Every year, thousands of people start down the path of becoming freelance writers. Some of them “make it” and become full-time freelance writers, some of them keep their old job and become part-time freelance writers, and some people take on a project or two and then drop out completely. Regardless of what type of freelance writing year they had, all of these freelancers have one thing in common, they have small business taxes to look into.
For a professional freelance writer taxes are a year-round concern. Writers making more than a small amount of money over the course of the year likely owe quarterly estimated tax payments. And writers earning $50,000, $75,000, or even $100,000 per year must focus on squeezing every business deduction they can out of any transaction that is even remotely related to their small business or risk being crushed under the burden of taxes.
Self-Employment Tax and Small Business Owners
The worst of all the taxes inflicted upon hard working Americans is the self-employment tax. While millions of people get up in arms about the estate tax, which most of them will never pay, any American who has the nerve to go out, work hard, and succeed in business for themselves will find themselves struggling with the onerous burden of the self-employment tax.
Self-employment tax, also referred to as SE tax, is a bit of a misnomer. What SE taxes really are is the double-whammy of paying both parts of Social Security taxes and Medicare taxes.
Most people are aware that they lose a significant part of their paycheck each week or each month to a wide variety of taxes. There are Federal income taxes, state income taxes, and some poor souls even pay local income taxes to a city or county. Then there is another category of taxes. These taxes are Social Security taxes and Medicare taxes.
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The government and the special interests that they serve do a wonderful job of obfuscating, spinning, and flat out tricking the American public into a compliant daze simply by using a little misdirection. The words Social Security never appear on most paystubs, a subtle, but effective way of dissociating the pain of paying taxes from the Elysian Fields of government funded retirement. Instead, Social Security taxes are usually labeled FICA on worker’s paystubs. I’m sure this stands for something to make it seem like there is no slight of hand going on, but most people would understand the words Social Security Tax much better, and everyone knows it.
Over the years, the secret of FICA has all but disappeared. There are few people these days that don’t know what FICA is. However, what many people do not know, is that the FICA taxes that show up on their paycheck is only half of the total Social Security tax. The rest is paid by their employer.
As an entrepreneur who works for yourself, you are both the employee and the employer. Add it all up and the SE tax rate is 15.3%. That is 12.4% for social security and 2.9% for Medicare. That doesn’t sound so bad until you realize that this amount is on top of your regular tax bracket rate!
If you do well enough in your business to be in the 30% tax bracket, that means that your tax rate for Federal tax purposes is over 45%. That doesn’t even include any state or local income taxes. In other words, as a successful freelance entrepreneur, you can expect to pay half of every dollar you earn in taxes.
Your only defense is to deduct as many business expenses as possible.
Business Tax Deductions for Writers
Don’t wait until you are earning more money from your writer to start deducting your professional writing expenses. Uncle Sam won’t wait to start taxing you, so do wait to start trying to get a little bit of your hard-earned money back.
Top 10 Tax Deductible Items for Writers
- Computers, Printers, Monitors, etc. – If you need it to write, you can deduct it.
- Office Supplies – Paper, toner, dictionaries, books, light bulbs. – If your office wouldn’t function without it, it’s deductible.
- Broadband Internet Service – You need the Internet for research, job hunting, submitting projects. Deduct it.
- Equipment – Filing cabinets, desks, chairs. These bigger expense items are all deductible. Don’t worry about depreciating them. Unless you are really cranking out expenses, they’ll all fit under your Section 159 exception.
- Cell Phone, Long-Distance, Skype – If you call clients, talk to prospects, or participate in conference calls, that is deductible. There is an issue of personal use if you don’t have a separate line, but keep records, especially those long-distance bills for a 45-minute conference call. Those are all legitimate expenses.
- Mileage – Any time you go anywhere for business reasons, that mileage is deductible. Trips to Office Depot for toner count, so do trips to see clients, driving to conferences, going to the library for research, a trip to get photos, even a trip to the UPS store. Get one of those little mileage books and keep one in every car you own. Write down EVERYTHING and deduct every single foot.
- Parking – Save your parking receipts and deduct, deduct, deduct. Here is a dirty little secret, parking receipts contain very little information, so it is almost impossible to disallow them as non-business expenses. When in doubt, deduct!
- Eating Out, Entertainment – O.K. not everything qualifies, and going overboard here can get you flagged for an audit. However, anytime you entertain clients or potential clients you can deduct those expenses. You and your buddy went to the ball game? He’s the V.P. of Marketing at a Fortune 500 Company? Deduct the cost of those tickets, baby! Make sure and ask him if he has any projects for you at some point during the game. Again, don’t go crazy, but if you’ve got $50K in revenue and $800 in entertainment expenses, no one is going to look twice.
- Home Office Tax Deduction – Once upon a time, the home office deduction was an audit flag. Not anymore. Setup a writing office in your home and you get to deduct not only part of your mortgage payment, but part of your heating bill, electric bill, and so on. Technically it must be for business only, so get some proof. Take pictures of your home office without a single non-business item in it. Make sure you can see a calendar or something else with a date. Take a picture every year. Use them as proof. What if you get audited? There is no such thing as a surprise audit. Clean up your office and make it for business only. Or, if you don’t want to bother, say you stopped using it for business this year.
- Education, Seminars, Training – Regular wage earners must meet the miscellaneous 2% floor to deduct these things. Have “the business” pay for them for you and then you can deduct them from the first dollar. Get a business credit card to help establish who paid for it. If you don’t have one, just make sure that the address on the confirmation goes to: Your Name, Your Business Name, Address, just like it would if they were sending it to IBM.
Good luck with your end of year tax planning strategies.
Small Business Taxes Tools
A new freelance banking app called Lance advertises making your estimated quarterly tax payments for you automatically by monitoring your income.
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