Taxes – not a favorite topic for most writers (often paired with an expletive or three) and usually the last thing on a to-do list. But important none-the-less, because if you earn income from your writing, taxation is a given.
While I’m not a CPA, I did moderate a panel about taxes recently for a writer’s conference. So I’ve summarized a few important take-home points and included a few relevant links and resources. For brevity’s sake, this section will only cover federal income tax laws and the new changes from the Tax Cuts And Jobs Act Of 2017 (TCJA). This section will not cover state and municipal business tax laws, which vary considerably. If you have questions or concerns about your city, state, or federal income taxes seek expert advice from a qualified accountant or tax lawyer.
Tax Planning For Writers Under TCJA
Over Christmas a few years ago, Santa gave Congress a new tax bill named The Tax Cuts And Jobs Act Of 2017 (TCJA). It passed on December 20, 2017, and President Trump signed into law two days later. Now, a year into the new laws, I wanted to revisit the issue. Here is my digest on how TCJA impacts a writer’s earnings. As with any tax law, how TCJA impacts a writer depends on whether you file as an individual or business. First, let’s revisit a few basics — what’s taxable income and what’s deductible.
- Taxable Income
In general, taxable income for writers is all income earned from the trade – advances, royalties, direct sales (like at a conference or book fair), works for hire or freelance writing projects (like articles, editing, proofreading, ghostwriting), lecture fees, prizes, awards, and grants. It matters not if you received a 1099 at year-end for income. A writer’s income is taxed as ordinary income. Business expenses incurred can be deducted to limit the amount subject to taxation (provided writing is a business and not a hobby…more on hobby writing below). You can read more about the general guidelines to federal taxation and what’s considered to be income by the IRS on their website, or see the following resource — Susan Lee’s Freelance Taxation.
The basic rule is business expenses are deductible, personal expenses are not. To be a legitimate deduction, it must be an ordinary and necessary expense of operating a business. But ask yourself first – is your writing a hobby or a business? Because how you use your deductions to offset revenues depends on your answer. Especially in view of the TCJA tax overhaul.
Hobby-Loss Rules Post TCJA
Not every writer is in the business to make a profit. Some write for the pure love of it. Some write to have occasional income. Others write to self-publish that family cookbook with no intention of profiting. Accordingly, if you’re not reporting an annual profit from your writing on a relatively regular basis, the IRS may define your writing occupation as a hobby and limit what you can deduct.
Before TCJA passed, it used to be that hobby writers could deduct hobby expenses up to the amount of the writing hobby income. If there were expenses that were more than the income made from a writing hobby, those were considered nondeductible personal losses. Unfortunately, TCJA has eliminated the itemized and miscellaneous deductions for hobby expenses. Any income earned from hobby writing must be reported and taxes paid. This change, which was effective in 2018, is currently set to expire after 2025. Writers can return to hobby expense deductions for the 2026 tax year, reporting in 2027.
After TCJA passed, being a hobby writer isn’t as beneficial tax-wise like it would be if you operate a business, because then your business losses can offset other income on your return. To be considered a business, and not a hobby, an activity must have a profit motive. A writer in the business for profit may deduct all related business expenses (even if those deductions exceed the income earned from writing in the given tax year).
There are two ways the IRS makes the Hobby-Loss or Business determination.
- Threshold – The three-out-of-five-year test is the longstanding threshold test for distinguishing between business and hobby. If a writer can show a profit during three out of five consecutive tax years, it is presumed the writer is in the business of writing.
- Motive – If you don’t satisfy the above threshold, don’t fret. The IRS will also consider a writer’s motive to earn a profit. The more a writer looks to be in the business of writing, the more likely the IRS will think the writer is in the business for profit. When considering intent for profit, the IRS looks at factors like your business routines and accounting (how you keep your records, do you have a separate business account), your expertise (education, publications, and credits), attending classes and conferences, and your time spent on writing and marketing (full-time writer dependent on writing for a livelihood or nine-to-fiver writing the occasional article). For more information on the motive factors, see Bonnie Lee’s article at Writer’s Digest. Or see Helen Sedwick’s article on Jane Friedman’s blog for a list of steps writers can take to convince the IRS their writing is a business. The list includes items like having a website, marketing your work, having a business name (mine are Prose-In-Progress, Inc. and Sidebar Saturdays), obtaining a Federal Employer Identification Number (EIN), and applying for a local business license if required in your city or county.
What Is Deductible For Business Owners Post TCJA?
- Ordinary, Necessary, Reasonable — There are numerous articles and a few books that list what deductible items are ordinary, necessary, and reasonable. See Susan Lee’s Freelance Taxation. Legitimate deductions include expenses like advertising costs, writing materials and supplies, office equipment (purchase or rental), office rental space, utilities, business and bank fees, professional fees, agent commissions, legal and accounting fees, insurance, shipping/mailing fees, workshops and seminars, publications and research materials, and travel and car expenses (but only for business purposes). Some major expenses like a computer or office furniture might have to be depreciated over several years. The cost of entertaining clients and colleagues isn’t deductible but 50% of meals can be, although there is some debate as to whether drinks only are actually a meal. Play it safe and order food with those drinks. For more information on business deductions, see item 7 below.
- Home Office Deductions — While the rent paid for workspace not in your home is deductible, the IRS treats home offices differently. A home office must be a designated part of the home and used on a regular basis as your place of business, and for no other purpose. So the dining room table doesn’t qualify as a home office if you still throw those elaborate dinner parties celebrating your climbing book sales. But commandeer the dining room and use it solely for your office space, and you may be eligible to use the home office deduction.
- A few additional points about home office deductions:
- You need not have a full room dedicated to a home office. A corner in the bedroom will work, but only if it is exclusively the space for your writing business.
- You can deduct expenses for things like repairs to a dedicated office area.
- Expenses that benefit both the office and the whole home (utilities, insurance, cleaning, repairs, etc.) can be deducted but in proportion to the size of the office as compared to the house.
- If you take the home office deduction, there is a limit as to the deductions you may take in relation to your gross income. See Writer’s Digest for examples of the limitations. If you need more information, consult a tax expert regarding your specific situation.
Remember, tax laws changed in 2017 with TCJA, so look at the date of the article, and filter through the information accordingly. Some of the older articles will obviously refer to laws no longer in effect.
Corporate Tax Cuts Under TCJA
The largest tax reform in the new legislation goes to corporations (a tax rate reduction from 35% to 21%). Alternative Minimum Tax (AMT) was repealed and the tax brackets collapsed to a single 21% tax rate. The corporate tax cut is permanent (unlike the individual tax cuts which lapse in 2025).
Individual Tax Cuts Under TCJA
While the corporate tax rates were slashed, individual tax rates were only tweaked. Individuals will still have to contend with the seven tax brackets, but the rates have been reduced by a few percentage points (between 1% and 4%). Only the 10% and 35% brackets were not reduced.
|Income/Married Filing Jointly
|Up to $9,525
|Up to $19,050
|$9,526 to $38,700
|$19,051 to $77,400
|38,701 to $82,500
|$77,401 to $165,000
|$82,501 to $157,500
|$165,001 to $315,000
|$157,501 to $200,000
|$315,001 to $400,000
|$200,001 to $500,000
|$400,001 to $600,000
These brackets are on top of the AMT, which still remains for individuals (but the exemption has widened). Most individuals will still be able to claim itemized deductions but those have been limited (see below). These limits along with the increase in the Standard Deduction (see below) may mean fewer individuals will claim itemized deductions.
Here are some of the bigger changes from the TCJA.
- State and Local Tax Deductions (SALT) — There is a $10,000 cap for deducting state and local income taxes, and property taxes. The cap is for the combined total of taxes paid for state, local, and property taxes, not each one. The SALT limitation is more problematic for people living in states like New York, California, New Jersey, and Maryland who pay high state income and property taxes. The $10,000 cap applies to individuals and married couples filing jointly. For married couples filing separately, the cap is reduced to $5,000 to prevent people from getting an extra bump in deductions.
- Mortgage Interest Deductions are limited to the interest on debt up to $750,000 for primary and one secondary home. This limit applies to loans after Dec 15, 2017. Homeowners with loans prior to that date will not be affected by the change. They still receive the benefit of the original $1,000,000 limit of debt principal.
- Charitable Deductions are increased from 50% to 60% of adjusted gross income. Any gifts over $250 require contemporaneous written documentation.
- Medical Expense Deductions were expanded but only temporarily. Previously, out-of-pocket medical expenses that exceeded 10% of adjusted gross income could be deducted. TCJA reduces that threshold to 7.5% of adjusted gross income. But that change was only for 2018. After that, the percentage reverted back to the 10% threshold. The Affordable Care Act penalty for individuals without an insurance plan has been eliminated by reducing the penalty to zero in 2019.
- Causality Losses are now limited to federal disasters only. Any losses that exceed 10% of a person’s adjusted gross income and were not compensated for by insurance can be deducted but only if the disaster is declared a national disaster, like the California wildfires.
- Miscellaneous Itemized Deductions for individuals that fell in the 2% of adjusted gross income are no longer deductible. This included things like tax preparation expense, unreimbursed employee business expenses (like the home office deduction), annuity losses, and a few other expenses for the production of income like investment advisory fees.
- Business Expenses on the other hand, whether for an LLC, S-Corp, or sole proprietorship entity, are still deductible, including investment advisory fees, tax preparation fees, the home office deduction, agent commissions, and other business expenses. However, if you are an author who works as an employee for a writing project and you receive a W-2 (instead of an independent contractor and a 1099), the business deductions are no longer possible.
- The Pease Limitation was repealed. Originally, if an individual’s adjusted gross income was more than $261,000 ($313,800 as married couples), the Pease Limitation eliminated 3% of the taxpayer’s itemized deductions. Now, with the Pease Limitation repealed, upper-income individuals effectively receive a tax rate reduction by being able to use those itemized deductions.
- The Marriage Penalty still exists for high-income couples. The so-called marriage penalty occurred when two high-income individuals paid more taxes filing as married than as individuals. The original Senate version of the tax changes eliminated the marriage penalty by doubling the individual tax bracket thresholds for married couples. Some of this made it into the final version to eliminate the marriage penalty in the lower tax brackets but not for high-income couples who hit the 37% tax bracket. The threshold for the 37% tax bracket is over $500,000 of income, but for married couples, it is only $600,000.
- The Personal Exemption and Standard Deduction have merged. Or you could say the Personal Exemption has been eliminated and the Standard Deduction doubled. Either way, the new Standard Deduction is $12,000 for individuals and $24,000 for married couples (up from $6,350 and $12,700 respectively). This change is problematic for those who had multiple personal exemptions prior to TCA. For example, if you filed under the old law as a married couple with two children, normally the standard deduction with personal exemptions for two children would have been around $28,000. Now, under the new law without the personal exemptions allowed for two children, the new Standard Deduction of $24,000 equals a decrease.
- The Individual Tax Laws Lapse in 2025. This time limitation was added to comply with the Byrd Rule that allows the Senate to block legislation that might increase the federal deficit past a ten-year term. Senate legislation could be passed with a simple majority if the tax cuts did not go beyond ten years, hence the 2025 expiration date. Otherwise, the Senate would have needed 60 votes to pass the tax cuts.
- The Estate and Gift Tax brackets have been condensed to four brackets — 10%, 24%, 35%, and 37%. Most people will be taxed at the upper rate because it only takes $12,500 in estate income to reach the 37% tax bracket (which was reduced from 39.6% to 37%). But the Estate Tax Exemption has been doubled – from $5.6 million to $11.2 million for individuals ($22.4 million for couples). With such high exemptions, estate planning will be irrelevant for all but the uber-wealthy.
- The Child Tax Credit has been expanded from $1000 to $2000 per child under the age of 17. Parents can collect a refund of up to $1400 (up from the current $1000 refund) if the child tax credit is larger than their federal income tax liability.
- The Kiddie Tax rules have been revamped. What is the Kiddie Tax? It is the tax that applies to income earned by children under 19 or full-time students under age 24. Under TCJA, earned income (like wages or self-employment) for children under 19 or full-time students under age 24 will be taxed at their own individual tax bracket (see chart above). But any unearned income will not be added to a parents’ income for reporting purposes. Instead, any unearned income (i.e. portfolio income) is now subject to the estate tax rates (see number 12 above). A child would have to have a sizeable portfolio of around $400,000 (assuming an average yield of 3%), to generate enough unearned income to meet the $12,500 threshold for the 37% estate tax bracket.
- Long Term Capital Gains continue to use the old 0%, 15%, and 20% rates.
- Deduction for Pass-Through Businesses — The changes for pass-through businesses (like a partnership, LLC, S-Corp, or sole proprietorship) are some of the most complex in the new law. Here are a few points to know about deductions for pass-through entities:
- Originally, pass-through income (income made by the business and passed through to the business owner’s individual tax return) was taxed at the same rate as any other income. Now, TCJA under Section 199A allows individuals to deduct 20% of their business income from a pass-through entity. In other words, pass-through businesses are taxed on 80% of the pass-through income. The 20% deduction is claimed on the individual’s personal tax return. This change allows business owners to keep more earnings tax-free. There are limitations and restrictions, like how income and wages are classified, and which service businesses are excluded from using the pass-through deduction. Consult an expert for tax planning advice if you have a pass-through business. Michael Kitces does a great job explaining the new rules for pass-through businesses in his article Individual Tax Planning Under The Tax Cuts And Jobs Act.
- One important limit, the 20% pass-through deduction only applies to individuals with taxable income below $157,000 ($315,000 for married couples). Income over that encounters a phase-out of the pass-through deduction. The deduction is lost when individuals hit $207,500 ($415,000 for married couples).
- For the self-employed person working as an LLC, S-Corp, or sole-proprietorship, their tax rate could be lower than one as an employee doing the same work because of the 20% deduction. People may want to shift to freelancer/independent contractor status as an LLC, S-Corp, or sole proprietorship if the individual is under the income threshold of $157,000 in order to capitalize on the 20% deduction. Because of the $157,000 threshold, large businesses that make income over that threshold lose the 20% deduction and are taxed at the higher rate of 37%. These larger businesses may want to transfer to a C-corporation and take advantage of the reduced corporate tax rate of 21%.
In view of the complexity of the new tax environment since TCJA passed, tax strategies will continue to emerge with a fuller understanding of the tax laws. Consult an expert for tax planning advice.
If you are not working for an employer who withholds taxes from your paycheck, you will have to submit those tax payments on your own. What you want to avoid is having a tax liability and being required to make estimated taxes. Here is what you need to know about estimated taxes.
The general rule is: if you expect to owe $1,000 or more in tax when you file your tax return, then you will have to make estimated tax payments. It doesn’t matter if you are a self-employed writer or a writer who has a full-time job on the side — if you or you and your employer didn’t withhold enough taxes, and you owe the IRS $1,000 or more in tax at the end of the year, then you’ll be making estimated taxes. If you owe less than $1,000, lucky you. No estimated taxes are necessary.
You’ll need to calculate your estimated tax bill for the year. Your CPA or accountant can help with this estimate. If you want to do this yourself, list all your income and expected income for the year, along with any deductions and credits. This is only an estimate, so you need not be exact.
To avoid an underpayment penalty for not withholding enough taxes for the year, you can pay the lesser of 90% of the current year tax or 100% of the prior year tax. This can then be split into quarterly payments. The IRS due dates are in the middle of April, June, and September of the current year, and middle of January of the following year. If you pay these quarterly payments on time (and you must make the full quarterly payment), you will avoid an underpayment penalty. If you pay late, you’ll have a late penalty too.
While I focused this section on federal taxes, you’ll need to look at your State taxes too for estimated tax requirements and penalties.
It may be a pain, but make it your habit to keep clear, current, and credible records. Doing so will make it easier to fill out your tax returns and pay estimated taxes. If you are audited, you will need the documentation.
Record income and expenses generated from writing on a spreadsheet or use accounting software like QuickBooks. Entries should note the date, the amount of money received or paid out, and the nature and source of that money. Keep copies of all checks, bills, and receipts. Do not commingle personal and business accounts. Use separate accounts (bank and credit cards) solely for your writing business.
If you want to learn more about the pros and cons of sole proprietorships, limited liability corporations, and S-corporations, see my earlier articles here and here. In general, business expense deductions still exist for expenses attributed to a bona fide business. For authors with a pass-through entity, whether a self-proprietorship, LLC, or S-Corporation, hopefully, the information above helps to explain how TCJA affects these entities. TCJA tax reform for pass-through entities is somewhat complex and will probably take a tax expert to help you unravel all the implications for your pass-through entities.
Legal Disclaimer: This information is provided for educational purposes only. Consult a qualified lawyer in your jurisdiction for all legal opinions for your specific situation.