By Kelly James-Enger
Chances are you began writing because you loved to capture your words on the page. Then, as you continued to write, you may have decided to pursue publication. What could be better than seeing your work in print? Why, discovering that you could get paid—sometimes well—for your writing.
Whether you write for love, or for money, or for both isn’t simply a rhetorical question. The answer may have a significant impact on whether you can deduct your writing-related expenses under U.S. law. Read on to learn what you need to know to determine whether your writing is a business or a hobby— and why that distinction is a critical one.
Let’s start with the basics. As a U.S. citizen, the money you make from your writing counts as ‘reportable income.’ Legally, you’re required to report the amount as income on your taxes, regardless of whether your writing is considered a business or a hobby.
But if you’re operating your writing as a business, instead of a hobby, you can deduct legitimate business deductions from that income. That reduces the amount you pay taxes on at the end of the year. On the other hand, if you’re pursuing writing as a hobby, you still have to report the income you make but you can’t take advantage of any business deductions (because you have a hobby, not a business.) Get it?
Let’s say your first year of freelancing, you sell several articles for $800 and win a writing contest which awards you $500. Your writing-related expenses including postage, office supplies, telephone charges, books, and other materials total $200. If you’re operating as a business, you’re allowed to deduct $200 from $1,300 and pay taxes only on the $1,100. If, however, you’re operating as a hobby, you’ll pay taxes on the entire $1,300.
So what’s the difference between a business and a hobby? After all, even if you’re writing to make money, you probably enjoy your craft, right? The key for the Internal Revenue Service comes down to something called ‘profit motive.’ Profit motive essentially means that you’re writing with the intention of making money from your writing—not simply pursuing a pleasurable activity.
How can you convince the IRS you’re writing with a profit motive—to make money, in other words—if you ever are audited? The IRS considers a number of factors, but some of the things you can do to prove this include:
- Submitting your work only to markets that pay. You’re writing for money, not for exposure.
- Dedicating significant time and effort to your freelancing career—not approaching it in a sporadic or haphazard fashion.
- Setting annual financial goals for your writing business, and aiming to maintain or exceed them over time. (Making a profit doesn’t absolutely prove that your writing is a business, not a hobby, but it certainly helps.)
- Keeping records of your submissions, assignments, income, and expenses like you would with any other business.
The Bonus of a Writing Business
Once you pass the ‘writing as a business’ test, you’re entitled to deduct all ordinary, necessary, and reasonable expenses related to trying to make a profit in your business. According to IRS regulations, those expenses are the ones that are common, accepted, helpful, and appropriate for your writing business. For most freelancers, those expenses would include:
- Computer and software purchased and used for your business;
- Paper, letterhead, pens, printing cartridges, and other offices supplies; Postage and mailing expenses (and these can add up fast!);
- Telephone expenses including long-distance charges (while you can’t deduct your primary phone line, a second one used solely for business is deductible); Travel and entertainment related to your business, such as lunch with an editor or trip to attend a writing conference (note that you can only deduct half of your meals); and
- Writing-related classes and events.
You may also be entitled to a home office deduction if you use a section of your house or apartment solely and exclusively as your place of business, and to deduct the cost of traveling from your home office to other locations for business reasons— such as mailing manuscripts, conducting face-to-face interviews, meeting with clients at their offices, and attending a networking event. With automotive expenses, you can choose between the actual expense method or the more commonly used standard mileage deduction to write off allowable operating costs.
The bottom line is that if you’re writing with the intention to make money, keeping good business records and maintaining expense receipts can support your ‘profit motive’ position and reduce your tax liability. As a smart, savvy writer, you want to make as much money as possible—but pay as little tax on it as you legally can.
Freelance journalist and speaker Kelly James-Enger is the author of books including Six-Figure Freelancing: The Writer’s Guide to Making More Money (Random House, April, 2005) and Ready, Aim, Specialize! Create Your Own Writing Specialty and Make More Money (The Writer Books, 2003). She can be reached through BodyWise Consulting.