Thursday, December 20, 2007

First Year Freelance Writer

Hi June,

I started working as a full-time freelance writer in January 2007, and since then I haven't paid any taxes. (I did pay my income taxes in April, but that was based on my normal full-time job from 2006.)

I've missed three periods of paying estimated taxes, and now I'm not sure if/when I should pay them or if I am exempt because it's my first year as a self-employed freelancer.

I know I probably need to pay a penalty to the IRS but I'm not even sure how to do that.

Will general tax software be able to help me with this?

I really want to get back on track with all of my taxes and all caught up. Any help you have on how to do this would be much appreciated.

Thanks, Stephanie New York, NY

Hello Stephanie,

First: You are not exempt from taxes because this is your first year of freelancing. Now who could have told you that?!

Read this Estimated Taxes to get an overview of how estimated taxes work. Then read my other blog posts on estimated taxes if you need more info.

I do not think that tax software does a good job for indies. Most programs are geared for employees or else small businesses that make widgets. Independent professionals are a unique breed and need special tax treatment by a pro who understands tax law as it applies to the self-employed. Educate yourself about what is and is not deductible. Read my posts on how to pick a tax pro and you'll be headed in the right direction. If you want more information, my book, Self-employed Tax Solutions, will give you a solid understanding of the basics.


Starting Out With a Loss

Hi June,

I just moved to Jacksonville, Florida coming from all over the country working as a PGA professional at private golf clubs. I worked as a club pro up into mid August and then I got engaged and became sales representative for golf apparel working from home.

I collected unemployment from mid august until late November.

I invested in a new vehicle, new clothing, new office equipment, work supplies etc.

I have received $100.00 dollars in commissions as of 12/18/2007. I have future commissions coming but I have no idea what I should do for tax purposes. Can I write off some of these expenses without really earning anything yet? Can I write them off in 2008? Can you help?

Thank you.
Dan in Jacksonville, FL

Hello Dan,

The quick answer: As long as you are in business trying to make money you may deduct business expenses even if you make no money.

The long answer: You need a lot of info. I see you requested a copy of my business expenses list. On the email that accompanied the list was a suggestion to read Is it a deductible business expense? on my website .

On this blog there is a lot of info about all kinds of expenses. Check out the category list on the left. You mention purchasing new clothes, so maybe a good place to start is the category expenses -- workclothes-uniforms-costumes .

And, congratulations on your engagement.

Happy Holidays!

Wednesday, December 12, 2007

Jack or Jane of All Trades: How does an indie define a business?


I'm a writer/designer/wearable art & life style accessories maker, thus my question: How broadly can I define my business?

If I do all of these things and make money at all of them, can I have one umbrella company that does it all? Or do I have to bifurcate the writing and communications activities from the design and manufacturing? To clarify, I'm primarily a technical communicator, but I have also started a jewelry and lifestyle accessories business. I plan on trying to get some writing published in jewelry and accessories publications, so where do I have to draw the line?

So how many "plates" can I have in my "cafeteria business" under one name and under one sole proprietorship? If you know the cartoonist Larson, it's a little bit like the one with "Lou's FillDirt and Croissants."

Christine, from Belmont, CA

Hello Christine,

What a great question. So many indies have irons in many fires -- fill-dirt and croissants is stretching it a bit too much, of course. The goal is to legitimately combine as many of aspects of your money-making activities under one profession or one business as you possibly can. The biggest reason: It simplifies your recordkeeping.

Here's the test that will help you decide: Write one press release announcing your business. In it combine all your services and products. If you can comfortably put them all together in one press release, and if you would not have a problem sending out that press release, then you're OK with one business.

Often the skills in one area give authenticity or credibility to another area. I see no stretch between designer/wearable art & life style accessories maker. And if you write about these things, that you write about other subjects as well does not make writing a separate business.


Monday, December 10, 2007

Auto Algebra & the 2008 Mileage Rates


Awesome site and info! I am definitely looking forward to purchasing the book, Self-employed Tax Solutions.

I am in negotiations with my first client to become their marketing consultant. I will be leading all of the marketing, PR, communication and fundraising activities for a non-profit organization.

I will be leasing a new vehicle soon after the new year. The client has proposed to pay mileage reimbursement for any duties related to their business. I will be driving both the new leased car and my current, much older, high mileage vehicle. Would the tax benefits of driving both cars normally outweigh a monthly mileage reimbursement check from a client? We're probably talking over 200 miles per month for this particular client because I don't they will include mileage from my home office to this office.

If not, can I still hold off auto expenses for other clients and still receive reimbursement from this particular client?

I'm anxious for your reply. This is probably the final negotiating term before I get started.

Thanks a million!

Jason from Charlotte, NC

Congratulations on your new indie work, Jason. And thank you for your generous comment about my site.

I will try to simplify your situation and thereby make it applicable to a lot of indies. First I am going to assume you have read, or I suggest you read if you haven't, How to Calculate Auto Expense and How to Keep a Record of Business Miles on my website. Then you should know that the mileage rate allowed by the IRS for 2008 is 50.5 cents per mile.

As an indie, all the payment you receive ,whether fees or reimbursement for expenses, is part of your gross income. All expenses, whether they were reimbursed or not, are deductible expenses.

For example, if XYZ pays you a fee of $5,000 + reimbursement for 200 miles at 50.5 cents per mile [that's $101] your gross income = $5,101.

Were you to use the standard mileage deduction for your car you would deduct the $101 as a business expense to get to an income of $5,000.

Were you to use actual expenses, it would depend on the costs of running your specific automobiles. Could be more than 50.5 cents per mile. Could be less. So your income could be more or less than $5,000.

To say which is better, reimbursement or not you need to compare two things. Your actual cost of running your car and how much your fee would increase were you to accept a higher fee and no reimbursement.

You may have several clients and some may reimburse you, some may not. You may still deduct all auto miles, for all clients, using either method, as long as you claim the reimbursement in your income.

There are several posts on this blog about reimbursed expenses that you might want to check out.

There is a full explanation of transportation and auto expenses in my book, Self-employed Tax Solutions.


Saturday, December 1, 2007

10 Tax-saving Tips for Writers

Attention writers.

All you freelancers, whether your income skyrockets in the 100s of thousands of dollars or you’re closer to $500 per year, Uncle Sam treats you all the same.

That’s right, amount of income earned by a writer carries no weight with the IRS. You all must follow the same rules. The most horrendous audit I've ever handled was that of an established poet who earned less than $5,000 that year.

I've put together 10 time-and-tax-saving tips on how to simplify complex IRS rules to fit your writing style. All stem from questions you have asked me or areas where I know you need help. A while back I presented a similar set of tips to designers -- Designers Dozen: Tax Saving Tips for the Graphic Artist .

1. Use two offices. Forget the old husband’s tale that home office or studio is an audit red flag. The IRS has lightened up on this. Even if you work out of two or three places, if used exclusively for your work they are all legitimate deductions. Yes, both your home office and the spare room at your country place where you do your three-hour morning blogging routine every weekend are deductible business expenses.

2. Work at home to increase your business transportation deduction. If you do most of your research and writing at a local Internet cafĂ© or college library or rented office you may still deduct costs for the area of your home used exclusively and regularly for your business, no matter how small the area. And by having two work places you’ll increase your deduction for auto use or public transportation costs.

Here’s why: The IRS does not allow a deduction for commuting from home to work and back. But it does allow a deduction for getting from one workplace to another. If you work in your home office and then drive to your other workplace – the library -- you are now driving “from one workplace to another.” You've increased your business miles and the amount of your auto deduction, or made your subway trip a business expense.

3. Careful, no office sharing allowed. Keep in mind the all-important IRS exclusive use rule: that your office must be yours and yours only. If you’re the writer for Clyde Client and your spouse handles the graphic design side of Clyde’s website and both you and your spouse use the same office – sorry, no home office deduction.

The way around that: make one spouse the employee of the other. By the way – there are a whole lot more benefits to hiring your spouse.

4. Hire your spouse. Even if your honey only helps you out with printer jams or errand running or fact checking, pay him for it. Putting him on your payroll opens up a vast array of deductions. You can provide generous employee benefits and deduct the costs of those benefits from your writing income. What kind of benefits? Well, for one thing, you can give him a medical plan that covers his family – that’s you and the kids. That would make your doctor bill a deductible business expense.

5. The more broadly defined your business the more deductions you can take. Being a sports writer limits your deductions. Same with calling yourself a technical writer. Yet we know if the money were there you’d write about pretty much anything.

Maybe you can position yourself as a generalist writer; in any case, describe your field of writing as broadly as you comfortably can. Do you sell ads on your blog? Do you sell a copywriting course on your website? Do you write for blogs and edit press releases for local businesses, all while working on your book? Perhaps your true business profession is a writing and marketing consultant rather than a writer.

Whatever your profession, claim all the income --- every dime. Consider as a possible business expense everything you do that makes you better at making money.

6. Why do you watch TV, rent DVDs, see a movie? If it’s just for fun, no tax deduction. However, if seeing films is vital to your own screenwriting or your novel in progress then claim a portion of the costs as a tax deduction. Or, has the literary void on network TV forced you to get cable? Well then, part of your monthly cable cost is a business deduction. And remember, the business use portion of the cost of your TV and DVD player is also a business expense.

7. Are you allowed to deduct a gift basket of fruit to Grandma? Of course you are -- if Gram has some connection to your business. Did she show you how to hook up your scanner? Make curtains for your office?

You’re an indie business and even though you may have a personal relationship with someone, that does not rule out also having a business relationship. This is particularly pertinent in gift-giving. Of course, if you bought your client a basket of fruit as a birthday present you would treat it as a business gift deduction. But what about the friends with whom you have a business connection? If dinner at a friend’s house was planned so that she could help you with your query letter or book proposal, then the chocolate you arrived with is a business gift.

8. Deduct your laundry and dry-cleaning. Spill ink or red wine on your white silk blouse while attending an awards event? Dry cleaning and laundry while on a business trip are deductible expenses. You may also deduct the costs of the first dry cleaning bill after you return home. But don’t get too creative and save all your winter’s dirty clothes for cleaning the day after you return from a 3-day writers’ workshop.

9. Just starting out? Twenty-five query letters out and still no magazine said yes. That’s a bummer, but even if you haven’t yet made your first dollar as a writer you may still deduct your expenses. As long as your goal is to make money, you’re in business – whether you actually make any money or not.

10. Discuss these ideas with your tax pro before incorporating them into your business. That’s the most important tip of all. If your tax pro isn't aware of them … time to get a new pro!