Taxes and Freelance Record Keeping

Taxes: Giving Unto Caeser

March 25, 1999
Notes By Henry Robb

"I love taxes, believe it or not." So began Ms. Susan Kopman, a tax specialist at Black Ink Associates in Berkeley, at the last Bay Area Editors' Forum meeting. She went on to share many bits of tax wisdom with us, all designed to save us money.

Good recordkeeping forms the foundation of taking control of your taxes, and the key to good recordkeeping is double-entry bookkeeping (make entries along both the vertical and horizontal axes of a page and then fill in the cells). Keeping good records will in no way reduce your chances of being audited—just by filing Schedule C, your chances of being audited are 3.15 percent, compared with 2.0 percent for the general population-but your records are your best defense against the IRS.

There are myriad ways freelancers can reduce their taxable incomes. One is to establish a "home office." To do this all you need is to set aside a part of your home or apartment for "regular and exclusive use" for your business. A spare bedroom with its own phone line or even a desk or table that you use only for work will fill the bill. Your business must be generating some earnings for it to be considered legitimate by the IRS. All expenses deemed "ordinary and necessary" to your business may be deducted from your taxable income. This includes office expenses, such as paper, pencils and business cards, and supplies, such as computer equipment, faxes and toner. All phone calls made in connection with your business can be deducted. If you get a second line to be used exclusively for business, all calls and the cost of the line can be deducted. All expenses related to the upkeep of your office can also be deducted. Another deduction can be taken for depreciation of capital items built to last more than a year, including computers, office furniture, cars and even the home office portion of your house. Ms. Kopman suggests taking the depreciation all at once in the first year because items like computers may soon be replaced.

You can also deduct all business expenses related to travel, entertainment, gifts and vehicles. If your work requires you to travel, you can deduct lodging, transportation, and 50 percent of all meals. If you don't keep exact records, you can simply deduct a standard $40/day for meals and $140/day for lodging. When using your own car, transportation expenses, such as parking and tolls are 100 percent deductible. Mileage can be deducted at $.32/mile.For out-of-town travel, you must keep receipts and an expense log. For travel in your area only a log is necessary.

Ms. Kopman recommends two IRAs: the Roth and the SEP. The key advantage of the Roth IRA is that you put $2000 of after-tax money in a year, and that money is never taxed again. The SEP (Simplified Employee Pension) IRA is for self-employed people and allows you to shelter 15 percent of your net income. The best strategy for freelancers is to open a Roth on top of a SEP.



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