It's the start of a new year, and whether we like it or not, that means tax season is nearly upon us. Daunting as that may sound, for many of us taxes are actually fairly straightforward. Understanding the basics can take the edge off, letting us focus our stress on more exciting things — like querying and pitching.
Luckily, today we have a guest to help us out! Laura Gibble is a tax attorney who has graciously offered up some tips for those of us earning income with our writing. She will also be around to answer any questions in the comments — thanks, Laura! And without further ado:
Death and taxes. Two guarantees in life. For some individuals, these are two of the most frightening realities to face. As a tax attorney, I hope I may alleviate some fear for the tax bits.
Every person has a different situation. There are some things, however, that will help the majority of people during tax time if good habits are practiced during the tax year. These little habits and tidbits are primarily focused on Independent Contractors (ICs). [Aria: When it comes to fiction writing, that's most of us!]
An Independent Contractor (IC) is an individual who receives income outside of wages and income tax documents outside of a W2 for the tax year. This means that no taxes are withheld from the money the IC receives in exchange for services or goods. In such cases, ICs may deduct certain expenses associated with earning money. These deductions reduce taxable income as they allow for only the profits to be taxable versus including the money that has already been put back into the business. Once the money goes back into the business, it becomes an investment towards producing more taxable funds in future years. (If there are any questions regarding the reasons for this, feel free to ask for a better understanding of deductible items.) An independent contractor files a Schedule C with the Federal Form 1040. Each state has their own tax forms.
Things to keep in mind and habits to pick up:
- Pay estimates to both federal and state. (Go to the IRS or state taxing agency websites to figure out payments based on your projected income.)
- The Government is supposed to run as a business, with bills and such, so quarterly payments go towards yearly expenses.
- If quarterly payments are not made when the income suggests they should be, there will be interest and penalties applied to what should have been paid.
- Keep your receipts! This includes proof of payment for utilities if you have an office in your home and large ticket items.
- Large ticket items include computers, printers, etc. utilized in whole or part for business purposes throughout the year.
- Trips for business purposes may be deductible in whole or part. Maintain receipts and itineraries.
- It is easiest to maintain a spread sheet if possible of amounts, payee, purpose, method of payment and date.
- [Aria: For us writers, this can include convention costs, courses we take, books on writing craft, and more!]
- Maintain separate accounts for your business and personal expenses.
- Keep record of any money transfers, particularly the purpose and dates.
- Keep a separate workspace for paid work versus personal work.
- Keep proof of medical expenses and insurance premiums paid.
- Though most medical deductions go on Schedule A, and most medical expenses are not enough to be deductible, the insurance and certain medical expenses are deductible for self-employed individuals.
- Keep record of ALL money paid to you, the source and the reason for receipt of the funds.
- Technically, all money brought in must be reported. There are different locations on a return to record money from different sources.
- Self-Employment tax is not additional tax above and beyond what W2 employees pay. In fact, SE tax is Social Security and Medicare which is withheld from W2 employee paychecks.
Hopefully these general bullet points are helpful. As always, ask a professional directly for specific questions regarding your personal circumstances.
Disclaimer: To ensure compliance with requirements imposed by the IRS, if any advice concerning one or more U.S. Federal tax issues is contained in this written document (including any attachments), such advice is not intended or written to be used (and cannot be used), for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein without additional review. The information and recommendations listed above are general taxation concepts and are not specifically tailored to any particular individual and are not legal advice.