations, business publications, and some industry-related educational costs. As a self-employed person, you can also deduct the cost of your health insurance. However, the policy must be in your name or your business’ name.

Two tricky Schedule C areas for freelance writers are non-professional memberships and home offices. Although you can deduct work-related entertainment and travel expenses, you cannot deduct the cost of membership fees or dues that give you access to those things. For example, you can deduct the cost of your hotel stay, but you can’t deduct the cost of membership in a rewards program. You can deduct the cost of tickets to a golf tournament, but not the expense of your membership in the country club that is hosting the event.

Home offices are a larger area of confusion. To be deductible, your home office has to be just that—an office. It can’t be your kitchen table, living room coffee table, or corner of your bedroom. The space must be dedicated exclusively to your work. If it’s strictly a workplace, then the deduction is based on the percentage of space the office occupies in your home. This is based on the square footage of the room versus the rest of your house.

Don’t Wait for April 15

For freelance writers, April 15 get its own special calendar alert—but it shouldn’t. If you wait until April 15 to start dealing with your freelance writer taxes, then a very expensive lesson could be waiting for you: self-employment tax isn’t cheap.

With self-employment, you are responsible for paying the entire amount of your Social Security and Medicare taxes for yourself, unlike when an employer pays half of them for you. This means (using 2017 numbers) that you will automatically owe 15.3% of your total income in taxes. That figure could be an unwelcome surprise when you file.

The way you can avoid this massive springtime bill is to pay your taxes throughout the year. The tax year is broken up into quarters:

• January 1 – March 31
• April 1 – May 31
• June 1 – August 31
• September 1 – December 31

Freelance writers can pay estimated taxes in each of these quarters to avoid having a huge amount due in April. The IRS tax form 1040ES is for these estimated payments. Form 1040ES will walk you through the process of estimating your taxes. Keep in mind that estimated tax payments aren’t actually optional. Although many freelancers frequently overlook estimated tax payments early in their careers as sole proprietors, the IRS expects estimated payments if you think that you will likely be on the hook for over $1,000 in taxes on April 15.

What should you do if you don’t make estimated payments and find out you can’t pay when you do your taxes? First, don’t panic, because you’re not the first (or last) writer to get a freelance tax surprise. Second, don’t ignore it, because penalties can pile up quickly.

Instead, file your taxes on time and pay as much as you can. After you file, contact the IRS to set up a payment agreement. The IRS will work with you to set up a monthly payment plan that allows you to spread out the costs. Over the course of your plan, interest will accrue, so prioritize paying it down. Prepare yourself for the next tax season, and be sure to make estimated payments going forward in your freelance career.

Change Is Knocking on Your Door

The Tax Cuts and Jobs Act, signed in December 2017, means that 2018 taxes (filed in 2019) will bring big changes for freelance writers. Most freelance writers will pay fewer taxes under the plan, which provides a deduction for pass-through, or business, income. Pass-through income excludes dividends and interest, but refers to the income that your business generates. In other words, the money your sole proprietorship generates is pass-through income. As such, it is eligible for a tax break.

Under the new law, business income is subject to a 20% deduction. That means that before you even start listing your deductions, you get to cut 20% from your income. This could cut the taxes you owe significantly. Yes, you can claim this deduction as standard for your business income, regardless of whether you also have income from a wage-earner job and only freelance part-time (although it only applies to your freelance writing income).

There are some restrictions on this benefit, mainly for service-related fields, such as healthcare and law. The deduction is phased out for these fields after $157,500 worth of income. These restrictions are generally not applicable to freelance writers. However, once you get into this tricky realm of increasing income and deductions, it’s always a good idea to check in with a tax professional.

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