Friday, November 11, 2011
Tax Tips for Freelancing Professionals
GUEST POST BY BRITTANY LYONS
Many people enter freelancing because of the flexibility and autonomy that it offers. Much like going back to school to earn PhDs, freelancing can have huge benefits, but there are also responsibilities that must be met.
New and established freelancers will eventually have to face the reality of preparing taxes for their small business. Fortunately, these tax tips will help ensure that freelancers understand income reporting, deductions and filing requirements, and can keep the IRS happy.
The most important thing for a freelancer is recording income. Because freelance writers are typically considered independent contractors, any income they earn must be reported to the Internal Revenue Service. Freelancers who earn more than $600 from a single source should receive a 1099-MISC form from that company, but that doesn't mean you can get away without reporting paychecks smaller than that. Income from all sources must be reported regardless of the amount. Some of the common income streams that are overlooked by freelance writers include:
1. Affiliate earnings, i.e. earnings from sales of products or services through affiliate networks.
2. Revenue sharing, i.e. money earned from taking part in a website's development by referring new members, or participation in a freelance group that shares both profits and losses.
Most writers do not earn $600 from revenue sharing or affiliate earnings annually, but the amount earned must still be reported. Freelance writers can save themselves a lot of hassle by starting records on all income streams at the beginning of each year, and tracking earnings by month. This process will ensure that income is accurately reported, and you're not scrambling to track all the information down at the end of the year, which can result in things getting overlooked. Those who receive earnings via PayPal or other online portals can also download earnings reports directly from their account, which makes life a little less hectic come tax time.
The second most important thing for freelancers to keep track of is their work-related expenses. Freelance writers often overlook deductions that they are entitled to take because they don't realize what counts as an allowable expense. For example:
1. Medical insurance: Self-employed persons may deduct the cost of their medical insurance if they are paying for it from their earnings. There may also be limited deductions available for life insurance.
2. Home office expenses: There is a misconception that if you rent your home, you cannot deduct rental costs on your taxes. Here, freelance writers should use the calculations provided by the Internal Revenue Service in Publication 334 to see if this expense applies.
3. Retirement account deposits: Most freelancers can claim their retirement account deposits, provided they fall within the contribution limits set by the Internal Revenue Service.
4. Subscriptions and software: If you have subscriptions to style guides, plagiarism checkers and trade publications that you use in your freelance work, you can claim them as deductions, though you may need to prove these items are necessary. Software/hardware expenses may also be eligible for a deduction.
Freelancers who are in doubt as to which expenses are deductible should review the various publications available on the Internal Revenue Service website, or contact a tax professional. Everyday expenses are often the most overlooked, including Internet access charges, online conference calling expenses, etc. Freelancers should review their expenditures carefully to find these more subtle deductions.
Unfortunately, those who are self-employed may be subjected to more scrutiny by the Internal Revenue Service. Numerous reports show that the IRS targets self-employed individuals for audits, due to the higher potential of unreported earnings. Freelancers who track their income and expenses and carefully review their allowable deductions may be able to avoid the unpleasant surprise of an IRS audit, and will certainly be better prepared if one does come their way.
Brittany Lyons aspires to be a psychology professor, but decided to take some time off from grad school to help people learn to navigate the academic lifestyle. She currently lives in Spokane, Washington, where she spends her time reading science fiction and walking her dog.
Image: Stock photo