How To Make Your Freelance Writer Taxes A Cinch
Whether you are a full-time or part-time freelance writer, you'll need to think about your contractor taxes. Have you calculated your overall income and determined your deductions for the forthcoming tax season? Well, the amount of money you made from your freelancing income is fairly easy to estimate, but you may have to spend some time figuring out the expense side. The government considers a freelance writer or blogger to be self-employed or a small business owner. Even if you aren’t registered as an LLC, you’re considered a “sole proprietors” for tax purposes because you file a 1099-MISC or 1099-NEC. As a self-employed, you’re subject to pay a self-employment tax as well as quarterly taxes if necessary for your freelance work.
Getting Your 1099 Form
If you were paid more than $600 a year, you must receive a 1099 form from whoever paid you. You need to compile every single 1099s and report them on your tax returns in the following year. Underreported income will cause a serious problem with the IRS whether intentional or not. If you were paid using electronic payment systems, such as PayPal, those who hired you do not need to submit 1099 to you or the government. PayPal or other payment processing companies will issue a form 1099-K and send it to you and the Internal Revenue Service if they processed over $20,000 for you.
Write Off Your Business Expenses
To be deductible from one's taxable income, a business expense must be both ordinary and necessary. For a blogger who writes restaurant reviews, the costs of a fancy dinner can be claimed as a business-related expense as that is both an ordinary and necessary expense. Track your 1099 expenses throughout the tax year so you won't be so surprised at your tax bill at the end of the year. In general, however, what kind of tax deductions can freelance writers claim?
- The cost of business computers and other devices such as printer and scanner
- Writing and other software or writer portfolio website (e.g. Microsoft Office or cloud storage system subscriptions)
- Internet Access
- Membership or Costs of attending a writing conference
- Business Legal and accounting fees
- Business mileage
- Continuing education classes related to your writing business
- Health insurance for the self-employed
- Office Supplies
- Home office deduction*
- Retirement plan contributions*
If you really want to make your life easier, use a 1099 expense tracking app like Keeper Tax. There are thousands of happy freelancers with Keeper Tax reviews.
I would like to provide more information on Home office deduction and Retirement plan contributions as those expenses involve more complicated rules. Tax laws are constantly changing so be sure you look at the most updated rules and regulations in regards to your deductions. Here's a list of write-offs independent writers can take advantage of.
Home Office Deduction
One of the business tax credits that you can claim is a home office deduction. As a freelancer, you probably work from home, especially with this pandemic situation. The home office deduction is an expense that you can benefit from by claiming if you did most of your freelance writing or blogging at your primary residence. Your overall deduction will be limited to the size of the “office” that you designated as your main writing area. Deductible home office expenses include:
- Home Insurance
- Property Taxes
To understand how to calculate the home office deduction, please review the following steps.
I: Figure out the overall size of your entire home and the size of the space where you’re writing. I highly recommend you have a specific room where you spend most of your time writing.
II: Divide the office space by the overall size of the home. If you have a 2,000-square-foot house and your writing area was approximately 300 square feet in size, you will get 15% as the result.
III: Summarize all your rent or mortgage payments, utility, insurance, and/or maintenance for the year. Generally, you only calculate the sum of payments for the months when you worked as a freelance writer or blogger.
IV: Multiply the total by the percentage. So, if you found the total home-related payments to be $20,000 for the year, you will get to take $3,000, which is 15%, out of your freelance income.
Retirement plan contributions
As a self-employed freelancer, you can contribute to a retirement plan and those contributions will be tax-free until later years when distributions happen. There are a couple of IRA plans to which a self-employed can contribute and below is a summary of those plans.
You can make a contribution to an IRA of $6,000 ($7,000 if you were 50 or over at the end of 2020). Contributions to a traditional IRA can be made on a pre-tax basis up to the lessor of your actual earned income or the contribution limits until the date returns are due with no extensions. The amount of the contribution will reduce your federal and state income taxes.
For 2020, the contribution limits are 25 percent of your compensation up to a limit of $57,000. As the contribution is made from your business, this can reduce your business income and potentially your self-employment tax as well. The account can be opened and contributions made up to date you file your return, including extensions.
A solo 401(k) is like a regular 401(k) except that it’s only for you as the employee, or a spouse in the business. If you have other employees, this is not the account for you. The limits on what you can defer are the same as a company 401(k) plan, $19,500 or $26,000 if you were 50 or over at any point during the year. Total contributions for 2020, including a company profit-sharing contribution, cannot exceed $57,000 or $63,500 for those 50 or over.
Freelancers are liable for the entirety of their Social Security and Medicare tax, which equates to 15.3% of your self-employment income for the year. You'll only pay self-employment taxes on the taxable income you report on your Schedule C. W-2 employees working a traditional job rely on their employers to cover half this amount, but as a freelance author, unfortunately, you’ll be held responsible for the entire amount. While the entire amount is part of your total income tax calculation, you can deduct one-half of the amount of the self-employment tax on your return.
This doesn’t reduce the overall amount of your self-employment tax, but it can be a helpful deduction for your income tax purposes. When your business net income starts to reach about $50,000, you may consider switching to S corporation so you may be able to save a portion of your self-employment taxes. Regardless, it is important to be on top of your tax liability.
Don't Forget To Make Your Estimated Tax Payments
As a freelancer who is expected to owe more than $1,000 in taxes as a contractor, you will have to pay quarterly taxes since none of your taxes were withheld from your income. You would need to look at your prior year's tax return to calculate estimated taxes. Your return from the last year will give you everything you need to know about you how much you should be paying in quarterly payments. If this is your first year as a freelancer, estimating your tax payments accurately may be fairly difficult.
The due dates for quarterly taxes are:
- Quarter 1 - April 15th
- Quarter 2 - June 15th
- Quarter 3 - September 15th
- Quarter 4 - January 15th
Qualified Business Income Deduction
This new QBI deduction can help you significantly reduce your tax burden if you’re operating as a sole proprietorship. Particularly if you have a business or LLC set up, but also if you don’t, you may be able to take this deduction, which will allow you to deduct up to 20 percent of your business income. As a freelance writer, all or most of your income should be considered viable under this deduction.
Taxes work a bit differently for a freelance writer than for paid employees working for an established business. It is important that you, as a freelance writer, know all the deductions that you can claim on your tax form and get the most out of it. Additionally, remember to stay within reasonable expectations as well for your own taxes. You can reach out to a tax professional who can provide guidance and prepare the return for you or to do your bookkeeping. Even this payment is also deductible!