Self-employed/freelance writer: how to?

[feuervogel]

I've been poking around on the net, and a lot of the advice boils down to things like "set up separate business & personal accounts" and "keep track of EVERYTHING" and "in order for the IRS to consider it a business, not a hobby, you have to turn a profit 3 years out of 5."

Will I need to do all that crap when I start making royalty-based sales? I got the payment for Retro Spec, and it was $24 ($23 after paypal fees), which isn't enough to report as income.

Of course, the other main piece of advice is "when in doubt, ask your accountant." I, of course, don't *have* an accountant.

I know some of y'all are freelancers or self-employed; how do you do it?

Comments

yes

[naryad]

I freelance as a proofreader/copyeditor, and the keep EVERYTHING advice is good. I also devised a simple spreadsheet to track my expenditures and income (I also have a full-time job), and figure out any prepayment of taxes to avoid a big hit at the end of the year. Expenses I wrote off when I was making something like 20% of my income that way included: internet connection (I received and sent most work via email), dot mac account for my email and archiving, and cell phone. I wrote off a laptop one year, too (I made enough that year to do that and still show a profit); there are some rules around that, but I kept it simple. I file two extra forms (Schedule C and the self-employment tax forms--SE something, or something SE). If you have any questions, feel free to email me at dharmapractice at mac dot com.

Re: yes

[feuervogel]

I've been told you have to use (for example) your laptop/internet/cell phone 100% exclusively for business or it doesn't count. I do use the internet to submit work and find beta readers and network with other writers and all that, but I also use it to play FarmVille and watch streaming (association) football matches.

If my friend (whom I offered to pay for this) finishes up my website design soon, I can get that up and write off the hosting plan. My blogger blog is free.

Most likely I won't do any of this for 2010 taxes, because my income ($23) is too little to report, and I haven't kept good records this year. 2011, otoh...

Re: yes

[naryad]

If you try to write off SPACE, then you will be audited--the space for sure has to be used 100% only for the work. The principle I used with the computer/internet/cell phone was that it was necessary for the work I was doing, even if I used it for other things as well. I figured the worst that would happen would be that they would disallow that deduction and I'd have to pay taxes on some or all of that amount, but I am NOT an accountant. The IRS actually has pretty good guidance on the website, so you should check that out before next year to see what you can/should do. the other thing I did was to make sure I reported all of the income; it's just easier that way.

Re: yes

[feuervogel]

Ooh. I should poke around the IRS site some, but it's so much. http://www.ssa.gov/pubs/10022.html#report says you only need to report earnings >$400. I'll peruse it later. Taxes is complicated.

[thesmallwonder.livejournal.com]

I agree with the general advice of the internet, keep thins separate, log everything that comes in (and from where) and anything that goes out (you can claim on your taxes as work expenses). Even if you're not in the big time yet, it establishes a habit and routine so your prepared when it happens. Plus, if nothing else, it gives you idea of what you accomplished monetarily, which is nice to know and can help with personal decisions about your writing should you even be faced with having to consider giving it up and working full time.

[beth_leonard]

Re: Keep track of everything

I use gnucash to keep track of our finances, both business and personal. If you are earning such small amounts, it's not worth it to open a business bank account (unless of course you can take advantage of some free promotion to get yourself a new toaster, etc.) If you only use paypal to receive writing fees and spend your balance on writing expenses, you could potentially treat that as your business account.

In gnucash, when you deposit the paypal fees into your personal checking account, you simply make the transfer from income:writing to assets:checking. At the end of the year, if that's the only income you made and you're not trying to take any business expense write-offs, you look at the total amount in income:writing and enter that in the line "other income" on your 1040. You then "close the books" on the year and make a transfer from "income:writing" to "Equity:Net Worth"

If you want to try to expense items that are legitimate business expenses related to your writing in order to reduce the amount of tax you pay on Ben's income (showing your business as a loss for these first two years while you get started) then you need to keep careful track of your receipts and I strongly recommend computerizing your finances because adding all that up at the end of the year is a big pain to do by hand. Your writing expenses show up as a transfer between "Expenses:Writing" and "Assets:Checking" or "Liabilities:Credit Card" or "Assets:Petty Cash" depending on how you paid for the item. At the end of the year, the total is there for you in the computer program.

Take a look at the Schedule C for small business taxes in advance for the different types of expenses. You might have different categories for "Expenses:Writing:Supplies" and "Expenses:Writing:Shipping costs" for example. I know what I need for my businesses but not for yours. You are a sole proprietorship doing business as your own name. You may have to register in your town for a business license. Check your local laws, most cities have a website and some type of "Doing business in our town" tab. In our city, everyone has to register, no matter how small, and the minimum fee is $81 for 2 years. In my parents' city, you have to do at least 10K of business annually to be required to register.

I can help if you have specific questions about gnucash. I've been using it exclusively to balance our checkbook for several years now and I've been quite happy with it.
--Beth

[feuervogel]

Do you have separate checking accounts? I'm a member of the credit union (in addition to BofA, whom I may just fire here soon because they keep losing my fricking money), so opening accounts is free & easy.

Thanks for the gnucash tip! I just downloaded it, and I'll probably end up spending all day farting around with it. ;)

[feuervogel]

OK, so I downloaded GnuCash & ran it, then I quit, and now it won't load again. I'm really confused.

So I reinstalled (by dragging the app from the dmg to applications again and overwriting), and it magically works. I'm ... more confused.

[plutokitty.livejournal.com]

Hm, if you're self-employed full time, sure I'd do all that stuff. Or if you're going to claim deductions and stuff.

If you're just like me, making the odd freelance buck (under $1000 a year), I just keep track of my earnings and then report them come tax time (I use software, so it is super easy, but I think it's Schedule C and some other form for royalties--1099?--I have to use that form to report my investment earnings anyway, IIRC). If you're under a certain amount (I wanna say $10,000) that's totally fine. Otherwise you have to report quarterly.

Oh, there's this, which says you ought to earn more than $400 before doing that: http://www.ssa.gov/pubs/10022.html#report

Royalties:
http://www.finweb.com/taxes/reporting-royalties-in-your-federal-income-tax-schedule.html

Uh, mostly I just depend on my tax software to sort me out then I also pay to have someone look it over cos I'm paranoid.

[feuervogel]

Well, I'm not full time at a day job, so I guess I'm self-employed at least half time.

We don't have tax software; Ben files through a website that does the calculations and suchlike. I just put a bunch of things in GnuCash, which Beth recommended above, and I'm $600 in the red for the year (including my web hosting plan, which, duh? Totally counts, right? Even if my website is currently empty...)

I won't be getting royalties this year, I'm pretty sure, and I've only earned $23 for writing. But I might end up buying a handful of copies of the anthology and selling them on consignment in local shops (local author! signed copy!), which counts as ... expense/promotion? Fucked if I know.

Then there's the "home office" and software expenses (ooh, did I buy Scrivener this year? No, last year. But there's going to be a new version in September. Shiny.) and computer depreciation and ... *tears out hair*

[plutokitty.livejournal.com]

I find the freelance income and investments to complicate my life enough that it's worth it for me to use H&R Block or TurboTax or something like that. But that's just me! I wish I could just use the 1040-EZ :(

You might already know this, but one thing they hammered into us at art school is that you can't "share" your work stuff with your personal life. So you can't deduct for your new laptop or new software or whathaveyou UNLESS it's 100% used for work. And your "home office" can't be used for any other stuff, it must be used exclusively for work. etc... So if you use scrivener to write fanfic, you're not supposed to claim it as a work expense.

Now, people still do that all the time... but technically, if the IRS wants to come after you, they could.

[feuervogel]

My home office is the guest bedroom. (Actually, it's the space underneath the loft bed. It's a double, though.) Of course, right now I'm using the living room, because it's easier to cool the downstairs to a comfortable temperature than the upstairs, and the fan I was using in the upstairs room mysteriously stopped working while I was in Europe.

I use google docs to write what little fanfic I write anymore. I love Scrivener with a seriously unholy love.

Ben handles our taxes. I should probably learn more about them, but it's complicated. We can't use EZ, either, with his mutual fund and various stocks.

I'm mostly concerned about con expenses. I read at the last 2 cons I went to, and I'm reading again at D*C. Writing D*C off as a professional expense is sketchy, since I mostly party, but NASFIC & ReaderCon ought to count as pro expenses, since I went to read and network (both of which I did; well, I planned to read, but there was that whole hospitalization thing in the middle).

[beth_leonard]

You can't write off your home office as you use it because it doubles as a guest bedroom. Likewise, your living room. If you plan to become more involved as a writer in future years, then it may make the most sense to have this year be an income-only year (just a simple single line on your current tax forms) and then treat future years which have more income and more expenses as real employment years, counting toward your first 2 of 5 years not profitable. With any luck and lots of hard work, by 3 years from now your con expenses will be more than covered by your earnings. If not, then you can't deduct them anymore and you're back to the simple line. The question to ask yourself is, "Will I have more expenses this year or 3 years from now related to my writing?"

I had a long response typed out in the gnucash thread, but my mouse malfunctioned and LJ seems to have eaten it when I tried to post using the keyboard only.

The short form is: put your Personal2010.gnucash file in it's own folder. Gnucash creates lots of extra save files that end in YYYYMMDDHHMMSS.xac and .log. They can quickly clutter up any folder they are in. Most of the time you ignore them, but in theory they can be used to recover from a system crash.

--Beth

[feuervogel]

I'll basically never be able to write off a home office, then, because, unless we do a lot of home rearranging, there's no space I can completely rope off as my work space. The only place the guest bed fits is where it is (unless we dismantle it and I put it in Ben's room, but even then, that requires a LOT of rearranging and organizing and purging, and Ben doesn't purge), and there's not any other place to put the exercise machine.

I was told, perhaps untruthfully, that you can say "I have X square feet of home office," and I could say that X is the amount of space in that room which I use as an office.

I don't seem to *have* any files with a .gnucash extension.

[beth_leonard]

Most people can't successfully write off a home office -- even we don't do it and we actually do have a room dedicated to Jon's tutoring business. I also keep my good china in there. Our accountant recommends against writing it off.

The .gnucash extension is only if that's what you decided to name your file. The program doesn't enforce any naming convention. I use it because it helps me quickly find my files in searches, but you can name your file with any extension you like, or lack thereof. I don't recommend .xac or .log though, because then it could get confusing with the save and log files.
--Beth