If you’re like most writers, you’re probably beside yourself wondering what you can deduct against your writing income when it comes to taxes. What does the Internal Revenue Service allow? What deductions send up a red flag? Will you be audited?
And the big one: How much will you have to pay in taxes? Any time you’re not working for W-2 wages—whether it’s a lone published piece, a whole portfolio full of them, or even sales of a self-published book—you’re classified as a self-employed independent contractor. As such, your tax liability will be greater than if you were on the payroll. When you find out how much greater, you’ll want to find all the deductions you can get. Here’s what you need to know to get started.
Tax Advice for Writers
Self-Employment Taxes (Why it pays—literally—to Know This Stuff)
If this is your first time dealing with self-employment income, you might be shocked at what you owe. It’s going to be a lot more than you imagined! Let’s say you’re in a 15 percent tax bracket. You’re paid $1,000 for an article you’ve written. You get your 1099 form and take it to your tax professional. If you have nothing to deduct in expenses against that $1,000, you’ll find yourself with a tax bill of $150 in income taxes (15 percent). But because you’re self-employed, you’ll owe another $150 in self-employment tax (15.3 percent)—$300 altogether. You just vaulted into the 30.3 percent tax bracket. Yikes!
First, the bad news: There’s no way around paying the self-employment tax. Those dollars fund your Social Security and Medicare. When you work for wages, Social Security and Medicare taxes (7.65 percent) are withheld from your paycheck, and your employer matches the deduction by paying another 7.65 percent out of its pocket, for a grand total of 15.3 percent. But when your pay status is that of an independent contractor, no taxes are withheld from your pay. You’re the boss as well as the employee, so you must pay both sides.
The good news is that because self-employment tax is based on your net profit, you can reduce it by taking deductions against your income. Let’s use the same example of a $1,000 payment for an article you’ve written. Say the topic required you to travel 100 miles to cover an event. You can deduct the cost of mileage, admission, research, meals, lodging, and any other “ordinary and necessary” business expenses you incurred in order to complete the assignment. You can likely add in a bit for office supplies, and if you qualify, you may be able to deduct home office expenses. (More later on how to determine whether or not you qualify.) If these deductions total $500, you’ve reduced your total tax liability to a mere $150 ($75 in income taxes plus $75 in self-employment tax), a savings of $150. Now you can buy that color printer you’ve had your eye on!
This is why it’s important to find every deduction to which you are entitled. You can have peace of mind with a little tax planning, basic organization, and a dash of knowledge.
Hobby-Loss Rules (How to Tell if Your Writing is an Occupation or a Hobby)
First, let’s define your writing occupation. The IRS will apply “hobby-loss” rules according to how serious you are as a writer. If writing is merely a hobby or an occasional income-producing venture, then you can deduct your expenses only to the extent of your income. In other words, you can’t take any losses against other income. For example, if your hobby writing generates $1,500 for the year and your expenses amount to $1,900, you will not enjoy a $400 loss against other income. You may deduct only $1,500 in expenses, making your net taxable income zero from writing sources.
Intent becomes a key factor in determining your status. Are you a full-time writer, earning your entire income from this source? Or do you have a 9-to-5 job and write an article here and there for extra income? Perhaps you’re currently living on your savings while writing the Great American Novel. If you are working toward making a living from writing, even if you have another job on which you’re subsisting for the time being, then you can declare your writing an occupation by filing a Schedule C and take deductions, even if the result is a business loss. The loss applies to all other income you receive during the year, reducing your taxable income and therefore your tax liability.
The IRS leaves it up to each individual to make an honest determination of whether his writing activities are a hobby or a business. You make the decision as you file your tax return.
But the IRS gets a big scowl on its face when it sees five or more years of losses from business activity. It’s inclined to audit and disallow the losses if it feels an individual is attempting to write off her hobby. That could be rather expensive because the IRS will go back three years and recalculate your tax liability—including interest—without the losses. In some cases, it may add penalties.
Here are some ways to prove business intent so you may enjoy losses against other income:
- Keep business records, either on an accounting software program or on spreadsheets.
- Maintain a separate checking account for transactions related to writing. (This not only proves business intent but will make it easier to track income and expenses.)
- Attend classes and conferences to improve your skills.
- Advertise, network, seek new clients, and keep a journal of these activities.
- If you plan to deduct vehicle expenses, keep a mileage log.
- Keep a phone log of business-related calls.
- Obtain any required licenses and insurance.
- Give your business a name.
- Chart future projections and plans to turn the activity into a profitable enterprise.
By following the above guidelines, you’ll demonstrate a profit motive and be more likely to convince an auditor you’re serious about the business of writing.
Business Organization (What you Need to Keep Track of, and How to Do It)
Being organized is one way to prove that your writing is something more than a hobby—and it makes filing easier, too. The best thing to do is track your income and expenses on a software program such as Quicken, QuickBooks, or Excel. If you take the above suggestion to open a separate bank account, keep careful records of your statements, as well.
Make a set of business receipt files. Remember, in the event of an audit, the IRS may want to see more than cancelled checks. It’s best to have actual receipts to confirm the nature of your purchases.
For both the business and the personal side of your taxes, it’s good practice to create a tax file for each year. Then, as certain transactions occur, you can store the proper documentation in the file. For example, when you donate bags of clothing to a nonprofit, place the receipt immediately in the file. When you pay DMV fees and property taxes, put the receipts in the file. You get the idea.
And in January, when you receive all of those third-party reporting documents (W-2s, K-1s, 1099s, 1098 Mortgage Interest Statement, etc.), simply place them in the tax file, too. Then, when it comes time to prepare your tax return, everything is at your fingertips. What was once a dreaded occurrence will be relieved in part by your organizational skills.
Deductions (How to Determine What Qualifies)
When it comes to what qualifies as a deductible expense, the guideline is “ordinary and necessary” business expenses. This is verbiage directly from the Internal Revenue Code. Because of the subjective nature of classifying business expenses, questionable deductions are not automatically disallowed. The validity of deductions is up for debate.
The list of what can or cannot be deducted is short. One reason there is no definitive list is because of the variance of expense requirements from one industry to another. What is reasonably deductible for one may not fly for another. For example, the purchase of candies placed in a countertop bowl for patients at a chiropractor’s office would be considered an “ordinary and necessary” business expense. However, if you are a writer with a home office that has no traffic, you will raise an auditor’s eyebrows if you try to deduct a bag of Hershey’s Kisses.
I advise my clients to view a questionable expense in terms of, “Would I incur this expense if I didn’t need it for the business?” If the answer is no, then you likely have a valid business deduction.
When it comes to writing, you may encounter some or all of the following deductions: office supplies, computers, copiers, printers, telephones, travel, meals, entertainment, self-publishing and print-on-demand costs, trademarks and copyrights, domain name expenses, costs of book-launch or book-signing events, advertising, marketing and promotion, vehicle expenses, postage, bank charges and outside services—to name a few. If these expenses are related to the business of writing, they are deductible.
Let’s examine some areas of deductions that have specific IRS guidelines and can be tricky to defend.
Home office can deduct a home office if you use the space exclusively and as your principal place of business.
Exclusive use: The area cannot be used for personal pursuits, only writing projects. That said, the space needn’t be a full room. If you have a desk and computer set up in your bedroom, you can deduct the area used as an office.
Principal place of business: You cannot have another space outside of your home (like a rented room) where you pursue your writing projects.
Many folks fear that the home office is a red flag. This was the case during the 1990s, when there was a big flap over home office use. There were severe restrictions in place stemming from a 1992 Supreme Court decision. But the IRS wised up and threw out those restrictions a decade ago. It understands that many self-employed individuals, even telecommuters, use qualified home offices. They’re not the red flags they used to be. As long as you follow the rules, you have nothing to worry about.
If you write one or two articles a year, you likely are not qualified to deduct a home office. The IRS would have a hard time believing you need an entire space of your home devoted to an activity that constitutes so little time. It also won’t believe the space is never used for personal purposes. You’ll throw up a red flag if you try to take the deduction.
However, if you spend a considerable amount of time in your home office on serious writing projects with a goal of reaping financial rewards, take the deduction.
First, calculate the square footage of your home office space, then divide that number by the total square footage of your home. This will give you a percentage to use against all your home expenses. For example, your home is 1,000 square feet and your home office measures 10 by 10 (100 square feet): 100/1000 = .10, or 10 percent.
Apply that percentage to the following expenses: rent or mortgage interest, property taxes, homeowner’s or renter’s insurance, utilities, housekeeper, repairs and maintenance. Don’t forget to write off the furniture and equipment used in the home office. (Yes, you can deduct that old desk you’ve had since college. Write off the lower of its cost or its fair market value.)
If you plan to do this, it’s a good idea to go to irs.gov and take a look at Form 8829 to see how the calculations are made. An even better idea is to consult with a tax pro to ensure that your office qualifies—and that you get every other deduction to which you are entitled.
Travel, meals, and entertainment: If you travel quite a bit for your writing business, you should maintain a travel file of notes, correspondence and any other documentation that will demonstrate to an auditor that the trips were for business rather than personal pleasure. Let’s face it: The IRS always suspects that you’re cheating on your taxes. It pictures business owners merrily writing off personal expenses as deductions, illegitimately saving beaucoup bucks in taxes. Assume you’ll be presumed guilty until proven innocent. That’s why I can’t stress enough the importance of keeping proper documentation to support the deductions to which you are entitled—especially in the area of travel, meals and entertainment. The IRS has encountered a lot of abuse in this area and is, therefore, very strict in its record-keeping requirements. It would behoove you not only to keep receipts but to thoroughly document the nature of each activity. If you take your agent to lunch to discuss your book proposal, write that info on the receipt and keep it. If you go to the San Francisco Writers Conference, you’ll need more than a credit card statement showing room charges at the InterContinental Mark Hopkins Hotel. If this is all an auditor has to go by, he’ll likely assert you had a nice little vacation, not a valid business deduction. Attach to the credit card statement a copy of your registration form and a flyer advertising the event. The auditor will match the location and dates and honor the deduction without question.
In fact, think about this with every receipt you have. If you buy a new computer from a store such as Costco, the auditor will want to see the receipt. After all, you can buy groceries and all manner of personal items from this retailer. Therefore, the IRS will want proof that the purchase was in fact for a new laptop and not for a dozen cases
There must be a clear business purpose to all travel, meals and entertainment deductions. A travel deduction for spending three months in Italy because the location “inspires” you to write will be met with a slamming gavel and the word “disallowed!” Yes, exclamation point included. But if the writing project you’re tackling is set in Italy and requires research of the culture, flora and fauna, architecture, etc., then hey, have at it.
Just be prepared to defend yourself. Keep all of your notes and your finished or unfinished project(s) in case you ever have to prove your point to an auditor.
Listed property: The term “listed property” refers to the acquisition of capital assets such as vehicles, computers and cell phones. Most self-employed people use these items on a personal level as well as for business, so you need to track the percent of business versus personal use. You then apply the percentage of business use to the cost and operating expenses, and use the result as a basis for your deduction. Of course, the IRS expects you to keep logs to verify those numbers.
Oh, great! A big homework assignment. It’s not as bad as you think. For instance, I have never been asked to produce a log for business versus personal use of a computer. The IRS has the right to ask for such a log and it technically can disallow the deduction for a computer if the taxpayer does not produce the log. Does that happen in real life? No—especially if you’re a writer. That’s the main tool of your trade. It would be like disallowing a ratchet set to an auto mechanic.
To properly document vehicle expense, write your beginning odometer reading under Jan. 1 in your appointment book. Flip to Dec. 31 and write the words “ending odometer.” That will jog you to record the ending mileage when the time comes. Throughout the year, write in various business destinations: office supply store, restaurant to meet a business contact, etc. At the end of the year, you’ll have your total mileage and a pretty good idea of what your business usage was. The IRS could technically demand a contemporaneous log, but I’ve never seen it happen.
This is, of course, an overview of a very complex subject. I would encourage you to meet with your tax pro to discuss your individual situation and how best to apply the laws to your advantage.