Tax Facts for Freelancers
Your Questions/Julian Block’s Answers
In these tough times, it becomes more important than ever for freelancers to familiarize themselves with steps that can keep their taxes to a minimum – and, of course, keep them out of legal trouble. To help subscribers take year-round advantage of
Question: I went to New York from the West Coast to attend an ASMP members’ meeting and photography seminar last spring. I’m pretty sure that I’m entitled to claim some deductions. But what sorts of expenses can I deduct, and can I deduct them totally?
Answer: You get to deduct 100 percent of what you spend for the attendance fee, tapes of sessions, books on photography and the like, plus travel between your home and New York and expenditures for hotels. There’s a limitation, though, for meals not covered by the attendance fee, including both what you eat en route and food consumed while you’re in New York: Deduct only 50 percent of those expenditures.
Question: My spouse (who didn’t attend the conference) came along on the trip. Any chance that any of my spouse’s expenses qualify as deductible?
Answer: There’s no deduction whatever for the portion of the outlays attributable to your spouse’s travel, meals, and lodging – with a limited exception, one that will allow relatively few freelancers to salvage deductions for a mate’s travel expenses. To qualify for that exception, these requirements must be met: (1) The spouse (or dependent, or any other individual) accompanying you on business travel is a bona fide employee of the outfit that pays for the trip--in this case, your freelance business; (2) the spouse has undertaken the travel for a bona fide business reason; and (3) the spouse is otherwise entitled to deduct the expenses.
Special tip: Take heart. Some often overlooked tax relief remains available for lodging costs, even when your spouse, significant squeeze, or someone else tags along only for fun. You are entitled to a deduction for lodging based on the single-rate cost of similar accommodations for you – not half the double rate you actually paid for the two of you.
Let’s say the two of you drive to New York, and you stay at a hotel in New York where rooms go for $200 for a single and $240 for a double. Besides a deduction for the total cost of driving to and from New York (you obviously incur the same driving expenses whether your spouse accompanies you or not), you are entitled to a per-day deduction for your hotel room of the entire single rate of $200, rather than half the double rate, or $120. To help safeguard your deduction in case the IRS questions it, remember to have the hotel bill note the single rate, or be sure to get a rate sheet.
Question: Can I deduct money spent for magazines purchased at a newsstand for research? And if I can: Where on Form 1040 do I list those deductions?
Answer: The law allows you to deduct business-related publications, and these magazines are in that category. Like your other business expenses, you claim them on Schedule C (Profit or Loss From Business) of Form 1040.
Question: I went to a get-together with some fellow researchers. There wasn’t a speaker; it was more of a social event. But I see it as networking with my professional colleagues, and most of the talk was about work-related issues. Can I take a business-expense deduction for the cost of getting there? How about my cash contribution to the refreshments for the group?
Answer: The event does not qualify. You're entitled to claim the entire cost of round-trip travel between your home and the party's site. For travel by bus, train, or taxi, just keep track of your fares and claim them as business expenses; for auto travel, you can claim actual expenses or a standard mileage allowance. That standard allowance for tax year 2006 is 44.5 cents a mile for the final four months and 40.5 for the first eight months. Whether you claim actual expenses or use the mileage allowance, remember to deduct parking fees and bridge, tunnel and turnpike tolls that you pay while you are on business, too.
As for other outlays, they fall into the category of meals and entertainment; like the food consumed on that trip to New York, they're only 50 percent deductible.
Question: I sell my own photography, also, and I have two agents, one for assignments and another for stock photography. At filing time, they both send me 1099 forms, and I understand that copies also go to the IRS. But they do different kinds of bookkeeping!
One agent's 1099 lists the gross (full) amount she receives from a publisher, as my income; that is, she doesn't allow for the commission subtracted by her up front before sending a check for the balance to me. The other one handles things differently; his 1099 lists only the net (after commission) payment he actually sent to me. How should I handle these payments on my return? I know I have to report the income, but I'm not sure which figures to report!
Answer: Let consistency be your guide. The amount of income you declare should be consistent with the figures shown on your 1099 forms. Otherwise, the IRS computers might go bananas, with unpleasant consequences.
When it comes to monies you receive via an agent, what you should declare depends on whether the agent submits a 1099 form for you that shows the gross amount (total paid by the publisher) or the net amount (amount actually paid to you after the agent's commission is deducted).
If the 1099 filed by the agent lists the gross, then that's the figure you should include in totaling your income to come up with your gross on line 1 of your Schedule C -- and remember to include the agent's commission, which is deductible, on the line for commissions and fees, line 10. If the 1099 filed by the agent lists the net amount, then you should use that amount in arriving at your gross income figure -- and you should not deduct the commission on line 11, since it's already been subtracted from the income figure.
To make it perfectly clear, here's an example. Say your agent receives a check from your stock agency in the amount of $50,000, deducts the 15 percent commission of $7500, and sends you a check for $42,500. After that year's end, you receive a 1099 form that shows $50,000. You should include the full $50,000 in your reported gross income on line 1 and deduct $7500 commission on line 11. If, on the other hand, the 1099 shows only the amount actually sent to you, $42,500, you should include only $42,500 on line 1 -- and deduct nothing on line 11. Either way, you pay tax on only the $42,500; either way, the serenity of the IRS computers will be preserved.
Question: I photograph for several magazines. One magazine's 1099 form reports not only the fees they paid me during
Suppose I receive a 1099 form that shows $2587.53, which actually includes a $2500 payment for an article and $87.53 worth of reimbursement for telephone calls. It doesn't make sense that I'd have to include the latter amount in totaling my income for line 1 on Schedule C, since it wasn't income.
Answer: Contrary to what many freelancers (and other self-employed people) mistakenly believe, it's not "just a wash." This is much like the prior situation with payments from agents; again, you should make sure your return reflects the consistency that will keep the IRS computers in a calm, unagitated state.
You should include in your line 1 total, the full amount shown by the magazine, $2587.53. Then, as with the agent's commission, count the $87.53 among your deductible business expenses, since you should not be paying taxes on it.
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