|For freelancers, the key to managing your taxes is knowing which items can be deducted and keeping the records to document your business expenses. Photo: picjumbo.com from Pexels. Click to enlarge.|
Freelance Files: Get Organized Now for Next Year’s Tax Returns
By Daniel Grossman
Every year, a few weeks before April 15, I pull out a manila folder bulging with receipts.
I sort airplane tickets, cash-register slips and bills. I smooth out crinkled paper scraps that drivers, waiters, translators and porters have handed to me. I comb through my credit card statements. I consult utility bills.
Over the following several days I wrestle this chaotic mass of paper and digital records into numerical sums and enter totals into a tidy spreadsheet that betrays nothing of the disorderly process that created it.
Among the many daunting hurdles
freelancers face, filing and
paying taxes is my least favorite.
Among the many daunting hurdles freelancers face, filing and paying taxes is my least favorite. But in 35 years on my own, I’ve learned how important deducting business expenses is because if we don’t, we are then giving the government more of our hard-earned wages than our legal share.
I don’t give out tax advice. I’m not an accountant. But I know one: Curt. He prepares my return every year using my spreadsheet. He says that my system works for him. Maybe some of my process could be helpful to others just getting started at freelancing.
The key is knowing which items can be deducted and keeping the records to document your business expenses.
Surviving the Schedule C
As a freelancer, I’m an independent contractor and not paid a salary. I have no W-2 income. My wages are W-9 income. No taxes are withheld, so I make quarterly payments (calculated using the previous year’s tax return).
A key part of the 1040 return I file is the “Profit or Loss from Business” form, also known as Schedule C, used to calculate the net profit (or loss) of a business, which is then entered onto the 1040.
Simply put, all W-9 income is totaled in one section of the Schedule C and all business expenses are totaled in another. After the expenses are subtracted, what’s left is my net income (or loss).
Most of my tax preparation
work goes into producing
figures for the Schedule C.
Most of my tax preparation work, therefore, goes into producing figures for the Schedule C. The Schedule C is an all-purpose form required for every kind of sole proprietorship, from housecleaner to piano tuner. Unless you are incorporated or are in a partnership, you are a sole proprietor.
Collecting the material needed to fill out the Schedule C can be tedious, but it’s not as hard as I once thought. Most of the document’s several dozen categories of expense are irrelevant to me.
For instance, I don’t have an employee benefit plan or a pension and profit-share program, two of the line items. In my most recent Schedule C I entered figures on only five lines: “travel;” “legal and professional services;” “business expense;” “expenses for business use of your home;” and the catch-all, “other expenses.”
Tracking travel expenses
“Travel” is often the most time-consuming category to calculate. I sort travel receipts into two categories. I tally meals separately because you can only count 50% of the cost of eating out as a business expense. However, you can count other travel expenses, such as transportation and lodging, in full.
I keep a log of when I pay people who don’t bother with paperwork, such as a Congolese motorcycle taxi driver or an Amazonian canoe guide. When I travel to multiple countries on the same trip, I stack piles of receipts for each country separately, because later I’ll have to convert each country’s currency into U.S. dollars based on current exchange rates.
Business use of a car must be calculated by the mile. Use the IRS per-mile rate for business driving (available with a quick Google search), which is published each year. That rate is supposed to consider the cost of upkeep, depreciation and gas. In 2020, the rate was 57.5 cents. For 2021, it’s gone down to 56 cents.
Tolls and parking are not included in this rate; I tabulate these separately. Curt says that I should keep a mileage log of business trips. Although he says he’s never met anyone who is that fastidious, it should be contemporaneous, he warns, “not generated right before an audit.”
Understanding other expenses
Under “legal and professional services” I include the cost of contractors, such as a photographer I hired, people I’ve hired to transcribe audio interviews and online services, such as storage on Google or a Nexis/Lexis account.
“Business expenses” include supplies and equipment. Equipment worth more than $200 with a useful life of more than a year, such as a video camera, can be deducted in two ways: amortized over five years or listed as an expense, deducting its full value in a single year.
If you’ll be amortizing items, they should be segregated out and listed separately. My accountant lists all equipment that cost less than $2,500 as expenses in a single year. The big-ticket equipment must be amortized over five years.
The IRS allows you to deduct the share of expenses related to maintaining and renting or owning your home attributable to the office.
“Business use of a home office”
is a category that contains within it
several individual components,
but the calculation is simple.
“Business use of a home office” is a category that contains within it several individual components, but the calculation is simple. The IRS allows you to deduct the share of expenses related to maintaining and renting or owning your home attributable to the office.
My office takes up 3% of the usable space of my two-family house (not including the unfinished attic or basement). So 3% of the mortgage interest and 3% of utilities (heat, in particular) are business expenses.
The “other expenses” entry incorporates expenses that don’t clearly fall under the other categories. On the second page of the Schedule C, I list separate categories of my own making. In my most recent tax return, for instance, I listed three such items: telephone and internet; newspapers, books and publications; and professional societies.
Some items in these categories are things that have a business and personal use. Curt says that I can only deduct the portion of a service or item that is actually part of my business work.
But there are judgment calls. For instance, he says that I can deduct my entire New York Times subscription because maybe I wouldn’t read the New York Times if I weren’t a journalist. He says that, technically, I should log every call I make with my phone and every minute on the internet and then determine the appropriate share of usage to deduct as an expense.
But no surprise — he says that no one does that. He recommends, instead, that I come up with a share of all calls that qualify as business ones — say 25% — that I could explain “with a straight face.” It would be cleaner to have a personal and private phone, though he says that’s not necessary.
After I’ve filled out my spreadsheet, I staple each pile of paper together in a separate bundle and stow the whole set away. Curt says that under normal circumstances the IRS will look back three years in an audit. (If auditors find a pattern of fraud, they could look further back.)
By then, well into the first quarter, a new manila folder is already filling up with new documents for the next year’s return.
Daniel Grossman has been a science journalist for 35 years. He has reported from all seven continents — including from near both the South and North poles — and is a past grantee of the Society of Environmental Journalists’ Fund for Environmental Journalism.
* From the weekly news magazine SEJournal Online, Vol. 6, No. 28. Content from each new issue of SEJournal Online is available to the public via the SEJournal Online main page. Subscribe to the e-newsletter here. And see past issues of the SEJournal archived here.