It’s the time of year when the floor of my office is covered with bits of white paper, dinner and the dishes get neglected and my accountant wonders how close to April 15 it’ll get before he hears from me.
Yep, it’s tax season.
I’ve spent the last three days finishing tallying up my income and expenses to have everything ready to send to my very patient accountant who’ll give my calculations a once over before filing my return with Uncle Sam.
Though taxes are something you have to do, they also should be something that you want to do in order to get better insights into how your freelance writing business is operating.
Here’s what I learned from crunching the numbers on my 2011 taxes:
1. Beware big clients. In 2011, my income dropped 3.5 percent from the previous year, a direct result of my largest client cutting back the amount of work they assigned during the second half of the year and not being able to make up all the difference from new work. The good news is I picked up two new clients in the second half of 2011, and that big client started assigning again, so by the beginning of this year my work load is about where it used to be, but my client portfolio is more diverse, always a good thing.
2. The only thing that matters is the bottom line. At the same time my gross income was down slightly, my total business expenses were up about 33.5 percent, mainly because of higher travel expenses (more on this below). Because of the increase, my expenses were about 9.8 percent of my income, compared with only 7.1 percent in 2010. Since I’m anticipating gross income to remain relatively unchanged this year, I’m already taking measures to cut back on business expenses so they’re closer to the 7 percent mark. On a side note: I’d love to hear from other freelancers if your overhead is similar to mine: is 7 to 10 percent typical for you? As a side note: isn’t it great to be in a business with a pre-tax profit margin of 90 to 93 percent?
3. It pays to travel (a little). In 2011, my biggest expense was travel. I made five trips out of the state last year, twice to cover conferences or conventions for work, twice to meet with editors or writers I work with, and once to run a panel at the American Society of Journalists and Authors conference in New York. Total expenses for airfare, lodging, transportation (taxis, shuttles, subways, parking, etc.) was approximately $4,850. I was reimbursed for about 40 percent of that, but the balance – about $2,950 – was still more than three times what I spent on travel in 2010. I won’t cut out travel altogether – I’ve already taken a trip this year that was partly work related. And I’m a firm believer in visiting editors at least once every other year. But I canceled plans to go to ASJA again this year because last year it was one of my most expensive trips and I got zero work out of it. Although I love going to New York and had fun meeting writer friends who I’d only known virtually before, I can’t justify spending that kind of money. I am thinking about attending the Online News Association convention next September in San Francisco because it’s so much closer to home.
4. I spend more on Internet services than on the telephone. And that includes minutes and texts on my Droid. My costs for monthly Internet service, hosting for my website, website design, domain name registration and inflight or hotel Internet service was about twice as much as what I paid for local, long distance and cell phone services. I think that’s a first.
5. I don’t eat out. In 2011, I spent a whopping $108 on business-related meals and entertainment in town, $433 if you include meals I had on business trips. That’s one advantage of not working in coffee shops – those $3.50 lattes add up. Think about it – even if you worked just 1 day a week at a Starbucks or similar coffee shop and spent $5 on coffee and a donut, that’s $260 a year.
6. I splurge where it counts. What I don’t spend on business lunches, I more than make up for paying for professional services, specifically the accountant who double and triple checks my tax return, and on media perils insurance, which covers my editing, writing and blogging.
7. Major expense categories don’t change much from year to year. In 2011, my top 10 business expenses were: travel, professional services, dues and subscriptions, computer hardware, Internet services including website design, office supplies, telephone services including cell service, books and periodicals, software, and mailing. In 2010, my top expenses were in the same categories, just shuffled around a bit: professional services, telephone and cell service, Internet services including website design, computer hardware, dues and subscriptions, travel, office supplies, miscellaneous expenses, books and periodicals, and software.
8. It pays to wait. In 2011, I bought a new computer, for the first time in at least four years (or five, I forget). The monitor I’d been using was even older – a label on the back said, “Manufactured in 1995” – almost as old as my college freshman – yikes! The silver lining in waiting was being able to buy a state-of-the-art all-in-one computer with the latest bells and whistles – touchscreen, fastest Intel processor on the market, 1 terabyte of storage, HD TV screen, etc. – for well under $1,000.
If you’ve done your 2011 taxes already, what insights into your freelance business did you gain, and what will you do differently this year as a result?
Interesting and helpful article, Michelle. I concur with your point about the perils of working for big clients (or rather, having big contracts with just one or two clients). Even if the client is thrilled with your work, external circumstances such as a sudden budget freeze can significantly affect the freelancer’s income without warning.
That’s happened to me several times since I came back to work in 2007 – a client that I depended on for a steady portion of my work cut back for reasons that had nothing to do with me, leaving me to fill a gap in my schedule, and income. In 2009 when that happened I was fortunate enough to pick up a major contract. Last year when it happened again, I was all set to devote some time to an ebook that I’ve been talking about writing for the past two years – but then a new client materialized and an old one came back and I found myself with more than enough work to keep me going – and to put the ebook idea back on the shelf for a while longer.
Michelle
Michelle, it’s interesting to see how our business strategies are alike or different. In my case, my business expenses accounted for less than 5% of my income, so my CPA suggests I shoot for a higher deduction to income ratio this year. Part of this is due to the fact that I only use the car for business-related travel a few times a year (I mostly do most of my reporting from home or use public transit) and usually for such small distances it hardly seemed worth tracking. This year, however, I do plan to track those car trips and other small expenses.
When I travel longer distances to conferences, I deduct bus or plane expenses, but I rarely pay for a hotel because of my Yankee tendencies. Last year, I stayed at a fellow ASJA member’s apartment during the conference and this year, I’m using Airbnb (which I’ll deduct). Admittedly, getting to NYC is much easier from Boston than it is from Portland.
I think it’s great that you’re diversifying, but I have the opposite issue. Each spring when I do my taxes, I’m amazed—and a little overwhelmed—by the number of clients I’ve worked with over the course of the year. This year I worked with close to three dozen clients. Some of them paid for one or two assignments over the course of the year, others were ongoing projects. It’s great to be diversified, but too many small projects create administrative headaches (learning their style guide and/or content management system, submitting an invoice in their format, tracking that income) and don’t lead to long-term relationships and stability. I do have minimums but sometimes I pursue a one-off assignment with a market I really love. Long-term, though, it’s better to be focused rather than scattered, and I’m trying to strike that balance where I’m continually challenged and engaged but not pulled in too many different directions.
Three dozen clients! You’re amazing. I’m not sure I could handle the administrative end of things (my husband would vouch for that). In 2011, I had five clients, in 2010 it was seven, and in 2009 it was 10. It’s interesting to note that my income has gone up as the number of clients I work for has decreased. I really do see myself as a team player – I know it’s my background as a staff writer – so I feel most comfortable working with a handful of publications on a regular basis, whether it’s on a monthly contract or a verbal agreement to turn in X number of assignments a month.
And regardless of what your CPA says, good for you for keeping your overhead so low!
Michelle
@Susan: my accountant is the same way — he keeps asking for more expenses.
@Michelle: what is “media perils insurance”? And do I really want to know about it, or will it just worry me while exciting my insurance agent?
Media perils insurance is liability coverage for your freelance writing business. If you blog, cover controversial subjects or have writing or editing contracts that put responsibility for various writing- or editing-related liabilities on you, it’s a good way to cover yourself. I’ve carried it off and on throughout my freelance career and have it now because of the editing and blogging I do, and also because I have investments I would like to protect in the event I was sued – and I’m married to a financially risk-averse attorney! The most economical policy I know of is called WriteInsure and comes from Axis; however, it isn’t really that economical. I pay an annual premium of $933 for $1 million coverage.
Michelle
It’s likely that my real expenses are slightly higher than my reported expenses, because I focus on tracking the big items (for instance, if I bought $2 pens at the drug store, I wouldn’t sweat it). I’ve resisted taking the home office deduction because in all honesty, I don’t have a truly dedicated space and I’d rather not have to defend that deduction if (heaven forbid) I got audited. Others with similar numbers might claim more deductions, but as my CPA put it, “few people would question the deductions you did take, so you shouldn’t worry about getting audited.”
Wow, I admire anyone who can overhead so low! But I also can envision different business models for freelance writers, based upon years of experience, the work and client mix and the relative stability of business conditions. Another big factor, I think, is the person’s aspirations. I’m kind of the equivalent of a stonemason or a carpenter with a keyboard–I take a certain amount of pride in my work, but at this point in life, I’ve got a wife who works with disabled children, a kid with a college fund, and a mortgage. It’s got to be about the benjamins. The person down the street, in contrast, may not be happy in life unless she is trying to write “Midnight in the Garden of Good and Evil” or “Seabiscuit,” or whatever. She’s going to have a tough time controlling expenses. High risk, high reward usually means high overhead, I think.
I’m in the same situation Pat, with a mortgage, kids in college, etc. I try to maintain a freelance mix that includes a lot of well-paid assignments that tap into my areas of expertise but with a little time held in reserve for work that might pay a little less but move me a little more. Like a lot of hacks, though, I can write about almost anything; once I’m in the midst of a project, I can get pretty excited about it, regardless of what it is. That’s probably why I haven’t written a book before now – I’m pretty content doing what I’m doing.
Michelle
Gee, I suppose I could make my accountant happier and protect myself all in one move.
I love this insight. I did my taxes this year and didn’t make my goal. Perhaps next year! thanks for sharing.
The perils of big clients are a big one. I had a big project come to a close, and two other clients get swept away in the second half of the year. That was really tough. Also, when doing taxes, I 1) Learned that I had made more than I thought I did and 2)At the same time realized that I really need to raise my rates.
Thanks for the tips, Michelle. I also added a much-needed new computer to my expenses for 2011, and was certainly glad to have the added business expense come tax time. I almost regret not buying the next model up!
Isn’t it great to have a state-of-the-art computer again? Wish I’d done it sooner.