Freelance Writing or Other Self-Employment and Taxes
Making Money as a Hobby or as a Business Needs to Be Reported!
As a self-employed writer without employees or partners you are by the IRS's definition a sole proprietor. Filing your taxes in this case is actually quite simple. If you are already filing a 1040 (the long form) it will be even simpler for you.
There are three "taxes' that you are responsible for reporting/paying: Personal Income Tax on your net taxable income, Social Security Tax and Medicare.
Income Tax, Social Security and Medicare
In addition to your regular personal income tax return, an individual that is self-employed should file IRS Form 1040 Schedule C (Profit or Loss from Business) and a 1040 Schedule SE (Self-Employment Tax).
The Schedule C is your profit and loss statement. Regardless of the "draws" you may take during the year, as a sole-proprietor you document your total gross income, expenses and deductions to determine your taxable income from your business. This becomes additional income on your personal income tax return.
The Schedule SE is your self-employment tax. You are required to complete this form if your net earnings are more than $400. Also consider the importance of this form regardless of your profit or loss. The Social Security Administration tracks your Social Security benefits over your working years. In 2007, if your net earnings are more than $4,000 you will earn the maximum of four credits for the year. All of these credit earnings are used to determine your Social Security Benefit, so it is important to report the income. The Social Security tax rate for 2007 is 15.3% on your self-employment net income for your first $97,500. On everything more than this that you earn, only the Medicare portion is taxable (2.9%).
Deductions
There are also two deductions that will reduce your taxes: First, one-half of your Social Security tax is a deduction of your net income. This is because if you are an employee, you pay one-half of your Social Security tax from your wages (which is not taxable) and the other half is paid by your employer. You can also deduct one-half of your Social Security tax from your personal income tax. As with most deductions, this is taken from your gross income to determine your adjusted (taxable) income.
Quarterly Payments
With all of these taxes, if you expect to owe less than $1,000 in taxes, you can file once a year and pay the tax then. If you expect to owe more than $1,000 you should make estimated tax payments quarterly throughout the year on a quarterly basis. The payments are due on April 15, June 15, September 15, and January 15. Use Form 1040-ES to make these estimated payments. This is similar to the monthly tax withholdings your employer takes out of your salary each month. It is also reported the same way on your personal income tax as payments.
Do I need to have a Business Name and Employer Identification Number (EIN)?
The majority of writers do not have employees. If this is your case, and you do not file Excise or Pension Plan Tax Returns, you do not need an EIN. Additionally, you do not need a separate business name. Most writers user their given name, or a pen name for their writing and their taxes along with their personal social security number.
It's Important!
Being self-employed has a larger responsibility than being the employee of a company. You are solely responsible for paying your taxes. There isn't anyone withholding a little bit out of your paycheck each month to pay for your tax at the end of the year. Remember that even if you do not owe any income tax and your net income was more than $400, you are still required to submit a 1040, 1040 C, and 1040 SE to calculate your Social Security Tax.
References
IRS Publication 334, Tax Guide for Small Businesses
Tax Topic 554, Self-Employment Tax
IRS Publication 505, Tax Withholding and Estimated Tax
IRS Form 1040, Schedule C Profit or Loss from Business (Sole Proprietorship)
IRS Form 1040, Schedule SE, Self-Employment Tax
Published by L.E. Duncan
A writer, photographer, traveler and investor. I have been writing internet content for six years. If you are interested in specific content, don't hesitate to contact me! View profile
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4 Comments
Post a CommentGreat information. A lot of writers complain about these taxes but they are there for a reason and when I retire I hope that my social security will cover a lot of my expenses.
Thank you Rooster. I've never been self-employed before and know nothing about tax law. I have always had very simple returns and use the EZ forms. I started publishing here in Jan 2008, so I have no idea if I'll really make over $400.00, but I hope to. I'm printing this article out to keep.
Absolutly Michy! It is not necessarily this simple. Deductions and EIN's are important, if not critical. The purpose of this article was to "simplify" a topic that is often looked at as very confusing or intimidating. Many of the writers here, that write part-time or for hobby do not consider themselves "self-employed" and they need to realize that, like it or not, you're sel-employed!
Thanks for the great comment Michy!
This is great information for someone who freelances a little writing on the side or if they have other income besides freelancing - but I freelance full time, and it's not this simple for me. I get all my income from writing or editing, one way or another, and I like the EIN so I do not have to give my personal social to anyone. If I want to lower the amount I owe, I have to take deductions for my business expenses, and some of those come off the top and some don't. It's a great overview though!