Tuesday, January 01, 2008

Tax forms for freelancers: 2008 tax season begins!

With the end of 2007, we've begun not only a new year, but also a new tax season. That's right: It's time to start thinking about your taxes!

If you are making your fourth estimated tax payment (due January 15th), your taxes are due on April 15th, just like everyone else. However, if you opt not to make the fourth estimated tax payment, you will need to file (and pay any remaining owed taxes) by January 31st.

Here is a list of forms for filing your taxes as a freelancer:

Form 1040 - Income Tax Return

This is the regular form for filing income tax returns. As freelance writers, we don't get to use the "EZ" 1040. Sorry.

Schedule C - Profit or Loss from Business

Form 1040 Schedule C is where you get to deduct your business expenses from your gross freelance income. This is where many freelancers get hung up, particularly if they haven't kept good track of their expenses throughout the year. I have an Excel spreadsheet that has a separate page for each category, as well as a page for an overview; I enter each expense as I pay for them throughout the year, and the spreadsheet calculates category totals and a grand total.

My income is kept track of via another spreadsheet. Each client gets a separate page, with a page for an overview that shows the total income from each client, as well as monthly totals and a grand total.

I highly recommend using spreadsheets or a similar setup to keep track of your income and expenses throughout the year. It makes tax time much less stressful.

Schedule C-EZ - Net Profit from Business

If you are lucky, you can use the simpler version of Schedule C. There are a few requirements if you are to use this form:

* You have to have made a profit or broken even in 2007 — this form doesn't allow you to declare a loss

* You have to have less than $5,000 in expenses for the year

* You can't claim the home office expense (which I think is risky and should be avoided, anyway)

* You can't claim the office equipment expense, which requires another form (Form 4562) on top of the regular Schedule C

* You have to declare your income in real-time (i.e. when you receive it, known as the cash method of accounting)

* You have to have only one business, and can't have any employees in that business

This form is definitely easier and faster to use, because it doesn't require a breakdown of your business expenses into categories. However, I still recommend keeping extremely detailed records just in case you are ever asked to prove your expense claims were accurate.

Schedule SE - Self-Employment Tax

Yep, that's right — our government, which is supposed to be so supportive of small businesses, penalizes us for being self employed by throwing extra taxes our way. Luckily, half of the self-employment tax you pay is deductible on Form 1040.

Form 4562 - Depreciation and Amortization

If you are expensing office equipment, such as a computer or printer, this is the form you will need. Please note that the form asks you what percentage the equipment is used for your business, and whether you have evidence to support your claim. I advise keeping track of business and personal use for each piece of equipment you claim, in case you are ever audited. For instance, I keep written time sheets that show when I use my laptop, and for what purpose.

Form 8829 - Expenses for Business Use of Your Home

This expense is a really tricky one. For one thing, it's a huge risk: I've heard that the home office deduction is the biggest reason the IRS decides to audit people. They also have strict rules as to how and why you can claim the home office deduction:

* The space needs to be used solely for business. No personal checkbook or personal office supplies in your desk drawer, no games on your computer, etc.

* The space needs to be your primary place of business. In other words, you need to actually work there most of the time.

* The way I read the IRS's definition of a home office (page 2 of Publication 587: Business Use of Your Home) is that you also need to use your home to meet with clients. I have also read books on freelancing and filing taxes that support this interpretation.

I advise only claiming this deduction if you rent your home. If you own it, the portion you claim as a home office becomes business property, in effect, and you'll end up owing taxes when you sell your home.

That's it — all the forms you'll need to file your taxes for 2007. I hope this list of links helps! As for the advice, please remember that I am not by any means an expert on the subject, and that the best way to be sure about something is to consult an accountant or a tax attorney.


Michele said...

AWESOME information, Katharine!

I dropped by to let you know I gave you a little link love in my post today. :-)

Happy New Years!


Katharine Swan said...


I hope the information is helpful!

Thanks for the link to your 2008 link love post. It is very creative!

Michele said...

Yes, it is helpful! I think I'll print it out.

I'm glad you enjoyed my link love post. I had a blast writing it!


Anonymous said...

Thanks for posting this information. It's extremely helpful.

Katharine Swan said...

I'm glad! Goodness knows, there's plenty to think about this time of year, so I figured my readers might appreciate links and something of a to-do list. :o)


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