Some freelancers keep expense receipts in a shoe box to deliver to their accountant before April 15. Others snap pictures of receipts with a smartphone to file into an electronic expense reimbursement app.
Whichever camp you’re in, there’s no getting around taxes.
Freelancers especially need to track income, expenses and deductions because ain’t nobody else doing it for them. Even if you hire an accountant – like me – there’s a fair amount of bookkeeping you just can’t avoid.
For an expert’s point of view, I asked former Internal Revenue Service special agent Julian Block to be my guest on the most recent WordCount Last Wednesday Twitter chat. Block is also an attorney and syndicated columnist who has written extensively about freelancers and taxes, including a chapter on taxes and deductions in the American Society of Journalists and Authors’ book, The ASJA Guide to Freelance Writing.
Here’s a recap of some of Block’s top tax tips for freelancers, along with additional suggestions from writers who participated in the chat.
Are there any changes to the 2011 tax codes freelancers should know about?
There are no major changes in 2011 income tax codes that writers should be aware of, according to Block.
If a writer’s freelance income is higher this year than last, how can he or she minimize taxes they owe?
To minimize higher income in 2011, pay all allowable expenses before Dec. 31, and make all allowable deductible contributions to your retirement funds, Block says. Another way to minimize income: if you pay for medical insurance coverage with a high deductable, open a Health Savings Account (HSA), suggests John Soares, a writer in Mt. Shasta, Calif.
Conversely, what if a writer expects their freelance income to drop substantially in 2012. What tax-related steps should they take in 2011?
Where possible, defer any income from 2011 to 2012 and accelerate expenses from 2012 into 2011, Block says. Examples of expenses to accelerate: equipment, office supplies, web design – get the work done and paid for this year, he says. An easy expense to accelerate is estimated state income taxes: make the last payment in December 2011 instead of in January 2012.
Say a writer completes an assignment but doesn’t get paid. Can they deduct it? What about related expenses?
A writer cannot deduct the amount of income lost for any article they wrote but weren’t paid for, Block says. But they can deduct unpaid expenses such as meals and travel.
A magazine send a writer a 1099 that includes fees and expense reimbursement. How should they handle that on Schedule C of their return?
In Schedule C, include the full amount in receipts as income, and include all reimbursed expenses as deductions in the applicable categories, Block says.
What’s the IRS-sanctioned expense reimbursement rate for auto mileage for 2011?
The mileage rate changed halfway through the year. For the first six months of 2011 it’s 51 cents a mile and for the second half it’s 55.5 cents a mile, Block says.
What home office expenses are deductible?
To be deductible as a business expense, a home office must be used regularly and exclusively for business reasons, Block says. “An office doesn’t have to be entire room, it can be specifically definable part,” he says.
But be careful on this one, advises Linda Bernstein, a New York freelancer. “A home office (deduction) is really tricky, having done it for years. We were audited and had to provide photos,” she says. “Our accountant says home office is like stamping ‘Audit me.’” In the past, Bernstein also divided up square footage and then applied whatever percent was used for work to her utilities and added it to her home office deduction. (Another way to calculate utilities is by division when they’re used for business v. personal time.)
But don’t be too cautious, Block says. If you are, you’ll end up overpaying your income taxes and self-employment taxes, and for many freelancers, self-employment taxes are higher than income taxes.
Find out more on home office deductions in IRS publication 587, but “it’s tough reading,” Block says.
Are software programs such as TurboTax helpful?
Block is a TurboTax fax because it’s simple and inexpensive. But less tech savvy freelancers prefer hands-on help. Jen Miller, a Collingswood, N.J., freelancer, says: “I’m not software savvy so I nixed TurboTax when I went freelance. (An) accountant is worth the money.”
Any other advice?
Look at last year’s tax return as a guide when doing this year’s return. “Another reason to look at last year’s return, you might have a carryover of losses from investments,” Block says.
Freelancers and other self-employed business owners can get free tax preparation from outfits like AARP, even if they’re not over 50, Block says. “And sign up for inexpensive adult education courses on taxes and personal finance to pick instructors’ brains about your tax questions.”