If you’re a successful freelance travel writer or legal writer or any other topic writer able to live on your income, congratulations! You have reached an upper echelon of independent earning that is uncommon and a sign of both discipline as well as a lot of hard work and a lot of articles and projects. However, that same ability to produce and earn also makes writers more susceptible to income tax requirements.
The fact is, things just get a lot more difficult when your earning on your own. When working for an employer your payroll taxes are taken care of for you. Employers are required to perform what is known as “withholding” where income taxes for the federal government, state, and local entities, as well as Medicare and Social Security, are taken out of your gross paycheck (see IRS Publication 505 for details). What you’re actually paid as an employee as cash in hand is the net figure of those adjustments, your real take-home pay. And it’s the employer who’s responsible for sending those withholdings to the various government agencies.
However, when you work for yourself, most freelancers end up in one of two categories: an independent contractor or as a small business. Those who operate as an independent contractor have to pay both tax withholdings, the employee and the employer portions. These are done in the form of estimated payments submitted quarterly. Those who operate as a business may think they have a bit more latitude but not much. If a writer expects to pay more than $1,000 in taxes annually, estimated payments for withholding are required per the IRS. Some writers wait until the end of the year at tax return time to see how it shakes out. If he or she doesn’t earn enough, nothing happens. However, if the writer earns too much, a penalty for not making estimated payments can end up biting into an expected tax refund.
The whole issue of estimated payments is very tricky and most tax advisers will suggest that writers making good income just make it a habit to make the estimated payments. The amount should generally be consistent to what would be paid if working for an employer. What happens at tax return time is that these payments are then added to any other withholding paid, such as from another job. The total is compared to the total taxes owed for all income earned in reportable year. If the writer overpaid, then the tax agencies issue a tax refund. If underpaid, then the writer has to pay the difference with the tax return filing or by an extension date (usually the October after the April tax return deadline).
In any situation, a writer should document and save copies of all estimated tax payments made to prove taxes were taken care of. The last thing anyone should desire is ending up being subject to an income tax return audit, and freelancers as well as small businesses under one person are frequently scrutinized by the tax agencies for mistakes. It’s okay to claim your legal tax benefits due, but you want to make sure you can always prove it with good documentation.
Tom L writes articles at night and spends his daytime hours managing big projects, contracts and budgets. Planning and prevention are two key tools he uses regularly to avoid problems before they occur