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Business matters
Taxing matters

There is good news about taxes for independent journalists: Almost everything to do with freelance work is tax-deductible.

There is also bad news: Most freelancers have to pay taxes four times a year. Quarterly estimated tax filings are required for anyone who expects to owe $1,000 or more at the end of the year in taxes on income that is not subject to withholding. That includes business profits of self-employed people, as well as partnership income and corporation profits paid out during the year.

The IRS knows you have received income because, at the beginning of each year, every client who paid you $600 or more during the previous calendar year is required to report that income on Form 1099-MISC. You receive copies of the 1099s when your clients send these forms to the IRS, and you can use them as a guide to make sure you report all your income. Payments of less than $600 must be counted as well, even if you don’t get 1099s for them.

In most cases, you won’t pay taxes on the full amount you receive from a client, known as gross income. Instead, you’ll file a form or schedule that reduces your gross income by the amount you spend each year to earn business revenues — your business expenses. That’s where the tax deductions come in.

If you haven’t formed a corporation or partnership for your freelance business, you report income and expenses on a Schedule C filed with your Form 1040. The IRS provides different forms for tax filings of partnerships and corporations. Those are somewhat more complicated, but for the most part, the same rules apply: Expenses related to the business are deducted from business income to come up with net profit on which taxes are due.

So, what’s deductible?

• Supplies and equipment used for work — computers, cables, drives, audio and visual equipment, software programs, disks, internet and email services, pens and pencils, printers and copiers, paper, ink or toner, stamps, and delivery services.

• Subscriptions and online fees paid to professional publications, including the ones to which you pitched story ideas.

• Travel, including gas and mileage or other transportation costs to meetings with clients and colleagues, for interviews, and to research stories.

• Meals consumed during travel and meetings. Note that Congress changed the tax law in 2017 so entertainment at events is no longer deductible. For example, if you take a business partner to a ball game or Broadway show, the cost can’t be deducted. However, meals at meetings to discuss strategy, editing and other business topics can be deducted as a business meal.

• Advertising -— promotional expenses, including business cards, web hosting services, brochures, flyers and ads. This also can include arrangements for meetings with potential customers.

• Professional development, including memberships, conferences, webinars, seminars and online learning programs.

Home office expenses

If your office is in part of your home that’s used exclusively for business, you may deduct some of your home expenses as well. This is easiest if you file your business tax information on Schedule C of your individual tax return because the IRS allows a “simplified method” for claiming the home office deduction: $5 per square foot, up to 300 square feet ($1,500).

If your business is organized as an S corporation, you may choose to have it reimburse you for a portion of your rent or the expenses of maintaining your home. An easy way to deal with this is keeping track of your expenses and taking the reimbursement monthly.

Claiming a home office deduction used to be considered a red flag for a tax audit, but working from home is so common nowadays, this is less of a concern.

The business organization tax dilemma

Beginning in tax year 2018, business income reported on the Form 1040 Individual Income Tax Return is reduced by 20 percent before calculating income tax. Limitations apply to business owners with taxable income exceeding $315,000 for a married couple filing a joint return, or $157,500 for all other taxpayers.

This Qualified Business Income Deduction (QBID) applies to taxable income. You qualify if you are an unincorporated sole proprietor, filing taxes on a Form 1040 Schedule C, or if you are set up as a limited liability company (LLC) and report your taxes as either a sole proprietor or an S corporation. It also applies to partnership income reported to you on Form K-1.

As a simple example, if you have $50,000 of net income (profit) from your business, the QBID will remove 20 percent of this ($10,000) from taxation, leaving you only $40,000 in taxable income.

The deduction is not available to C corporations.

Paying estimated taxes

Estimated taxes are due around the 15th of April, June and September and in January of the following year. Exact dates may vary — the IRS and state tax departments determine the dates and provide downloadable vouchers to enclose with the payments — but expect to pay throughout the year to cover what you may owe at filing time. Otherwise, you may have to pay penalties and interest along with your taxes.

Business income from a sole proprietorship or partnership, as well as profit distributions from an S corporation, are subject to self-employment tax. That amount is included in the $1,000 threshold that determines who has to pay estimated taxes quarterly.

The best way to manage this aspect of freelancing is to do what experts advise for saving money: Pay yourself first. Set up a savings account for tax purposes and put 10 percent to 25 percent of each payment in that account.

Another good tip: Don’t stockpile receipts until tax time; instead, maintain expenses and payments as they occur, to avoid headaches later. One way to do that is to set up file folders (both paper and electronic, since some of your purchases and payments are likely to be made online) organized by the categories in Schedule C. You also can use software like Excel to record and track expenses as they occur, which makes tax time much less & taxing.

More details are available from the IRS. Do consider using an accountant, at least for the first year of freelancing, to get the hang of how to be accountable as an independent journalist.

Contributors: Ruth E. Thaler-Carter, Hazel Becker

Resources:
   • IRS website
   •CPA Matt Apodaca explained the 2017 tax law changes in an interview with Quill, published as 2017 law means changes for freelancers’ taxes in September 2018.
   •Freelance finance writer Roger Wohlner offers The Freelance Writer’s Guide to Taxes on ClearVoice.

Income adjustments for self-employed health insurance premiums

Although the business expense deduction for employee benefit programs (Schedule C, Line 14) doesn’t apply to freelancers who don’t have employees, those without employees can take their own health insurance premiums off as an adjustment to income in some circumstances. This tax benefit, enacted as part of the economic stimulus package in 2010, applies to premiums you paid for medical, dental and long-term care insurance covering yourself, your spouse and children under age 27 at the end of the tax year.

The benefit does not apply in two circumstances:

• If you were eligible to be covered during any month of the tax year by a health plan subsidized by your or your spouse’s employer, that month’s premium is not eligible for the income adjustment.

• If your business did not report a profit, you aren’t eligible for the income adjustment. The adjustment also cannot be more than you report as income for all your self-employment activities (including, for example, royalties that you receive outside your business).

Health insurance premiums are taken off the top of your gross income on Form 1040, Line 29 — a section of the individual income tax return that adjusts gross income before the tax is calculated.

Contributor: Hazel Becker

Last updated: December 2018

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