How do you receive your tax refund?  Check or direct deposit?

There really are no strict rules as to which method you should choose.  You ought to know, however, that the IRS prefers to use the direct deposit method simply because this costs less and also is faster than sending out checks.

On your part, it also would be better to opt for direct deposit.  How so?  The reasons are practically the same.

1. Transactions are faster via direct deposit. Transactions are practically instantaneous and the IRS sends out tax refunds via this method before they send out paper checks.
2. The chances of you actually getting the money are higher. That’s because there is no check that might get lost in the mail.  We all know just how efficient the postal service can be at times!
3. The direct deposit option is FREE. You do not have to pay extra to have your tax refund sent directly to your savings account or checking account.

However, there is a drawback to direct deposits.  It is something that can be avoided, though.  If you choose to use the direct deposit, you have to be extra careful with inputting your bank account details.  Every letter and number must be correct, otherwise you risk losing your tax refund.  There have been horror stories wherein it took tax payers years to get their tax refund back because of a slight error.  In some cases, they never got the money back.  This is where checks have an advantage – it is easier to retrieve the money if someone cashes the check.

Bottom line: you have everything to gain by choosing the direct deposit method.  It won’t kill you to make sure that your bank information is 100% correct anyway.

I don’t live in the United States.  Can I apply for U.S.-based freelance writing jobs?

Since it’s such a common question, I want to provide an answer publicly.  Here goes…

Can you apply?  Yes.  The hiring manager will determine whether or not they’re willing to work with a writer outside of the United States.  You’ll never know if they’re willing to do so if you don’t apply.

When it comes to freelance writing, you’re not an employee.  You’ll either be paid as a contractor or a vendor and that means you’ll receive that payment as miscellaneous personal income or as earnings for your business.  Tax rules vary from one country to another, so what really matters is how the client is willing to pay you and how they want to report those payments to the Internal Revenue Service.

These days, many clients are happy to pay via PayPal, which offers an automatic currency conversion (which may or may not require you to pay fees depending on how both your account and your client’s accounts are set up).  That means they can simply send money to you via PayPal as they would any other vendor and PayPal takes care of the rest.  Banking-related issues that used to make it more difficult for clients to pay vendors outside of the United States are not as prevalent anymore thanks to tools like PayPal.

Keep in mind, I’m not an accountant, and this answer is based on my own experiences writing for clients outside of the United States and witnessing clients who pay multiple writers in various countries around the world without any problems.  However, the bottom-line answer to this common question is still yes.  There is no reason why you can’t apply for freelance writing jobs if you’re not from the United States unless the job description specifically restricts applicants to U.S. citizens.

A final suggestion: it is worth your time and effort however to consult with someone in your country who understands business, income, and tax-related issues so you set your freelance writing business up in the best way from the start.

Image: stock.xchng

At the top of my list: hiring family members to work for you so that you can make some tax savings because of medical health insurance and wages.  Here’s one source which actually suggests these two points. One, it suggests hiring your spouse as an employee. As the employer, you can then provide medical benefits to your employee and then enjoy an additional tax deduction. Two, it suggests hiring your children:

Sole proprietors who hire their kids to do data entry, answer phones, clean the office and perform other business-related activities can deduct their wages on Schedule C, as long as the compensation is reasonable for the type of work performed. Wages paid to the children are exempt from Social Security tax if they are under 18 and are not subject to federal unemployment tax if they are under 21.

In addition, unless the child has a lot of unearned income, chances are that he or she won’t owe income tax on the wages, which lowers the family’s tax bill considerably. Also, a parent can make a contribution to an IRA or a Roth IRA for them based on their wages.

I don’t know if I am being too conservative here, or maybe I am just missing something.  I’ll throw the ball in your court, guys.  I’ve got two questions for you:

1. What do you think of these two suggestions as  ways of trimming your tax bill?
2. Are there any tax deduction “techniques” that make you feel uncomfortable?  If so, what are they?

Photo credit: Foxtongue

How many times have you been tempted to NOT report income because you think that the IRS will not be able to track it anyway?  Perhaps your best friend might have told you – if you can get away with not reporting something, why not?  Or maybe another freelance writer has shared experiences wherein he/she did not report part of his/her earnings and didn’t have any trouble.

Do you really want to risk it?  If anyone can track an individual’s earnings, it’s the IRS.  What the IRS doesn’t know may not hurt it, but it will probably hurt you.  In fact, I’d go as far as to say that what the IRS doesn’t know just might make it even more curious.

So what is there to do?  If there is one rule that you ought to remember when it comes to your taxes, it is this: declare everything. Don’t even think that you can hide.

I am not trying to make out the IRS as the big bad wolf here. All I am saying is that – cliche as this may be – honesty is the best way to go.  You earn money.  You pay taxes.

Now here’s something to think about: How many times have you been tempted to hide part of your income?  How many times have you actually done it? (Not that I am expecting any answers for the second question.;))

Photo by howcheng

That is probably common sense – you don’t need me to tell you that you will save money if you pay everything in one go (much like with other purchases that you make). Do you know exactly why/how you can save money by paying your taxes in full, though? Take a look at these convincing facts.

Personal exemptions and deductions

These exemptions and deductions vary from one individual to another. Some people may not qualify for them, while others may have more exemptions. The common denominator is that these “perks” can be claimed only if you file your return.

Penalties and charges

Deadlines exist for a reason, and if you miss the deadline for filing your tax return, you will most certainly have to pay surcharges. You may not realize it, but filing late can cost you as much as 25 percent more!

Here’s another thing – even if you pay via an installment agreement, applicable penalties and charges are not always frozen. In short, you’ll still be paying more than you ought to if you had only paid in full.

Social Security Benefits

In some cases, self-employed individuals may lose out on some benefits from the Social Security Administration. In calculating social security benefits, the Administration depends on the documents that you file. If you do not file in full, you might not get all the benefits due you.

As much as possible, pay your taxes in full and avoid installment agreements.

Photo credit: ericskiff

In this post, I am going to share some tips that can help you avoid a tax audit.  Yes, I sincerely believe in the old saying “an ounce of prevention is worth a pound of cure.”  Let’s begin with looking the groups of people that the IRS usually looks more closely at.

The bad news is that, in many cases, those who declare themselves to be self-employed are the focus of attention.  Since you’re a freelance writer, there really isn’t much you can do to change your self-employed status.  Still, the IRS does not pore over every self-employed person’s tax returns.  What they do is take a closer look if they encounter certain factors.  Some of these are:

• Home office deductions
• High earnings (according to CNN Money, the threshold is about $200,000)
• Large deductions for charity

If you know that your tax return will have one of the above, all that you can do is keep records really carefully.  Make sure that all of your receipts are filed and easily retrieved if necessary.

Here are other things that you can do to lower your tax audit risk:

Don’t round off numbers

You might be tempted to round off figures to make things simpler. However, in the interest of accuracy, you’re better off indicating the exact amount – down to the last cent.

Include documentation for items that you think might be questioned

While you can’t really be sure what will be questioned or not, there are some items that you might have a “feeling” about. When in doubt, just go ahead and attach the paperwork. This will probably save you the trouble of a tax audit later on.

Check and double check your math

I am sure you already do this, but the importance of double checking the math in your tax return cannot be emphasized enough.

Use the home office as it is supposed to be

That is, set it aside for that sole purpose. You already know that home office deductions raise a red flag. If you really do have a home office, then make sure that it is justified. Your couch does not count as a home office – even if you work there the whole time.

Photo credit: rvw

Correspondence Audit

This is the most common type of tax audit, and some tax experts don’t even consider a correspondence audit the “real thing.” The whole process is done via mail, wherein you will have to send in documentation that will provide the IRS with an answer to the item/s it is questioning. It is pretty straightforward and is nothing to worry about.

Office Audit

As the name implies, this kind of tax audit is done in an IRS office. You’ll also have to provide the IRS officer with documents, much like in a correspondence audit, but this time, you’ll have to show up. In an office audit, you will be interviewed by an IRS official.

Field Audit

This is the mother of all audits – when people from the IRS go over your books thoroughly. The one good thing about this type of audit is that you have the right to name the place and time of the field audit. Experts suggest that you choose a “neutral” place, such as your accountant’s office, for the audit. More so, take as much time as you need to get your records in order so that you will come out of the field audit unscathed.

In the next post, we’ll talk about some tips that can help you avoid being audited by the IRS.

Photo credit: mdid

While we’re on the topic of contests and prizes…

Have you ever won a prize – cash or otherwise – from a contest?  Let’s say you joined the contest above and you won, what would you do with the prize?

Oh, I can count the things that I can use the $500 for.  It may not be a king’s ransom, but it is not such a small sum either.  Given that this is the section about taxes, though, my question was more about what you do with contest prizes tax-wise.  Are contest winnings taxable?

I wish they weren’t.  After all, having to “give away” part of what you’ve won takes a little of the excitement away, doesn’t it?  There’s no going around it, though.  If you win cash from a contest, then it is considered taxable income.  You have to declare this under “Other Income.”

If you win some other prize – a trip, a stay at a hotel, a gadget, etc. – you still have to declare this under the same category.  Do you have to declare the exact amount of the prize?  The Fair Market Value (FMV) is what’s required, but if you can show that the value of the prize is lower than the FMV, then you can declare the lower value in your Form 1099.

So who’s joining that contest?  Good luck, and don’t forget to declare your winnings!

When it comes to taxes, the need to track your income is paramount. After all, how will you be able to declare your income and compute taxes accurately if you do not follow some one system or another?

This post is the result of a comment I saw on some forum regarding one woman talking about a client who forgot to send in his 1099 before tax time. As a result, she forgot to declare that as part of her income. The job was a one-time deal done at the beginning of the previous year, explaining the lapse. For many freelancers, one-time deals are not that uncommon, and if you are not careful, you might find yourself facing a similar situation as the one I just described.

You may be thinking, so what? Well, this just might bite you in the butt later on, when the IRS sends you a revised tax statement. If it’s a small job and it’s just one, then no worries. However, if you neglect to declare a considerable amount (or several jobs amounting to a lot of money), then you’ll end up having to pay maybe several hundreds more.

So how do you track your income?

Obviously, this depends on your personal preference. I suggest keeping separate files for different items such as receipts, bank statements, invoices, etc. Whether you use a box, a filing cabinet, an expandable folder, an Excel file, or some other software, it doesn’t matter. The bottom line is that your filing system will help you NOT to overlook any income that you make so that when you declare your taxes, you can be as error-free as possible.

FWJ readers, care to share your income tracking system with us?

If you’re dealing with a person face to face, it might be easier to follow up on the payment. If you’re dealing purely via the Internet, it will be much more complicated. Worst case scenario – you do not get paid for your work. While this hasn’t happened to me yet, I am very much aware that it could happen. Indeed, maybe it has happened to some of you.

How does this affect your taxes? Can you write it off as a business loss?

The answer depends on how you declare your income. There are two options – the accrual method of accounting and the cash method of accounting. The former method means that you report your earnings even if you haven’t received the money yet. Let’s say you got a job order right before you report your taxes. You will be receiving an X amount of dollars for the job order, but not till a few weeks later. Using the accrual method, this amount is already part of your earnings even if you do not have the cash with you. The cash method is pretty straightforward as well – you only report whatever cash you have actually received for your work.

The good news is that according to IRS Publication 535, if you use the accrual method of accounting, you can write off unpaid invoices as a business loss. However, if you use the cash method of accounting, this does not apply.

For freelance writers, however, all the responsibility lies on our shoulders. If you opt to go the monthly payment route, you solve the problem of having to pay in bulk. It could be quite burdensome to go through the motions every month, though. What are you to do then?

Here’s a suggestion: pay quarterly or yearly, but make sure that you set aside money every month for taxes.

This will entail planning at the beginning of the year so you have a rough idea of how much to save each month. You simply need to estimate the percentage that you will have to pay and then set aside that much of your earnings from freelance writing monthly. When tax time comes, you will still have to go through all the paperwork, but you can rest assured that you will have more or less (hopefully more) money to cover everything. An added benefit of making this a habit is that, if you set aside more money than necessary for your taxes, you will end up having an extra savings account.

Anyone here who has been putting this in practice? Care to share your experience?

Let me start out with a very important aspect: listing down business-related expenses.  Organizing your taxes and filing them may prove to be an arduous task if you leave everything for the last minute.  If you do the groundwork way before tax-paying time, though, your work just might be a little easier.

So how do you go about identifying your expenses?

Form 1040

Also called Schedule C, old timers would be familiar with this form by now.  If you’re relatively new to the freelance game, then this is the form that will be your best friend (or worst enemy) come tax time.  Here are useful links.

Form 1040

Instructions for Form 1040

Form 1040 actually includes a comprehensive list of expenses.  It is a good idea to base your own list on this form.  This way, when you file your taxes, your list will be synchronized with the official form.

Expenses

Here are the most common categories that freelance writers use:

• Advertising – example are business cards if you use them, as well as online advertising.
• Legal and professional services – for example, if you employ an accountant, you can file the fees here.
• Repairs and maintenance – more likely than not, your computer is exposed to a lot of wear and tear – I know mine is on practically 24/7!  Repair fees and other maintenance costs can be filed in this category.
• Supplies – you can include regular office supplies such as pens, paper, printer ink, etc.
• Utilities – your electric bill and gas bill (NOTE: this does not include telephone bills, Internet, etc.)
• Travel – if you go to conventions and seminars, you can include these expenses.
• Meals and entertainment – you may be a freelancer but this does not mean that you don’t take your clients out to lunch or drinks.  You can actually count these as business expenses!
• Other expenses – the category where you can dump all other business-related expenses such as telephone, Internet, magazine subscriptions and books (related to your trade, of course), and other tools that you may need to practice your profession.  The bottom line is that whatever you put here should be directly and obviously related to your freelance writing.  Otherwise, you might be questioned by the IRS.

Do you have other items in your list of business expenses?  Why not share them with the rest of us?

I have been in the bad habit of letting my tax burden pile up, and paying the entire amount that I owe right on the due date. On one hand, this allows me to keep my money in my pocket longer, but on the other hand, I have four massive bills to dread every year (not to mention annual income taxes).

So, starting this quarter, I have decided to turn over a new leaf and start paying my quarterly estimated taxes monthly.  Here are the pros and cons of this (possibly insane) course of action as I see them:

The Pros of Paying Quarterly Estimated Taxes Monthly

• Paying quarterly estimated taxes monthly breaks up the tax burden. There’s less chance of failing to plan for January 15^th, April 15^th, June 15^th or September 15^th and suddenly finding yourself in financial crisis.
• You can also inoculate yourself against penalties. If the IRS finds that a sole-proprietor hasn’t paid her full complement of taxes over the year, they’ll charge interest and a penalty.
• Filing monthly is also fairly easy these days. The IRS gives us Form 1040-ES, but it’s set up with only four, quarterly vouchers. Nowadays, with electronic filing through the Electronic Federal Tax Payment System, you can pay your federal taxes just like you’d pay your other bills online.

The Cons of Paying Quarterly Estimated Taxes Monthly

• The money you pay out in taxes early could be sitting in an interest-bearing account making money for you, not Uncle Sam.
• Something might change with your business. You might decide to throw in the towel, or maybe your industry self-destructs. Suddenly, your income is much lower than you expected for the year, but you’ve already paid far too much in taxes. You’ll get the overpayment back as a tax refund, but that isn’t until you file your annual income taxes after January 1^st.

For now, I’m going to stick with the monthly plan. How about you? Do you suck it up and shell out quarterly estimated taxes four times a year or go a different route when it comes to quarterly estimated taxes?

The obvious solution to this headache? A second bank account, devoted solely to your freelancing income. But not so fast, there are pros and cons to opening a second bank account solely for your freelancing income.

Just Do It: Two Bank Accounts are Better than One

The biggest advantage of a business account is peace of mind at tax time. Deposit all of your income into the account, pay all of your expenses out of the account, and your neat and orderly bank statements are your accountant’s dream at the end of the year. There’s no need to worry about accidentally deducting a personal expense and ending up with egg on your face (and no eggs in your fridge) in case of an audit. And there’s no chance of you forgetting a tax deduction because a business expenses got mixed in with your household purchases.

If you want to keep your financial life neat, simple, and uncomplicated. Then opening a second checking account for your freelancing income and expenses may be for you.

Don’t Do It: Commingle Those Funds

Have you deposited a paper check lately? Then you know that you sometimes have to wait a day or more for newly deposited funds to become available. I think we all remember the days of waiting impatiently for a check to clear. If you open a business bank account, you might put yourself through this irritation twice – once when the check clears in your business account, then once when transferring your funds from your business account to your personal account. Not to mention, many banks charge fees for everything. When opening a second bank account, you may end up nickel and diming yourself out of your profits.

Besides, who wants to balance two checking accounts at the end of the month? Some tax pros, like June Walker the well-known accountant to indies, say Schedule C-ers (us unincorporated folks) have no need of a separate bank account as long as we keep our financial house in order. June gives the example of a freelancer buying groceries. Some of the food is for the family, while some is for a client who’s coming to dinner. The ingredients used in client’s risotto are tax deductible, while the munchkins’ Teddy Grams are not. Does she pay with her business account or her personal account? (Or does she drive the clerk nuts by separating her groceries into piles?) A simple visit to the grocery store becomes a hair-tearing experience when a freelancer tries to use two accounts.

If you feel confident that you can keep track of your freelancing income and expenses, then you may not need to bother with a dedicated bank account for your business.

A final note: If you are incorporated and commingle your business and personal funds, you could be in big trouble come lawsuit or audit time. Check with your accountant about your options as an S-Corp, LLC or other incorporated entity.

Jennifer Escalona is not an accountant, nor does she play one on TV. Be sure to consult your financial pro before making important financial decisions about your business.

Hang on to Receipts

First, keep receipts or invoices for anything you purchase that could even remotely be considered part of your business. Even if you aren’t sure whether your book on stress management is a deductible business expense, a savvy accountant can help you sort it all out at the end of the year.

If you have trouble managing your receipts, a service like Shoeboxed can be your best friend. This Durham, NC-based company sends you a friendly blue envelope, allows you to stuff all of your paper receipts inside, pays your postage, scans and digitizes them for you, then stores them on the cloud in an easily searchable format. Believe me, at the end of the year, your accountant will appreciate you using Shoeboxed for your receipts much more than she will appreciate you using a box for shoes.

Be Your Own Bookkeeper

Okay, or hire somebody. Either way, keep track of all of your business expenses as you go along. Don’t be like me.  When preparing my 2008 tax return last year, I found myself logged into Paypal eyeballing mysterious transactions from places like “HistoryImage” and trying to remember what on earth they were for. Were they business expenses or had I bought a framed print of a turn-of-the-century preteen bicycle messenger smoking a hand rolled cigarette? (It turns out I had, but that’s a story for a different day.) If I’d taken the time every week or month to jot down my business expenses, I wouldn’t have had to face my entire sordid 2008 internet purchase history.

Expenses such as utilities are also much easier to manage if you record them as they come in rather than trying to search through your bills (and calculate percentages) at the end of the year. You don’t want to let a single business expense slip through your fingers because every expense you record means that you get to keep more money in your pocket at tax time.

Write it Down

As for my own bookkeeping, I started out keeping track of all my business income and expenses in an Excel spreadsheet. If you’re spreadsheet savvy and have few expenses, you can probably get away with simply recording every transaction on your spreadsheet. Just make sure that you note what each expense was for. By the end of the year, you’ll forget why you spent $19.77 at “Rami Campus.”

I would share my own rudimentary Excel template, but my accountant made me promise never to foist such a horrendous document on the world ever again.  I did find a few income and expense tracking spreadsheets online, but all of them would require modification to suit a freelancer’s needs, so I suggest creating your own or surfing around until you find the one that works best for you.

That is, unless you don’t want to bother with spreadsheet creation. As soon as I realized that my spreadsheet was hopelessly convoluted, I moved on to tracking my income and expenses in Outright.com, a service designed with sole-proprietors just like me in mind. (Full disclosure: Outright.com is my client, though I was a user first.) A previous FWJ posts covers the ins and outs of Outright.com for freelance writers, but suffice it to say that Outright.com is a free online application that helps freelancers easily record income and expenses without the spreadsheet.

No matter what solution seems right for you, be sure that you keep your receipts and record your income and expenses throughout the year. Come tax time, you’ll be glad you plucked all of those juicy write-offs out of business expense obscurity.

Sadly, no.  While they’re no fun to think about, if you’re a freelance writer, tax deductions are a part of your life all year round. And trust me, you want to think about tax deductions because they’re going to save you money in the long run.

What Can I Deduct?

Almost anything you buy to use in your business can be deducted on your taxes. In the past, respectable tax payers have been able to convince the IRS that cat food, beer, and even breast implants are viable tax deductions. While you’re probably not going to convince the IRS that your new DDD’s are integral to your freelance writing business, there are plenty of deductions you can safely take:

(Just because I said that doesn’t mean you shouldn’t run all this by an accountant or tax pro before filing taxes. Please don’t substitute this blog post for advice from a tax professional.)

Office Supplies – It’s fairly easy to be a “green” freelance writer, but until the world goes entirely paperless we’ll always need supplies like printer ink and pens. Save your receipts when you jet out to the office supply store.

PayPal Fees – Do you grimace in pain every time you see PayPal bite a chunk out of your invoice? Never fear. You can get that approximately 2.9%+.30 back at tax time by writing it off as a bank fee.

Business Phone – This deduction is easy to take if you maintain a separate phone line for your business, but really, in the age of the smart phone, how many of us do that? Just a couple of weeks ago the IRS removed cell phones from their “listed property” category. While tax pros seem to agree that this is good news, the IRS hasn’t yet issued any guidance on how sole-proprietors like us should treat cell phones that we use for both business and personal purposes on our 2010 taxes. Until they do, stay tuned!

Professional Services – Do you use an accountant at the end of the year? A bookkeeper? Maybe a business coach? You used those services to help your business and you can write them off.

Professional Memberships and Networking Events – I’ve been to networking events that set me back hundreds of dollars. Somehow the fact that I’ll be able to write off those fees at the end of the year has helped me more easily swallow forking over that cash.

Mileage – If you drive your personal auto to meet your clients, note your beginning and ending mileage in a mileage log. At the end of the year, you can deduct .50/mile. Your bus, train or taxi fare is deductible, too.

Contractors – The amount you pay anybody you hire to help you work in your business is tax deductible. Just be sure to send your contractors a 1099 by the end of January every year.

Web Hosting – Though there is a great deal of debate about how to categorize web hosting on your taxes, it most certainly is a deductible business expense.

Advertising – Did you take out an ad or print up some brochures? Deduct it!

Home Office –The home office deduction can be one of the larger deductions a freelancer like us takes, but it can also trip you up if you’re not careful. Long story short, to take a home office deduction you must use a precisely delineated portion of your home (i.e. a room, a shed, a garage) as your office and for no other purpose. From there, you can deduct the amount that you pay in rent, mortgage, etc. for the percentage of your home used for business.  In other words, if you use 100 square feet of your 1,000 square foot house as an office, then you can deduct 10% of your rent or mortgage as part of your home office deduction. For homeowners, this can start to get tricky when it comes to mortgage interest, and don’t even think about selling your home unless you want a huge tax headache. The home office deduction is one of those tax time quandaries that reminds us all why accountants are so invaluable.

Utilities – These go hand in hand with the home office deduction. If you deduct 10% of your rent or mortgage as your home office deduction, you can also deduct 10% of your utility bills. In my case, these amounts are usually under $20 per month, but they add up over the year.

Nothing Personal, It’s Just Business

Keep in mind when it comes to tax deductions that you can only deduct the portion of anything – your utilities, your PayPal fees, etc. – that you use for business. The IRS tends to frown upon sloppy bookkeeping and letting your personal finances bleed all over your Schedule C business taxes. Because of that, next week I’ll provide answers to the age old question, “How on earth do I keep track of all these tax deductions anyway?”

There are thousands of tax deductions out there. As a freelance writer, do you regularly take any tax deductions that didn’t make this list? Share with your fellow writers so we can all keep Uncle Sam out of our back pockets.

Jennifer Escalona is not a tax professional and this post should not be taken as tax advice. She’s just a freelance writer who has battled the tax laws and won.

So…I’m sitting here thinking about how my quarterly taxes are due in January and probably many of you are having the same experience. Freelance writers don’t pay taxes in the same manner as those who are salaried employees. We have to plan ahead and predict. For freelance veterans, this may all seem routine. However, new freelancers might be confused as to how to pay taxes as a freelancer and estimate taxes if needed. Many don’t even realize they have to put away money from each gig for taxes.

To help, I’ve prepared a list of posts about freelance taxes. Hopefully you’ll find some, if not all, helpful.

From the Freelance Writing Jobs Network:

1. Tax Tips for UK Freelancers
2. What Every Freelancer Needs to Know About Taxes
3. How to Solve Freelance Tax Problems
4. When a Writer Needs to Hire a CPA
5. Easy to Forget Income Tax Deductions
6. Introduction to Quarterly Taxes
7. 3 Ways to Reduce Your Freelance Writing Taxes and Help Yourself
8. Tax Tips for Freelance Writers
9. 20 Tax Deductions for Freelancers
10. Year End Tax Tips for Freelance Writing Businesses
11. When Your Freelance Writing Business Gets Audited

From Around the Web:

1. From the IRS: This Guide to Estimated Taxes is very helpful and will tell you if you need to file quarterly estimated taxes and how to go about doing so.
2. Freelance Tax FAQs at The Anti 9 to 5 Guide – This post is from 2006 but it’s still very helpful.
3. Taxes and Freelancing: A very useful roundup from About.com Tax Planning.
4. Freelance Switch included a very useful post about saving for taxes in their series on The Business of Freelancing.
5. Writing.org’s guide to freelance taxes is simple to understand.
6. The Writers Technology Companion discusses using Outright, a free online service that simplifies the quarterly tax process.
7. Freelance Sprout helps you to prepare for freelance taxes all year long.
8. How Should a Freelancer Prepare for the Tax Season? Timely advice from About.com Freelance Writing.
9. If your client doesn’t pay you for a job, can you write it off? At About.com Freelance Writing.
10. Small Business Taxes for Freelance Writers at Artic Llama
11. Tax Issues for Freelance Writers at About.com Business Finance
12. Making Sense of Freelance Blogging Taxes at About.com Weblogs
13. Tax Tips for Freelance Bloggers at About.com Weblogs
14. Freelance Writers and Estimated Taxes at LoveToKnow
15. How to Pay Estimated Taxes at About.com Tax Planning

Do you have any questions or tips about freelance taxes that haven’t been addressed here? Let us know!

by Thursday Bram

When something goes wrong with an employee’s taxes, her employer is often responsible when everything is said and done. For freelancers, though, no employer is going to take the time to correct errors. That means that you have to take responsibility for making sure that all of your paperwork is in order and, if it isn’t, that you take the right measures to keep the IRS happy.

Contact the IRS

Staying in touch with the IRS can simplify most of the problems a freelancer can face when it comes to taxes. In most situations, such as late filing, the IRS automatically assumes the worst. In the case of a missing return, for instance, the IRS’ standard policy is to create a substitute tax return based on your expected income. The IRS won’t take time to figure any deductions, though — they’ll just charge you will the full tax obligation for the income they think you’ve earned and charge interest and penalties based on that amount. The only alternative is to contact the IRS if, for any reason, they haven’t received your payments or tax return.

The IRS makes it easy to find information and make contact. You can call and ask tax questions Monday through Friday (freelancers should use the toll-free business help line at 800-829-4933). You can also get face-to-face help at local IRS offices.

Talk to Your Clients

More than a few issues with freelancers’ taxes can be traced back to an incorrect Form 1090. If you can get your client to file an amended form with the IRS quickly, you can simplify the situation. If you do not receive an amended form from your client, even after contacting him via certified mail, the IRS can correct it — but will only do so if you can provide evidence (such as a certified letter) that you have attempted to resolve the matter on your own. Getting your client to amend their paperwork is generally a faster solution.

Know Your Rights

As a tax payer, you always have the right to appeal a problem with the IRS. At every step of the IRS’ process for handling tax problems, you can get help, and if it continues to escalate, there organizations meant specifically to help you. If you can’t handle a matter through the normal IRS channels, the Taxpayer Advocate Service may be able to help you with the situation.

by Thursday Bram

While the standard business advice is that you need to hire a CPA as soon as you go to work for yourself, most freelance writers don’t need to call on a CPA quite that fast. As long as your taxes are fairly straight forward, you can take your 1099s to a tax preparer and get your income tax return completed for less than you would pay a CPA. If you’re willing to put the hours into it, it’s even possible to do your taxes on your own: completing Form 1040 will take some time if you aren’t just working for one employer, but there are both in-depth instructions and software packages available to help you out.

There are certain situations in which hiring a CPA does make sense, though. Most of them can be summed up in one description: your taxes are getting more complicated. Here are a few examples of when hiring a CPA can make your life a lot easier.

• Your tax burden is getting out of hand: Depending on what state and local taxes you’re paying, as well as how much you’re earning, it’s easier for a freelancer’s tax burden to take up a larger portion of income than someone working for an employer. Most tax preparers can only help you find the obvious tax deductions, but a CPA can help with an overall plan to reduce your tax burden and keep more money in your pocket.
• You choose a new business structure: Some freelance writers find it practical to start an LLC or otherwise change their business structure from a sole proprietorship to something else, especially if their businesses are growing. But while such a move may sometimes reduce the overall amount of taxes you could owe, it increases the paperwork dramatically. You’ll need a professional to help keep it all straight.
• You’ve got multiple sources of income: Some writers end up with income from more than just client work. If you’re receiving royalties or selling an ebook, for instance, you may want to work with an accountant, rather than a tax preparer.

If anything about your taxes doesn’t make sense, it’s worth taking the matter to a CPA. While a tax preparer usually only knows the details associated with completing a tax return for someone who has one source of income, a CPA is trained in a variety of fields beyond simply preparing an income tax return. A CPA can often advise you about everything from how buying a house could affect your business’ finances to when it’s a good idea to change your business structure. A CPA can offer you the big picture. Some CPAs will offer a short consulting session, rather than the more expensive option of bringing your taxes in. You may be able to get the benefits of talking to a CPA with committing yourself to something more than your freelancing career needs right now.

by Thursday R. Bram

One of the perks of being a freelance writer is that we don’t have a lot of major expenses when we start up our businesses. When I started freelancing, I already had a computer and an internet connection. Just because we start out with very few expenses doesn’t mean that we can’t take deductions for our business expenses when tax season rolls around. We all know the standard deductions: the home office expense, any computer equipment bought specifically for business use and that sort of thing, but there are a lot of deductions that are easy to forget.

Research Expenses

Any costs you incur while researching an article can be considered business expenses. If you buy a book, drive to an interview or even buy a movie ticket in order to review a film, those expenses are a necessary part of doing business. You can’t use this as a way to write off all your book purchases and other expenses, unfortunately, but as long as you can connect a receipt to a specific project, you have a good chance of being able to deduct it.

You can make use of this opportunity to deduct some travel expenses on occasion. Unless the sole purpose of a trip is to conduct research for a project — no trips to see family or vacations — you can’t write off the whole trip. But if you were to make time for an in-person interview or do some other research that produces an article or another project, you can write off some of the associated expenses. Because the situations can vary, it’s important to talk to a tax preparer to see exactly what you can write off.

Child Care Credit

If you pay for child care so that you can work on freelancing projects, you can qualify for the Child and Dependent Care Credit. There are some requirements: if you’re married, both you and your spouse must earn income. You also have to be able to document the child care. While this option is a credit, rather than a deduction, it’s still overlooked by many freelancers and can make a big difference in your tax burden.

Your Tax Preparer

While you may be able to do your taxes yourself, working with a CPA or another tax preparer can make the process a lot easier. Even better, the amount you pay to your tax preparer for completing the income tax return for your business is also a business expense and may be tax deductible. The same holds true of any other costs you incur in the course of doing business, whether you’re buying a product or paying for a service.

by Thursday Bram

The biggest difference between doing your taxes as an employee and doing them as a freelancer, at least in the U.S, is figuring out just what to do about quarterly estimated income tax. Since your clients pay you as a contractor, rather than an employee, they do not make sure that the IRS receives your payroll taxes. Instead, you’re responsible for sending in a check every quarter for a fourth of the amount you expect to owe at the end of the year.

Not Every Writer Has To Pay Quarterly Estimated Taxes

In general, it seems like every freelancer should be submitting a tax payment to the IRS every three months, but that isn’t actually the case. If you’re freelancing part-time and working for an employer the rest of the time, you don’t have to make quarterly payments. Instead, by adjusting your payroll taxes with your employer, you can make sure that you’re paying enough to cover your freelancing income as well.

There are other situations in which you may not need to make quarterly as well. If you’re just starting out, you may not reach the threshold for quarterly payments this year: if you expect to owe less than $1,000 in taxes for this year, you are not obligated to make quarterly payments.

Filing Quarterly Estimated Income Taxes

As long as you’ve got your most recent income tax return, getting your quarterly estimated tax payments ready is a fairly simple process. You can view the IRS’ instructions in Publication 505 and download Form 1040-ES (PDF). To sum up the instructions, though, you’ll need to check the total tax and your withholding on your last return. You’ll be paying a quarter of the difference between the two number in every payment. You can either file your paperwork and make your payment through the mail or you can pay online through the Electronic Federal Tax Payment System.

If your income this year will be much higher than last year’s total, you may want to recalculate your quarterly payments based on how much you’re actually earning. There can be penalties if you pay significantly less than your total tax owed for the year through your quarterly payments.

While working with a CPA or tax preparer to get your quarterly payments ready to go is an especially good idea if you’re filing them for the first time, I’d recommend at least checking in with your tax professional. It’s impossible to give universal tax advice — everyone’s situation is different — and the variables that go along quarterly payments can make it important to get help with your specific situation.

by James Hendicott

Working for yourself is great, isn’t it? You get an open schedule, a nice mixed bag of employers and plenty of creative freedom. Wait, nobody told you about the paperwork? Well, if you’re a casual freelancer with a small income, you might not have to worry too much (see how to pay, and how to calculate payments). If this is the start of something big, though, you’d better get on with registration… here’s a quick lowdown on freelance tax issues to get you started:

How to register with HMRC: So you’ve just received that first fulfilling payment as a freelancer? Well, you probably don’t want to deal with every tiny intricacy of the self-employed tax system right from the start, but there are a few things you simply have to do. First of all, you need to register immediately, as the UK tax authority can be pretty strict on punishing those who don’t. You can do that here, and find the information you’ll need on HMRC’s helpful PDF, here. You’re almost certainly a ‘solo trader’, unless you are part of some kind of writing partnership. If you want to keep hold of your national pension (and other – including to some extent NHS health) benefits, you’ll need to look into National Insurance Contributions, too. The simplest way to do this is by direct debit, which you can set up through this form – the fixed amount is currently £2.40 per week, so it’s certainly not something to be too concerned about. Remember to keep a thorough record of your business-related income and expenditure (with receipts, where possible, even if they’re just PayPal ones), too, as this is vital in calculating your final payments, and will save eons of time should the dreaded audit come along later.

How to pay, and how to calculate payments: The best way of completing your annual tax return is probably online, as it allows you to complete it over time, and gives an additional three months to do so on top of the paper application deadline (online deadlines are the 31^st of January). It also calculates your taxes automatically, and will provide you with complete details on how to pay them. You can find a step-by-step guide here. If your total earnings are less than £5075 (this figure changes year on year), you may be exempt from certain charges altogether, though you’ll still need to register here. You don’t have to worry about registering for VAT unless your turnover exceeds a certain amount for the year (currently £68,000). Further information on all these steps can also be found in PDF form here.

Account keeping and Tax Breaks: Aside from just noting down your income, there’s another side to account keeping for freelance writers. You’re entitled to claim a range of business related expenses against your income, which can include anything from the computer you use to business cards, and even the utility bills for any part of your house that you use for your business, though you’ll need to keep receipts for all of these claims (so claiming on an old computer’s unlikely to make the cut). All of these factors can be added easily to your online tax return, though you should be careful about exactly what you claim, as you could end up with a penalty. A detailed explanation on what can be claimed (and what can’t) can be found here. When it comes to tax breaks, you might benefit from being part of a cohabiting couple, having children or having been out of work for sometime before embarking on your freelance quest. The benefits can be substantial, so that’s always worth checking out, too.

Employing Someone Else: Wow, you are doing well, aren’t you! In truth, most of the time you’re better off sub-contracting work to other writers should it come to that, and letting them deal with their own tax issues. If you do need to become an employer, though, you’ll need to register for PAYE (employee Pay As You Earn), as well as contributing to your employees National Insurance Contributions. As most of us will be in dreamland should we ever reach this level of success, we’ll leave you lucky people to find out more for yourselves, here.

Most of us fall well within the simpler parts of the UK tax system, but should you need to look at things in an altogether more complex way, there are regular open days, and advice is available by phone, too. Fortunately, the government wants you to get your tax right almost as much as you want to avoid being audited, so there’s usually a way to sort out more complex issues. A good place to start is in calling business link on 0845 600 9006 (in England – slightly differing regulations in Wales, Scotland and Northern Ireland mean they have their own numbers, which can be found on page 29 of this PDF). Tax can be a complex world, but being able to hold your head high and say you run your own business is a worthy reward, right? Best of luck.