For a professional writer or those freelancing part-time, it feels great to land jobs and get paid. The income validates the work performed and it probably helps get bills paid. However, a technical writer can’t forget that at the end of the day all earned income from writing is taxable. However, filing choices can cause different tax results.
First, whether the writing is a hobby or a business depends first on the freelance writer’s profit motive. If the writer spends more than 500 hours a year freelance writing, then the IRS considers the activity eligible as a business. This is not the only test, but it is the easiest to remember and prove. Personal work time logs help document the difference clearly.
The difference of being a business versus a hobby allows a writer to deduct his business expenses against his gross income earned, even if it becomes a net loss. Hobbies, in comparison, are not allowed to have deductible losses. Even as a business, however, a writer needs to eventually be profitable. Profits have to occur at least three years out of five per the IRS.
Second, how a writer’s business income is reported for taxes depends on how that writer operates. For many freelance writers, unlike employees of a business, payment on a job is made in full and typically gets reported on a 1099 MISC IRS form. The resulting tax reporting burden is entirely on the writer’s shoulders. If working as an independent contractor, then he will need to fill out a regular personal income tax (such as an IRS 1040 Form or 1040EZ if less than $50,000 total) and report the income. He will then be required to pay his own payroll taxes plus what the employer would have paid. The calculations are produced by filling out the income tax return form and following the form guidelines.
If, however, the writer operates as a sole proprietorship, then he will need to report his income and business expenses on a Schedule C Form attached to his personal income tax return form (such as the 1040 or 1040EZ). This allows the writer to declare business expenses against the income earned, reducing the tax potential on the writer’s income dollars.
The writer will be taxed for income tax as well as Social Security, self-employment taxes, and Medicare withdrawals. State taxes may apply separately as well. The business taxes then roll up with the normal income tax owed if the writer is also employed in a regular job, reported on an IRS 1040 tax form.
Where a writer operates as a partnership or limited corporation, the business entity itself must file income earned as a corporation. If the money is put back into the business, then the corporation may not owe anything. However, anything actually distributed to partners or employees for salaries must be taxes and withholdings sent to the IRS. Because corporate taxes are far more complicated, using a certified tax accountant for the tracking work is a smart idea. Additionally, partners and employees will still have to report what they earned on their individual income tax returns as personal income.
Tom L is a freelance writer available on WriterAccess, a marketplace where clients and expert writers connect for assignments.