Tax season is upon us, and for freelancers, that means navigating some complicated tax requirements and options. As freelance writers, we are considered self-employed individuals or small-business owners by the Internal Revenue Service. As a result, taxes are not applied to our top line earnings. Instead, as business owners, we get to deduct business expenses. Here’s what that means and a look at some of the most common deductions for freelance writers.
Defining a Business Expense
According to the IRS, a business expense is one that is “usual” and “necessary.” Usual means that the expense is a common one for professionals in your field. Necessary implies that the expenses are for something useful. Necessary doesn’t mean that you absolutely can’t work without it.
For example, if you track ideas on Post-it® notes, that is “usual” for a writer. Although it’s not totally essential, it is helpful and thus considered a necessary expense. Ergo, you can write off your Post-it® notes.
Office Supplies and Utilities
Office supplies include things like notebooks, pens, and postage. You can also write off monthly utility expenses, such as your Internet or cell phone bills, as long as they are used exclusively for business.
If you incur an expense that is both for personal use and for business use, prorate it. For example, imagine you use the Internet half of the time for work and half of the time for pleasure. As a result, half of its cost is considered a business expense. That means if you have a $60 bill, you can write off $30 as a business expense.
Legal and Professional Services and Advertising Expenses
If you spend money to maintain a website or repair the laptop you use for work, those are both considered business expenses. In addition, money you spend to do your business taxes is also a business expense. Specifically, your website is an advertising expense while laptop repairs and accounting fees fall into the category of legal and professional services.
Note that a business expense is incurred with the intent of making a profit. However, it doesn’t necessarily have to directly produce a profit.
For example, I run a writing business. If I pay submission fees for fiction manuscripts, those are advertising expenses. Even if the manuscripts are rejected and I make no money directly from those investments, they’re expenses.
Similarly, if I maintain a website to attract private clients but I don’t attract any, the website is still considered an advertising expense. Essentially, I incurred those expenses in order to expand and grow my writing business, and as long as I have income from other writing gigs, I can write them off as a business expense.
In contrast, if I spent money setting up a bed and breakfast that has nothing to do with my writing business, I can’t legitimately write off those expenses from my writing income.
Education and Research
Did you buy a style guide or a business book? Attend a writing workshop or webinar? If so, the IRS allows you to include these educational costs as business expenses.
In order to qualify, the costs incurred must be to improve skills related to your trade or business. They cannot be to pursue a new trade. For example, you could write off the cost of a marketing book as it shows you how to market and expand your business, but you could not write off the cost of a cooking class, a woodworking book or a nursing program. (If you planned to write about those things though…that may be another story.)
According to the IRS, “subscriptions to professional, technical, and trade journals that deal with your business field are deductible.” However, if a cable TV, newspaper or streaming service is necessary to your business, you can also write off those expenses.
For example, someone who writes reviews of movies or someone who generates content ideas from the newspaper can consider movie rental fees or newspaper costs as a business expense. Similarly, someone who buys a magazine because they want to submit to it can also consider that a business expense.
You do not have to submit proof that your subscriptions were work-related with your income tax return. However, to be on the safe side, you should keep some justification of the expense with your records. In addition to tracking what you spent on subscriptions, make notes about why those subscriptions were useful to your business. For example, if you spent $3 on ABC Farming Magazine, your note could say “read magazine to review style and tone before pitching an article about worm composting.”
The Home Office Deduction
For freelancers, the biggest deduction is typically the home office deduction. In order to claim this deduction, you must use the space exclusively for work. Also, it must be your principal place of business or where you meet clients. It doesn’t have to be an enclosed room—it could be a corner of a room that is only used for work.
To determine your home office deduction, calculate the size of your office as a percentage of your home’s total size. For example, if you have a 10 x 10 foot office, it is 100 square feet. If your home is 1,000 square feet, your home office represents 10 percent of your home’s total space.
As a result, you can write off 10 percent of your rent or mortgage, property insurance, and electricity and water bills, as business expenses.
Similarly, you can also write off 10 percent of any other home expenses that affect your entire home. For example, if you put on a new roof, the IRS considers ten percent of the cost as a business expense. In contrast, if you did a repair that only affected your bedroom, you wouldn’t be able to write off any of that repair as a business expense. However, if you do a repair that exclusively affects your home office, the entirety of that expense is deductible.
Simplified Home Office Deduction
If you don’t want to do a lot of math, you can use the simplified home office deduction. Your office must meet the same criteria as above.
To calculate your simplified deduction, multiply the number of square feet in your office by $5. For a 100 square foot office, your deduction is $500. You don’t have to worry about adding up and parsing utility bills or other expenses.
Using the simplified home office deduction is easy, but the downside is that if you take the simplified home office deduction, you can only claim up to $1500. To find out which option is better for you, you should work out the deduction both ways and compare.
In most cases, using the standard calculation nets you a larger deduction than the simplified home office deduction, but if you use the simplified deduction, you don’t have to worry about keeping records of your mortgage, rent, insurance and utility bills to back up your home office claim. Ultimately, it’s up to you to decide which option you like the best.
In some cases, you can also deduct your health insurance premiums as a business expense. To qualify, the insurance premiums must be in your name or your business’s name. In most cases, you can write off the cost of premiums for yourself, spouse, and children.
This expense is not as straightforward as other business expenses, and ideally, it’s best to consult with a tax professional to figure out whether or not your health insurance is deductible as a business expense.
Travel, Entertainment and Vehicle Expenses
If you travel for work (e.g., to attend a writing conference or an educational seminar), you can write off 100 percent of your travel and accommodation costs. However, you can only write off 50 percent of your meal expenses.
If you drive your car to these events, or take out a client for a business meeting, you can write off 57.5 cents for every mile you drive. Alternatively, you can track your business mileage, calculate it as a percentage of your total miles driven and then write off that percentage of your car’s bills.
For example, if you drove 1,000 miles for work and 10,000 miles total, you could write off ten percent of your annual insurance, gas, repair and other vehicle costs.
Unfortunately, as of 2015, you still cannot write off the cost of taking yourself out to a coffee shop…even if it protects your sanity and gets you out of your house.
If you pay your children to work for your business, you can write off their income as a business expense. Best of all, if you are a sole proprietor and employ your kids under the age of 18, you don’t have to pay payroll or Social Security tax on their behalf. In addition, as long as they earn under the standard deduction of $6,300, they don’t have to worry about income tax either.
However, your child must actually work for your business. You cannot have your child do household chores and claim that as a business expense. In most cases, you can choose whether your child is an employee or a contract worker. Then, you must issue a W2 or 1099 accordingly.
In most cases, business expenses can be divided into two categories: current and capital expenses. All of the expenses above are current expenses. Essentially, you enjoy their value at the same time that you pay for them.
A capital expense, in contrast, is for something that is going to provide you with value for years. If you make a large purchase or incur a capital expense, the IRS requires you to amortize it. Instead of writing off the purchase at once, you write off a percentage of it each year over several years.
The length of time varies depending on the expense. For example, the IRS allows you to write off a computer in far fewer years than it allows you to write off a building. Luckily, section 179 covers certain expenses, such as computer software. And you can write off 100 percent of these expenses in the year they are incurred (up to $500,000).
These expenses are referred to as depreciation expenses on your income tax return. Examples include everything from race horses, to tractors, to motorsports entertainment complexes. As a freelance writer, expenses relevant to you include computers, office machinery (calculators, printers, etc.) and furniture (desks, filing cabinets, etc.).
Finally, your self-employment tax is deductible. This deduction is not treated the same as your other business deductions. Instead, it is subtracted from your net income after your self-employment taxes have been calculated but before your income taxes have been calculated.
For example, imagine you earned $30,000 writing last year and you had $4,000 in business expenses. Your net income is $26,000 and your self-employment tax is calculated based on that number. Then, the IRS subtracts your self-employment tax from your net income before assessing your income tax.
As long as you have records (receipts, bank statements, driving ledgers, notes, etc.), you can legitimately use the above deductions to offset your income. However, it’s important to note that I am not a tax professional. Consult with a professional (or at least with some tax software) to determine your tax deduction options.
Best of luck with your taxes. If I missed any of your favorite deductions, shout them out in the comments.
This article was written by one of our writers who is not a tax professional. The author’s views are entirely their own and may not reflect the views of WritersDomain. For official tax advice, readers should consult with a professional tax advisor.