tax expense guide for freelancers

We’re a couple months into the new year, and you know what that means…

It’s time to start stressing out about taxes.

Tax time isn’t technically for another month or two, but filing earlier means you stress out for less time, and if you have a refund coming, it means you get that no-interest loan to the government back that much quicker.

How to Approach Freelance Finances

In my experience, the relationship between freelancers and taxes falls into one of three buckets:

The Ants

Like the ant in the fable, January finds these freelancers fully prepared through a combination of robust bookkeeping, expense-tracking apps, and a great accountant.

Ants do not need any of the information in this article, and should instead skip over to my hilarious 12 Days of Writing article here.

The Grasshoppers

Like the fabled ant’s foil, grasshoppers ignore the existence of taxes until (hopefully) a bit before the deadline. Their expenses and income are a huge mess, and many grasshoppers are years behind.

Grasshoppers won’t get much out of this article either. They should immediately call a tax professional and get themselves back on track.

Everybody Else

The rest of us don’t have all of our ducks in a row, but we have a spreadsheet somewhere or know how to download our account statements. We’re probably using TurboTax or HRBlock to file, and we know how to get the most out of our businesses. But the months leading up to filing are stressful, and gathering our records can eat up most of a week.

This article is for the “everybody elses” of the world.

In the past, we’ve covered how to set up your freelance business and what deductions you might be able to take. So this time, we’ll tackle how to track expenses. Sticky questions about expenses. What resources exist to help us with expenses. And for new freelancers of all stripes, we’ll start with:

Tax Season, Expenses, and You

For brand-new freelancers, or freelancers who want to do more of their own tax preparation, here are the basics of tracking freelance writing income and expenses.

You will be taxed on the difference between what you earn with your writing business, and what you spend to keep your writing business going.

Unless you’ve incorporated, those taxes on “self-employed” income will be higher than any other kind of taxes. Higher than corporate tax rates, than employment tax rates, than capital gains. Higher than literally anything.

That means you want to make as many legitimate expenses as possible apply to your taxable income, driving it as low as you can.

But that doesn’t mean you should lie. Never lie. The IRS takes a dim view of that, and the penalties are impressive. Tell the truth, and telling the truth means tracking your expenses carefully.

The rule of thumb for business expenses is “ordinary and necessary for your industry.” That means, when deciding what’s a business expense and what isn’t, to ask yourself if other freelance writers spend money on the same things, and in the same amount.

For example: Spending money on a new laptop every couple of years would never raise an eyebrow, but expensing a hot new desktop gaming rig would be cheating. Expensing a new set of power tools, even though your contractor neighbor expenses his, won’t fly either. On the other hand, you can expense basically all the printer paper you want.

Expense Tracking 101

At the end of each tax year, it’s up to you to total up everything you spent on your business, then categorize those expenses so you can fill out the right boxes in your tax forms.

In essence, the process is very simple:

  • Step One: Buy something.
  • Step Two: Decide whether it’s a personal or business expense.
  • Step Three: Throw away the receipt if it’s a personal expense.
  • Step Four: Keep the receipt if it’s a business expense.
  • Step Five: Enter the data from the receipt into your business bookkeeping software.
  • Step Six: Store the receipt somewhere safe.

There are a lot of traps, pitfalls, better practices, and rookie mistakes for most of these steps (which is why accountants and bookkeepers can make a living). But that’s the core process.

Everything we’ll talk about in the rest of this article is about those traps, pitfalls, practices, and mistakes. Starting with…

Is It a Legitimate Expense?

As a freelance writer, the lines between business and personal expenses can blur. For example:

  • That new printer in your home office also gets used by your kids for their homework.
  • You drove into town to meet with a client, but also swung by the bookstore for personal shopping.
  • That lunch you had with your friend who’s a freelance editor. You talked shop for 10 minutes, but then talked about Star Wars for another hour.
  • Speaking of books, do those seven titles you bought in your genre count as research, or a personal expense?
  • You bought work clothes for interviews with potential new clients, but you also wear them to weddings.
  • You bought airfare to attend a conference, but while in town you visited with friends as well.

Are these expenses? Are they personal costs? Can you apply some, but not all, of it?

You won’t love the answer, because you’ll get different answers from different sources.

Overall, there are three schools of thought:

  1. Go by the letter of the law, and disallow anything involved with your personal life. This means less expensable income, and arranging your life to create firm dividing lines, but is the safest approach. On the other hand, a portion of what you miss is almost guaranteed to be legitimately expensable.
  2. Get as aggressive as you can with expenses. The IRS isn’t really looking to bust small businesses at the level of most freelance writers, and it’s up to them to prove you wrong. This maximizes your tax savings, but it does put you at more risk.
  3. Estimate and be fair. If you charge the whole printer to the business, make that Star Wars lunch a personal expense. Make the conference flight a business expense, but that extra hotel night is on you. This seems like the most common amateur approach, and has some advantages and disadvantages in common with the other two methods.

I cannot tell you which of those three is the best for you and your situation. Only a tax professional can (and you should listen to that advice carefully, no matter where you immediately lean).

But think about all three so you can go into that meeting fully prepared to make a decision you’ll be happy with.

Tax Tracking Best Practices

So, what are the things you should do to keep your expense tracking “on track,” or to get them on track early in the year? Different answers come from different experts, but here are the ones we’ve heard the most frequently.

1. Set up in-house expense tracking to match the IRS business expense categories.

That way when you fill in the tax forms, you’ll already have collated your expenses to match. The IRS expense categories for self-employed income are: advertising, business insurance, car expenses, depreciation, home office expenses, meals and entertainment, office expenses, supplies, travel, and “other expenses.”

That last item includes things like business gifts, industry subscriptions, dues, banking fees, research, and education.

2. Use your home office expense.

Brick-and-mortar business spend thousands each month in rent, utilities, and upkeep expenses for their locations. Working out of your home, you get to deduct a portion of the mortgage (or rent), utilities, phone, and similar bills.

For almost all work-at-home freelance writers, this will be the largest or second largest deduction from your income. Do everything you can to understand it, and to maximize it.

3. Run the numbers for getting an accountant and/or bookkeeper.

If you’re serious about freelance writing, you’ll be billing $50 to $100 an hour by the end of your third year in business. Bookkeepers cost far less than that, and (most) accountants cost a little less.

That means you might be losing money by not hiring professionals to do all this for you. And that’s not even considering that most professionals will get you much bigger deductions than you will on your own.

Of course, this only applies when you have to spend an hour either writing for pay or doing your taxes. If you’re only writing a few hours per week, handling your own tracking is both cheaper and easier. Like I said, run the numbers and see what makes the most sense.

4. Track your most likely tax bill.

If you’re self-employed, you’ll be paying 15.3% of your income for Social Security and Medicare, plus whatever regular tax bracket you fall into. Whether or not you file your quarterly estimated taxes, you should save money according to your best-guess estimate of what your taxes will be.

If you’ve saved too much, you have extra spending money that quarter. Just don’t save too little. Those checks can add to real scratch, and interest applies no matter why you came up short.

5. Use your W-2 withholding wisely.

This almost always requires the help of a tax professional, but if you have employment income and self-employed income as a freelance writer, the income and the withholding can interact in almost magical ways.

This is also true if your spouse has a W-2 job and you are a full-time freelancer (if you file jointly).

If you have W-2 income on your tax return, it’s almost always worth checking in with an accountant about how to leverage that.  

6. Negotiate with the IRS.

If you end up in trouble — be it from a disagreement about expenses, or a late filing, or not having the money to pay taxes right away — you can often make arrangements with a phone call or letter to the IRS.

This is especially true with the kinds of tax bills most one-writer shops are likely to see. Since their mission adjustment in the late 1990s, the IRS is actually very accommodating. They will work with you. All you have to do is ask.

tax mistakes freelancers should avoid

Tax Tracking Rookie Mistakes

On the flip side, the experts I spoke with also mentioned far-too-common rookie errors made by their clients.

These mistakes will cost time if you’re lucky, and can mean huge tax burdens and penalties if you’re not. Although you can get by only adopting a handful of the best practices I mentioned above, do everything you can to avoid all of these unforced errors.

1. Not filing your quarterlies.

Each quarter, you’re supposed to file and pay taxes based on the quarter that just ended.

This works in essence like the tax withholding from a regular paycheck. It keeps you from having a huge tax check to write at the end of the year, and provides the government with a consistent stream of income.

If you don’t file your quarterlies, you’re not only on the hook for a full year’s worth of taxes, but you may also be in for interest and penalties.

Besides, getting everything together once each quarter seriously reduces the time you’ll spend for your annual tax prep. Quarterlies are due on April 15, June 15, September 15, and January 15.

2. Misfiling 1099 income.

1099-MISC forms report money paid to you as a person from company clients. It’s possible for the IRS to have one opinion about how that income is reported, and for you to have another. If you guess wrong, interest and penalties definitely apply.

In general, use the name on the individual 1099 form when assigning where the income goes. If it has your name, it’s personal income. If it has your business name, it goes in business income.

3. Getting cute with your home office.

I know I told you to maximize your home office deductions, but in recent years, the IRS has developed less of a sense of humor about abusing it.

If you work from a corner of your living room, you don’t get to deduct the whole living room’s worth of expenses. If your main computer is a game console and homework station for the kids at night, you don’t get to depreciate 100% of it. It can be tempting to “fudge” things here, but resist that temptation. The rewards are not worth the risk.

4. Doing it all at once.

If you try to do all your expense tracking and categorizing in one big chunk (often at the very last minute), you’re going to make mistakes. All mistakes are expensive.

If you under-report your expenses, you pay more taxes than you should. If you overreport your expenses, you’ll be paying penalties and interest when the IRS notices. If you just dump a pile of uncollated documents in your accountant’s lap, he won’t make mistakes — but he’ll charge you by the hour.

Instead, dedicate time at least once a month to categorizing your expenses. It won’t be your favorite hour you ever spent, but it will be more fun than spending that hour (or more!) late at night in early April.

5. Not keeping receipts.

Yes, all of your expenses are tracked to the penny in your various online bank accounts. Yes, some apps help you itemize and categorize those expenses with exact precision. No, neither of those constitutes valid proof of expenses if you get audited by the IRS.

Keep the actual receipts for everything. Electronic copies are fine, but keep those files for 7 years.

6. Cheating.

Say it with me: DO NOT CHEAT ON YOUR TAXES. Do not overreport your expenses. Do not under-report your income. Do not do this, no matter what.

Making an honest mistake on your taxes results in fees and interest. Lying to the IRS can mean jail time, plus fines many times the amount you saved by lying. Simply never, ever do this.

Tax Tracking Apps You Should Look At

If you’re still transcribing your bank records into an Excel spreadsheet to track your business expenses, you’re not alone…but you are working far too hard. Especially with the explosion of apps for your phone, you can find the perfect tool for your expense tracking needs. Here are some of the best examples:

Expensify

Expensify is probably the best app for most freelance writers. Like many other apps on this list, it’s a full-service expense tracker and receipt keeper that helps you determine what goes where.

Unlike the other similar apps, it’s (in my opinion) at the perfect balance point between having too much complexity for a one-person writing business and being too simplistic for our needs. The downside is it costs $5 a month, but it’s available for all platforms.

FileThis

FileThis is less of an expense tracking system and more of a general document control, storage, and access app.

On the one hand, it suffers from mission drift in that it doesn’t treat receipts differently from employment contracts and bank records. On the other, it keeps everything in one place so you can access those mortgage statements and cell phone records when you need them.

Since it’s free for the basic account, it’s good to use alongside the more specialized options.

Travel Expense Apps

MileIQ and TripIt manage one of the most vexing aspects of maximizing your vehicle expenses. In both cases, the app interfaces with your phone’s GPS and asks you via notification when you stop your car whether it was a business or personal trip. They then generate reports you can upload into your tax software, or copy over by hand if you prefer. Both offer free basic packages.

MileiQ offers an upgrade based on number of trips per month, while TripIt’s “pro” upgrade offers more features. Neither helps with deciding whether a multi-purpose trip is expensable or not. That’s between you and the IRS.

Document Management Apps

OneReceipt, Scannable, and Scanbot are all great alternatives to the Expensify/Quickbooks/FileThis triad that offer some features some writers might find important enough to go with them over other options.

OneReceipt is optimized for iPhones which appeals to some of the Mac crowd. Scannable interfaces beautifully with Evernote. Scanbot will also help track invoices. Basic accounts for all three options are free, which is nice.

QuickBooks

QuickBooks is the granddaddy of business finance software. Their phone app is a glorious electronic palace of form, function, and easy interface. It’s also got so many features that a simple freelance writer might find themselves overwhelmed by unneeded options. It’s also pricier than other options on the list.

On the upside, you can upload your records direct to your accountant or online tax service for easy tax prep.

Generally speaking, I recommend QB only if you have (or plan to have) a more complex operation than home office micropreneuring.

Swipefin

Swipefin is the Tindr of business expense apps. At last brag, it was able to connect with 29,000 financial institutions. You connect the app to your bank records, then it shows you the transactions one at a time. Swipe right for business, left for personal. Although it doesn’t help with receipt management, it lets you handle initial expense triage while waiting for the train, standing in line, and other “lost” downtime activities.

Which app, or collection of apps, you use to track your expenses is up to you. It will depend on what phone you use, what kinds of expenses commonly come up for your writing, and how you like to file your taxes.

Personally, I use MileQ for my vehicle expenses and Expensify for general tracking. I only found out about FileThis while researching this article, but I will probably start using it for 2018.

Obligatory Warnings

Warning #1: This information is written by an American freelancer who has only ever paid American taxes. The rules, best practices, penalties, and assumptions may be very different from the reality in any other country.

Warning #2: I am an experienced freelance writer and serial entrepreneur, who has filed business taxes for one company or another since 2003. I am not an accountant, bookkeeper, IRS asset, or legal tax expert of any kind. Do not take this article as professional-level advice. Instead, use it to get your ducks in a row before hiring a professional. That way, you’ll take up fewer of her hours and spend less.

Got it? Good! Now get out there and have a fantastic new year, tax season, and refund time.

Want even more great information on how to run your freelance business? You’ve come to the right place!

 

 

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Jason Brick

Jason Brick is a professional writer, martial artist, travel addict, and dad whose work has been published across multiple genres and formats. He has contributed over 3,000 articles and short stories to print magazines and online sites on topics ranging from home improvement, to health and wellness, to cocktail recipes, to small business management. Some of Jason’s top-level corporate clients include Black Belt and Thrillist magazines, American Express, Intuit, and Mint.com. Find him online at Brick Comma Jason.

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