Three Tips for Creating an Income Stream as a Freelance Writer

A guest post by Dennis E. Hensley, PhD, Director of the Professional Writing Major at Taylor University in Upland, Indiana.

First, establish a guaranteed monthly positive cash flow. Cash flow for freelance articles will be sporadic and unpredictable, but monthly bills will be constant and inflexible. You need to secure some kind of work that will guarantee a set amount of income each month. Perhaps you can teach a continuing education class at a local college’s night school or write a column for a newspaper or magazine or perhaps run a part-time résumé service. You might even want to do what I’ve done: invest some of your royalty earnings in rental real estate which generates monthly rent payments while also providing a tax depreciation deduction. Do whatever you feel most comfortable doing, but never jump into freelance writing full-time without some guarantee of cash flow from some source.

Second, develop some long-term income-producing projects. Instead of churning out one article after another in a frenzied attempt to generate immediate cash flow, allot some of your weekly writing time to writing books. Once a book is written and published it will earn money for you even when you are sleeping, eating lunch, or taking a vacation. This is passive income. You no longer have to do the work, yet the earnings continue. This takes a lot of pressure off you in regard to feeling you have to be pounding the keyboard around the clock.

Third, capitalize on tax shelters. Have your accountant determine the best way to handle expenses. You may wish to depreciate your computer, audio recorder, camera, and other new equipment over five years so that you will always have sizable yearly tax write-offs. Whenever your book royalties are substantial, buy yourself a new printer or some new office furniture or file cabinets and use accelerated depreciation to reduce your present tax bite, should that continue to be an option allowed by the IRS.

By planning in advance for a steady stream of income, you’ll increase your chances of success as a professional freelance writer.

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Adapted from Writing for Profit by Dennis E. Hensley [Thomas Nelson, 1985; revised 2003]. Learn more about the prolific Dr. Hensley’s writing, editing, and public speaking credentials at www.DocHensley.com.

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The IRS Meal Allowance; Part of your Tax-Reducing Arsenal

Onion bloom as served in a Dallas restaurantOne of the most valuable tax-busting deductions seems to be hiding under the mushroom of business inexperience.  When I review this deduction at a writers’ workshop, ranging from novice to established writers, authors and illustrators, I find that only 2 or 3 have some awareness of this tax break.

I am talking about maximizing the IRS Meal Allowance.   The meal allowance becomes available when you incur meal costs while away from home (essentially, travel requiring overnight lodging) on business trips. If you eat sparingly, or only one basic meal a day, or are a perpetual “snacker” during the day, you will like the idea of not having to keep records of meal costs coupled with the higher, no-questions-asked, meal allowance.

In the IRS tables, the allowance is referred to as the “M&IE” rate (meals and incidental expenses).  In addition to meals and tips for food servers, the allowance (M&IE rate) includes a limited number of “incidental” expenses such as fees and tips for porters, baggage carriers, hotel maids, or room stewards.  Self-employed individuals may claim the M&IE allowance. 

Meal Allowance on 2015 tax returns

For travel within the continental U.S., the standard meal allowance (M&IE) for 2015 is generally $46 per day; however, [flashing lights] higher rates apply in major cities and other high-cost locations (such as resort areas) designated by the government.  For example, in 2015, the M&IE rate for both Dallas, TX and San Francisco, CA is $71 per day (rate research guidance will be provided below).   The basic and high-cost-area meal rates are determined by the federal government’s General Services Administration (GSA) and the IRS allows taxpayers to use the applicable rates in figuring their meal allowance deduction.

You must keep a record (required anyway for all away-from-home business travel) of the time, place, and business purpose of the trips.  As long as you have this proof, [flashing lights] you may claim the allowance even if your actual costs are less than the allowance!  EXAMPLE:  Suppose you were in Dallas on business for five full business days (excluding the arrival and departure days, discussed below) and you averaged spending only $35 per day for food, beverages and tips (totaling $175).  Your allowed deduction for those five full business days in Dallas would be $355 (5 X $71)!   In this example, you double your tax deduction by simply doing your meal allowance research and documenting the amounts in your travel journal.  If you frequently travel overnight on business, this approach, consistently applied throughout the year, will lower your tax due or increase your refund.

One quick note:  the meal allowance is prorated for the first and last day of a trip.  You may claim only 75% of the allowance for the days you depart and return.

Researching your Destination Meal Allowance

To get the allowable meal allowance for your business destination, you will use the General Services Administration (GSA) website and click on “per diem” rates on the home page.  [See below for Apple iPhone app.] You can search your destination meal allowance by using the name of the city and state or inserting its zip code.  You can also click on a particular state, using the map, and get a list of cities within that state.  You will be using this resource to see if your destination location has a higher meal allowance than the standard amount of $46 per day.   The M&IE amount is shown in the last column of the GSA chart.

The GSA chart is set based on the federal government fiscal year–October through September each year.  Right now, if you look at the per diem page, you will see, right above the map, that the rates currently reflect “fiscal year 2015” (October 2014 through September 2015).  You will need to use the drop down menu and select “fiscal year 2014” to get the rates for 2014 by destination.  As a calendar year taxpayer, you will be recognizing your expenses from January through December each year, so you are given an option:  you can apply the rates that were in effect for the first nine months of the year to business trips in the last three months or you may use the first set of rates for the first nine months and the updated rates (FY 2015) for the last three months (Oct.-Dec.).  For trips within the last three months, you must consistently use either the rates in effect for the first nine months or the revised rates that took effect on October 1; you cannot switch between the sets of rates on a trip-by-trip basis.  If you travel to more than one city on the same day, use the meal allowance for the area where you stay overnight.

Claiming the Deduction

As a self-employed person, you will report your allowable meal expense for the year times 50% on Schedule C, line 24b (based on the 2014 return).   That’s correct.  You take your total allowable meal expense, reduce it by 50%, and then report that net amount on Schedule C, line 24b.  Congress enacted the 50% reduction whether you use actual meal costs or the meal allowance (M&IE).   That’s why I feel this is so important to you.  Would you rather end up with 50% of your actual meal costs or 50% of your meal allowance?  My thoughts are that when you use 50% of the meal allowance, it is likely you are recovering almost 100% of your actual costs (review my Dallas example above)!  Without this strategy and documentation, you will only be allowed 50% of your actual costs as a deduction on Schedule C.

2015 Tax Strategy

Before completing and e-filing your 2015 federal tax return, go back through your out-of-town business trips that required staying overnight and research your meal allowance for each location and compare it to your actual meal expense for that location.  Use the higher amount in each case for purposes of claiming your meal and incidental expense on your tax return.  Some of you may have no meal receipts at all and this will be a godsend for you.

Finally, if you have your tax return prepared by someone, you must bring this information to them.  Paid preparers are busy!  Some may take the time to ask you how many days you were here and there when out-of-town and look up the meal allowance for you and then make the calculation but they will be charging you for this time.  You need to know, when you walk in or drop off your materials, your total business meal costs incurred or allowed.  Tell your preparer: “My gross out-of-town business food costs allowed or incurred for 2015 was $ ….. and my Schedule C deduction is $…… (50% of the gross amount).  Your preparer will not only be impressed but relieved. Be sure, when you review the completed return, that you check Schedule C, line 24b for agreement with your documentation (mistakes happen in a busy tax preparation office) before you approve the return for e-filing. It’s important that you retain the documentation to support the amount claimed for at least 3 years from the filing due date.

Mobile App Now Available

Go to the Apple iPhone app store and search using “GSA per diem” and download the application for easy use.  For other mobile platforms, go here.

DON’T FORGET TO SIGN UP FOR AUTOMATIC EMAIL ALERTS!  (See the very bottom right-hand side on my home page).

List of Business Trip Deductions $$$

While you are in the process of summarizing your 2012 business expenses, this will be a good time to review those items that are deductible, as a self-employed business professional, while on business trips away from home:

  • Plane, railroad, taxi and other transportation fares between your home and your business destination.
  • Hotel and other lodging facilities.  You need receipts or similar evidence for lodging expenses.
  • Meal costs.  You may claim your actual meal costs if you maintain records, or you may use the standard meal allowance.  Whichever method you use, only 50% of the unreimbursed meal costs are deductible.
  • Tips, telephone, and telegraph costs.
  • Laundry and cleaning expenses.
  • Baggage charges (including insurance).
  • Cab fares or other costs of transportation to and from the airport or station and your hotel.
  • Entertainment expenses incurred while traveling away from home are deductible subject to restrictions, including the 50% deduction limit. [Read “Deductible Business Entertainment Expenses“]

Self-Employed Business Losses and the Profit-Presumption Rule

The question of whether an activity, such as freelance writing, is a hobby or a business arises when losses are incurred. Early business losses in any endeavor are not really all that unusual; however, that does not mean you shouldn’t be prepared to substantiate “your numbers” during an IRS field audit.

Normally, your self-employed business losses will be challenged as part of an IRS field (person-to-person) audit after a one-year significant loss or losses for two or three consecutive years.  To successfully sustain your losses:

  • You will have to prove that you are engaged in the activity to make a profit (“profit intent”), supported with a viable business plan [read my post “Professional Writer or Hobbyist?”], or
  • You may be able to take advantage of a “profit presumption” election to defer an IRS business/hobby determination until after you have completed the first five years in business.

Presumption of Profit-Seeking Motive

You are presumed to be engaged in an activity for profit if you can show a profit in at least three of the last five years, including the current year.  The presumption does not mean that losses will be allowed; the IRS may try to rebut the presumption. You would then have to prove a profit motive as outlined in “Professional Writer or Hobbyist?”

Profit Presumption Election Postpones Determination

If you have losses in the first few years of an activity and the IRS tries to disallow them as hobby losses, you have this option:  You may make an election on Form 5213 to postpone the determination of whether the above profit presumption applies.

The postponement is until after the end of the fourth taxable year following the first year of the activity.  For example, if you enter a freelance writing activity in 2012, you can elect to postpone the profit motive determination until after the end of 2016.  Then, if you have realized profits in at least three of the five years (2012-2016), the profit presumption applies.

When you make the election on Form 5213, you agree to waive the statute of limitations for all activity-related items in the taxable years involved.  The waiver generally gives the IRS an additional two years after the filing due date for the last year in the presumption period to issue deficiencies related to the activity.

To make this election, you must file Form 5213 within three years of the due date of the return for the year you started the activity.  If before the end of this three-year period you receive a deficiency notice from the IRS disallowing a loss from the activity and you have not yet made the election, you can still do so within 60 days of receiving the notice.  These election rules apply to individuals, partnerships, and S corporations.

State Income Tax Refunds….Taxable? Yes, No and Partially So!

Soon you will be preparing your 2013 tax return.  When you do, you will need to look back and check your 2012 state tax return to see if you paid in additional state taxes or received a state refund in 2013 (for 2012).

If you paid in additional state taxes in 2013 for 2012 (or other prior years), that amount can be added to any other state taxes paid (such as state tax withholding on wages) in 2013 and deducted on Schedule A, if you itemize deductions in 2013.   Note that only the tax amount is deductible, not late payment penalties or interest.

If you received a state tax refund in 2013 (for 2012), it may be fully taxable, partially taxable, or not taxable at all.   Let’s start with the easy answer first: if you did not itemize deductions (but took the standard deduction) on your 2012 federal return (Form 1040), using Schedule A, then none of your 2012 state refund received in 2013 will be taxable on your 2013 federal return.

If you did itemize deductions on Schedule A in 2012 and correctly deducted all of your state tax withholding or other separate payments (such as state estimated tax payments), then some or all of your 2012 state refund (received in 2013) will be taxable on your 2013 federal tax return (Form 1040, line 10).  The taxable portion of your refund is limited to the amount by which your total itemized deductions exceeded the standard deduction you could have claimed in 2012.

EXAMPLE 1; Partial taxation:  On your 2012 return, you filed as a single taxpayer.  You claimed itemized deductions of $6,445, of which $2,325 was for state income taxes.  Your deductions exceeded by $495 the $5,950 standard deduction you could have claimed.  In 2013, you received a state refund of $960 for 2012 state income tax.  You must report only $495 of the refund as income on your 2013 Form 1040, line 10.  The taxable recovery is limited to the $495 difference between the claimed itemized deductions of $6,445 and the $5,950 standard deduction (for a single taxpayer) for 2012.

EXAMPLE 2; Full taxation:  On your 2012 return, you filed jointly with your spouse.  You claimed itemized deductions of $14,900 of which $3,500 was for state income taxes.  Your deductions exceeded by $3,000 the $11,900 standard deduction you could have claimed.  In 2013, you received a state refund of $1,255 for 2012 state income tax.  You must report the full refund of $1,255 as income on your 2013 Form 1040, line 10.  The taxable recovery limit in this instance would be up to $3,000, the difference between the itemized deductions claimed of $14,900 and the standard deduction of $11,900 (married, filing jointly) for 2012.

The same rules apply to local (city or county) income taxes.  State refund amounts are reported to you and the IRS on Form 1099-G.  You must determine the “taxable” amount, if any.

Four Tips on Preparing to Succeed Financially as a Freelance Writer

A guest post by Dennis E. Hensley, PhD, Director of Professional Writing Major at Taylor University in Upland, Indiana.

First, determine your financial role as a writer. Are you writing just for the enjoyment you gain from sharing your views with others, or are you doing it as the sole support of your family? Is writing just something you do for a little extra cash, or is it your true second income? You cannot set a cash goal until you determine how many cash obligations you have.

Second, evaluate your hourly rate. Add up to the total amount of cash you receive for your first three manuscript sales and divide that total by the number of hours it takes you to research, write, type, and submit all that material. This will tell you how much you are worth per hour. If someone wants to hire you, you then will know what to charge.

Third, prepare a budget. Make two lists. One will be a list of the obvious costs you are required to cover in order to stay in business as a writer (online monthly service fees, paper, stamps, computer maintenance). The other list will outline the household expenses you are required to meet (food, rent, clothing, utilities). These lists will give you a clear picture of what your total cash flow needs are per month.

Fourth, set up three business books.

You will need a separate checkbook so that all of your expenses will be legitimately documented by canceled checks should you ever be audited by the Internal Revenue Service.

You will also need a cash disbursements journal so that you can record the date, payee, cash amount, item purchased, and check number for all expenses related to your writing career.

Finally, you will need a cash receipts journal to record all your freelance sales and royalty payments; be sure to note the date the check was issued, its payer, the amount, the check number, and for what manuscript the money was paid.

Taking the time to establish these foundational steps will ensure your financial success as a freelance writer.

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Adapted from Writing for Profit by Dennis E. Hensley [Thomas Nelson, 1985; revised 2003]. Learn more about the prolific Dr. Hensley’s writing, editing, and public speaking credentials at www.DocHensley.com.

Making a Living as a Freelance Writer

A guest post by Dennis E. Hensley, PhD, Director of the Professional Writing major at Taylor University in Upland, Indiana.

During an interview some years ago, I asked singer Johnny Cash, “Is it true you used to make a living by picking cotton?”

Cash scowled. “I made an existence picking cotton,” he corrected me. “No one makes a living picking cotton.”

I sometimes feel that same way when people look at me with amazement and say, “Wow! You make your living entirely from freelance writing, eh?”

Depending on how a career and its cash flow are going at the time, any freelance writer could give a variety of responses to that question. At certain times of the year, such as royalty statement day, a writer is flush with funds. Other times, he or she may only be making an “existence.”

Overall, however, I have survived rather well since turning to freelance writing full-time many years ago. And, through trial and error (read that “fail and terror”), I have become more efficient each year at money management.

My goal has always been to help writers live more comfortably on the money they earn as writers, particularly if their desire is to depend substantially on their writing income for sustenance. In the coming months I’ll share money-management and time-management tips on this blog to help you succeed.

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Adapted from Writing for Profit by Dennis E. Hensley [Thomas Nelson, 1985; revised 2003]. Learn more about the prolific Dr. Hensley’s writing, editing, and public speaking credentials at www.DocHensley.com.