A guest post by Brenda Lindsey.
SHOULD I BE MAKING QUARTERLY ES PAYMENTS?
The rule for everyone is the same. The U.S. is a pay-as-you-go tax system. As you earn income, you must pay taxes. However, a common misconception is that every self-employed individual must make quarterly estimated tax payments. If you file your income tax return and have not paid throughout the year, you will be penalized. There are some general exceptions to the penalty: if you owe less than $1,000 in taxes for the current year; if you have already paid in 90% of what is due in the current year; or if in the previous year you have already paid in 100% of the tax due for the current year. (Look at last year’s Form 1040, Line 61.)
Not all writers are full-time writers. As a writer, if you also have a wage or salary earning job, you get an added advantage to the pay-as-you-go rule. All payments to the IRS remitted through withholding by your employer will be considered remitted equally throughout the year – even if you change your W4 at the end of the year and have large withholdings to “catch-up” on taxes for income received much earlier in the year. Also, payments to the IRS when your status is “married filing jointly” are considered joint payments and will apply to the joint taxes owed. This is why, if possible (i.e. you or your spouse have another job with an employer), you should consider simplifying the process and avoiding penalties by making all your tax payments through increased withholding by an employer.
If increasing the withholdings through an employer is not an option, you will need to make estimated tax payments on Form 1040 ES. You should estimate the taxes you need to pay (estimated self-employment income less estimated deductions multiplied by your income tax bracket + approximately 15%) and divide by 4. These payments are due on an unusual schedule – April 15, June 15, Sept. 1, and Jan. 15. You can get a refund on your income tax return and still incur ES payment penalties because you did not remit timely payments on the “pay-as-you-go” system. (You can get a waiver if you can show – via Form 2210 – the actual amounts earned by quarter. This would be used, for example, if you received a large advance in the last quarter of the year.)
CAVEAT ABOUT CLAIMING DEDUCTIONS
Be very careful about what you claim as deductible expenses. This is one of the areas where writers can most easily find themselves in conflict with the IRS. Remember, only your expenses as a writer can be deducted from your self-employed writer’s income. For example, if you and your spouse travel together to another city to attend a convention, unless your spouse is also a writer, only your travel, meal, and lodging expenses are deductible.
CONSIDER HIRING A CPA
While it is wise to understand the rules involved and the records you should be keeping, the paperwork should not keep you from your first love – writing. A Certified Professional Accountant can remind you of deadlines, file forms on your behalf and help you to avoid unnecessary penalties. Keep orderly and itemized records of receipts and expenses and consider letting a CPA worry about Uncle Sam.
Good luck with your writing!
Brenda is a Certified Public Accountant and has over 10 years in public accounting experience, specializing in taxes for small businesses. She is currently the Controller of New Gulf Resources, LLC in Tulsa, OK. She is not a writer, but she is a reader, and she is related to Fictorian David Carrico, so she has a connection with the writing life.