Many writers (myself included) struggle with the business side of things, especially keeping the books and paying taxes. That's why I was thrilled when Brigitte A. Thompson, author of Bookkeeping Basics for Freelance Writers and owner of Datamaster Accounting Services, LLC, offered to tackle some of those tough questions. Many of you suggested questions for Brigitte via Twitter, so thanks for weighing in. I plan to use Twitter more in the future to solicit questions, so stay tuned!
Urban Muse: What are some tax write-offs that freelance writers might not be aware of?
Brigitte: There are many tax deductions available to writers. Some expenses are common such the cost of purchasing a case of paper or paying for a computer software upgrade. Other costs incurred in the operation of your writing business may not jump out at you as expenses when they could be. For example, consider the following accounts:
- Mileage: Trips made in your vehicle to pick up office supplies can be counted as a business deduction if you record the proper information to support it.
- Meals: Treating your agent to a restaurant meal with the discussion focusing on your next book can also generate a tax deduction when properly documented.
- Shipping: UPS charges and postage used to mail a query or review copy of your book can be a small expense, but I suggest you track it. Those small deductions add up and every penny spent as a qualified business expense will reduce the amount of income tax you owe.
My book devotes an entire chapter to expenses including a comprehensive listing of them and detailed information on what documentation is required to support each one.
UM: A lot of writers freelance on the side while holding downing a day job. Any tips for part time freelancers on tracking and reporting freelance income?
B: It’s essential the two sources of income be tracked separately: one source as an employee and one as a self-employed freelancer.
The day job employee income will be reported by the employer on a W-2 after the close of each calendar year. However, freelance self-employment income should be tracked & reported by the writer.
Each time a writer sells an article, receives a royalty payment or completes a copywriting project as a freelancer, there are several things to track. These include: name of the person or business paying you- method of payment; cash, check, credit card- date of payment- dollar amount received- reason for the payment.
This information should be should be kept in any format that works best for you. Some people prefer to use a notebook identifying pages by months and others utilize accounting software. As long as you find a way to record this information on a regular basis and save related documentation, the IRS (and your tax preparer) will be thrilled.
UM: What are some of the differences between doing business as a sole proprietor vs. an LLC? B: Over the years, there has been confusion with Limited Liability Companies (LLC) and sole proprietors. It’s important to understand an LLC is an entity created by state statute. The IRS did not create a new tax classification for the LLC. They still identify a business entity as a corporation, partnership or sole proprietor.Most writers are sole proprietors who file Federal Form Schedule C with the IRS to report their income and expenses. If a sole proprietor would like to register with their state as a Single Member LLC, applications are made at the local level. The IRS would classify this business as a Disregarded Entity which is taxed as a sole proprietor for federal income tax purposes and the same Schedule C would be required.
If a writer is a member of a partnership or corporation, a multi-member LLC can be elected. Different forms are used for this election and they are explained in my book.UM: I'm sure you've observed other freelance writers making accounting missteps that cost them time and money. What are some of the most common issues and how can we avoid them?
B: The most common misstep I’ve seen with writers is not taking themselves seriously as business owners which leads to financial pitfalls. Many writers have been honing their craft for years so it’s hard to identify an official starting date for their self-employment. Without this point to mark the beginning, it is easy to put off tracking income and expenses. This can be an unfortunate mistake.
The IRS will consider you to be in business when you are actively pursuing projects intended to generate income and expenses. This means they will expect you to file a tax return to report those transactions. Keeping track of your income and expenses from day one will enable you to pay the least amount of income taxes on the money you earn.The most important thing you can do as a writer is to become organized. There are many books available on how to organize your writing, but this is the best book available to organize the financial side of your writing business.UM: Obviously, your book is a great place for writers to get information on bookkeeping. Are there are any other resources you'd recommend?
B: Yes, I recommend US-based writers visit the IRS web site for specific tax issues and the Small Business Administration for general business information. Both of these government sites are working hard to become user friendly. I also recommend joining professional associations for writers such as American Society of Journalists and Authors, The Authors Guild and National Writers Union. There are many groups to choose from so consider the benefits of membership before joining.
I was interviewed recently by Freelance Success, which offers an insightful newsletter for their members (ed. note: I'll second that!). There are also online groups for writers such as MomWriters which offer networking opportunities as well as camaraderie.
My book, Bookkeeping Basics for Freelance Writers, is available through Amazon.com and my publisher's web site. Please also visit my blog, Writers In Business where I share tax tips and feature guest writers.
Thanks so much for sharing your insights, Brigitte!