For the last few years, the largest source of my income has been writing. As a result, I’ve been paying much more attention to my taxes. Life was simple when all I had to worry about was a W-2 form from my employer and a 1099 for savings account interest. More recently, I’ve gained experience with juggling twenty 1099s, tax-deductible SEP IRAs, and Schedule Cs.
Here are some of the more important tax tips freelancers, bloggers who earn income, and anyone else earning money that’s not reported on a W-2 should consider.
You are required to report all your income. While you may receive 1099s to help you track the money you earn throughout the year, companies are not always required to distribute these forms. The IRS wants you to report a gross income that is equal to or higher than the total amount of income reported on 1099s sent to you. Therefore, it is helpful to track every dollar you are paid. Any income form that is sent to you must be included when you file your taxes, and that is just the minimum.
Whether you use Quicken, a spreadsheet in Excel, or an envelope containing check stubs and deposit receipts, make sure you know the source and amount of all income that you earn. This can be difficult when you are dealing with multiple modes of payment, including paper checks, electronic direct deposits, PayPal, and cash. Tracking your income and your important expenses and having the details ready when you sit down to complete your tax return will make your job so much easier.
Yes, tracking your expenses in addition to your income is just as important. As a freelancer, you are a self-employed individual and entitled to take certain deductions for business expenses. My goal is to maximize these expenses, so I am careful to track everything in software, collect physical receipts in an envelope, and save emailed receipts in a printable format (like PDF) on my computer in an area designated for the current year’s taxes.
With your expenses fully enumerated and categorized, you will be well prepared for deducting as much as legally allowed on your Schedule C — the tax form where you describe your self-employment income and expenses. Here are a few examples: If you advertise your services, you can deduct the fees you pay. You can deduct the expenses paid to any subcontractors who work with you as long as they provide you an invoice for their services. You can deduct most costs of doing business, including business banking fees, tax software purchases and fees associated with accepting credit card payments.
About once every week or two, I drive to the studio where I record the Consumerism Commentary Podcast with my friend and subcontractor, Tom. That mileage is deductible on Schedule C, as well, at a rate per mile that is set by the IRS every year. To stick by the rules, log the miles you drive for business if you don’t have a vehicle that is used only for that business. You can do this with simple pen and pad, or, if you’ve got an iPhone, apps like Tap2Track help you automatically keep track on the go.
Self-employment also qualifies you for a number of options for saving for retirement. A Simplified Employee Pension (SEP) plan is a tax-deductible IRA available to anyone who works for himself or herself. The annual investment maximum for this IRA is higher than the maximum for a traditional or Roth IRA, so you have a chance to reduce your taxable self-employment income by the amount you invest in your SEP IRA. This is a deduction worth considering.
Here is a selection of the the possibilities for reducing the taxes you owe on your self-employment income, taken right from Schedule C. Any business expenses in these categories will help you reduce the amount of tax you owe.
- Depreciation of equipment (such as computers used for your
- Interest you pay on business loans
- Legal and professional services
- Office expenses
- Travel, meals, and entertainment
- Other business expenses
As a blogger, if you earn enough money from your writing that your endeavor is more than a hobby, these are some specific expenses you can likely deduct:
- Web hosting and management fees
- Photography costs if your website includes self-created images or
stock photography fees
- Software necessary for producing your content
- PayPal fees
- Books, e-books, seminars, and subscriptions that help you improve
- If your blog is focused on a certain topic, any expenses related to
research pertaining to that topic
- Telephone or Skype expenses if used for your website
The key for freelancers and bloggers who earn money is as I mentioned at the start of this article: get organized and stay organized. If you remain reasonable in your assumptions and deductions it’s unlikely you will be audited, but it doesn’t hurt to have your supporting documentation ready to go at a moment’s notice. Plus, when you sit down to complete your taxes, having your materials available will reduce your stress. According to doctors, less stress will extend your life, which will allow you to earn more money and, as a result, pay more taxes.