You’ve made it this far. You’ve mastered income, developed your business plan, chose your taxable business entity, learned the framework for deductible expenses, organized your transactions, and even seen how artists have fared in Tax Court (with and without prostitutes.)
Today I’m going to cover some miscellaneous topics that come up as frequently asked questions.
The Tax Cuts and Jobs Act
In late 2017, the US Congress passed a tax bill called the Tax Cuts and Jobs Act (TCJA.) The bill included drastic changes to the tax code with impacts for most taxpayers. Here’s how the changes affect freelance and independent writers:
- Most individual income tax rates were slightly lowered. This means a temporarily lower federal income tax bill for most writers, regardless of which pass-through entity is used.
- The standard deduction is almost doubled, which means many taxpayers who previously itemized their deductions could switch to taking the standard deduction. For writers who are also homeowners, the home office deduction might be the only place to see a tax benefit for a portion of their mortgage interest and real estate taxes.
- Entertainment expenses are no longer deductible. Business meals are still 50% deductible, but the cost of entertaining your colleagues and associates in a business capacity is no longer a valid tax deduction as of 2018. The kneejerk question for writers—no judgement, just my fermented experience talking—is whether drinks are considered meals or entertainment. As of the date of this post, no official guidance has been released. “Meals” refers to any food and beverages, but is it specifically AND beverages, or could it mean OR beverages? To be safe and not get caught in the black hole of coordinating conjunctions, order some food along with your drink at your next bar function.
- 20% QBI pass-through deduction. This is the biggest tax change for writers. One of the main objectives of the TCJA was to reduce corporate income tax, but it became obvious that pass-through entities needed a break too, so a new deduction was born. Now all Sole Proprietorships, Partnerships, and S Corporations can deduct 20% of their qualified business income (QBI) when calculating their federal income tax bill. This represents a big savings for many pass-throughs, but keep the following points in mind:
-The deduction has no effect on calculations of self-employment tax.
-The reasonable compensation paid to the shareholder-employee of S Corporations is excluded from “qualified business income.”
-The deduction is for federal income tax only, and has no impact on state income taxes.
Note: the lowered income tax rates and the 20% QBI pass-through deductions are temporary. They are currently in effect for tax years 2018-2025, and are set to expire in 2026.
Paying Estimated Taxes
You’re probably used to your employer withholding taxes on your paycheck and remitting the tax to the federal and state governments on your behalf. As a self-employed writer, you’ll have to make these payments directly.
Taxpayers generally have to make estimated tax payments if they expect to owe $1,000 or more in tax when their return is filed. The government doesn’t care how those payments are channeled, so if you work as an IT employee and also write steampunk romances at night, as long as your employee paychecks are withholding enough so that you don’t owe $1,000 or more in tax at the end of the year, you won’t have to make additional estimated payments.
For those who do, you’ll need to follow these steps:
- Calculate your total estimated tax bill for the year. If you work with an accountant to file your taxes they can help you make this calculation. Otherwise, you can use the worksheet on Form 1040ES to estimate your bill. You’ll need to know your expected income for the year—this is where your essential projections spreadsheet comes in handy—and the deductions and credits you expect to use. For this piece, your prior year’s tax return will be extremely useful.
- Writers work in an uncertain business environment, and our income is anything but consistent. Don’t worry if you’re not confident about your income estimates. The IRS understands we can’t be completely accurate with our projections. In order to avoid an underpayment penalty, just pay the lesser of:
100% of your prior year tax
90% of the current year tax
High earners: If your adjusted gross income was $150K or more, you get bumped up to the lesser of 110% of the prior year tax or 90% of the current year.
- Once you have your estimated tax amount, split it evenly into four equal installments and avoid late payment penalties by making your quarterly payments on time. The due dates can fluctuate, but are generally mid-April, June, September, and January of the following year. Here are the 2019 estimated tax payment deadlines.
April 15, 2019. The same day your annual return is due. If you had an overpayment for the prior year, you can always elect to use that money toward your estimated taxes for the current year.
June 17, 2019
September 16, 2019
January 15, 2020
- Don’t forget about your state income taxes! Follow the same process for estimating your state income tax obligation and check with your state to confirm how much and when the payments are due. Every state is a little different.
- Keep your payment receipts and record the amounts paid during the year. The more data you have ready for your annual return, the simpler the whole process becomes.
I mentioned two different penalties the IRS can charge you—the underpayment penalty and the late penalty. Even if you pay enough by the end of the year, the underpayment penalty can still apply if you don’t cover at least one quarter of the amount in each installment. Our income doesn’t come in nice, regular intervals, but of course the IRS still wants their income in nice, regular intervals. If your income is so irregular that you’re unable to pay in equal installments, you can request to annualize your tax payments. Fill out Form 2210 and you might be able to reduce or eliminate the underpayment penalty.
Penalties also apply for late payments, so always pay every installment on time. The online system makes paying your tax very convenient.
The underpayment and late penalties do not apply if you owe less than $1,000 when filing your annual return or if you had NO tax liability in the prior year.
Whenever you sell your own work to the public, you could be required to remit sales tax. Unlike income tax, sales tax is imposed by state and local authorities and you, the merchant, become the unpaid sales tax collector on their behalf. A few states don’t have sales tax at all, but every state has their own rules.
If you plan to carry inventory (your books) and sell that inventory online or in physical locations—even if that’s only at various book festivals throughout the year—go to your home state’s Department of Revenue website and read up on their sales tax policies. Most states will have a “Getting Started” section for small businesses.
Tax Planning vs. Tax Evasion
Finally, before I release you back into the wild, let’s have a quick discussion about tax planning vs. tax evasion.
Tax planning is the legal and ethical practice of structuring your business and transactions to minimize your tax bill. No one wants to pay more than they must, which is why every writer should implement a tax plan for their business. Some common tax planning strategies:
- Choose a business entity that maximizes your tax savings. See A Closer Look at S Corporations for, well…a closer look.
- Shift recognition of income. If you’re in a position to do so, try to defer the sale of your work from a higher-tax year to a lower tax year. Depending on what triggers your income, wait to sign the contract or negotiate content deliveries for January instead of December.
- Shift your deductible expenses. Accelerate your deductions into the current tax year by making prepayments on rent (up to 12 months in advance), booking upcoming business travel, registering for conferences or renewing professional association memberships. Note that assets such as a new computer or office furniture may not be fully deductible in the current year. Check the cost recovery rules for these types of purchases.
- Maximize your retirement and HSA contributions to lower your tax bill.
Of course, all of these decisions should be made with both tax and non-tax consideration. If it doesn’t make sense for your business, don’t do it.
Tax evasion is very different from tax planning. Although the goal is the same—to reduce or eliminate tax obligations—tax evasion accomplishes this through illegal means of subterfuge or fraud. Tax evaders (also known as criminals) are subject to penalties up to and including prison sentences. Tax evasion commonly includes various riffs on understating/omitting income and overstating/fabricating deductions.
Bottom line: Write about criminals. Don’t be one.
And on that cheery note, we’ve come to the end of our #TaxAdviceforWriters series! You’ve got all the information you need to build and execute a strong business plan and manage your taxes like the professional you are.
Further Reading and Resources
The oldest and largest professional organization for writers in the United States. They offer their members a wide range of legal and web services, as well as periodic tax updates and guidance geared specifically toward writers.
A nonprofit, nonpartisan membership association dedicated to provided benefits, expert advice, and collective bargaining power to entrepreneurs and microbusinesses.
Go right to the source. This IRS site provides general information and guidance on various tax topics. Check that the last document update is in 2018 or later, to be sure it includes TCJA content.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting services. Presentation of the material does not create a tax-professional-client relationship. The material is provided on an “as is” basis and is accurate and true to the best of my knowledge, but no representation or warranties of any kind are given about the material, and there may be errors, inaccuracies or omissions.