If you make over $400 per year in “additional income,” you better plan to pay tax on it. You can not plan to, but you’ll still be paying the taxes anyway. And yes, you could also decide not to report what you make from freelancing; for multiple reasons, not reporting is a very bad idea. So you know you’re going to make some amount of money from your writing, and whether that’s moonlighting it or as a full-time writer, the tax structures are about the same. Here is a little breakdown to help you decide how to deal with your freelance income and the resulting taxes.
- The first, and most obvious option, is simply to report as self-employed. You don’t have to set up a business structure; it’s the simplest option. Another way to say it is that you work as an Independent Contractor. This means that “the person for whom you perform services has only the right to control or direct the result of your work, not what will be done or how it will be done,” according to the IRS. You need your social security number, good records of the income you have received, and a little time to fill out some additional forms at tax time. The federal self-employment tax rate is 15.3%, and you will have to make estimated tax payments since your taxes are not automatically withheld.
- A
Limited Liability Corporation is the next simplest option. It’s not that complicated to set one up;
About.com’s guide predicts 1 – 4 hours. Basically, you have three items on your list: the Articles of Organization, the business name, and the Operating Agreement. The simpler your company is, the simpler these documents will be. If you’re one person, the sole owner of the LLC, you’re looking at a fairly quick set-up. Unless you have more than one member, the federal tax rate is basically the same as it is for self-employed income. The IRS treats a sole-owner LLC as a “non-entity” and taxes it according to sole proprietorship (self-employed) tax laws. So what’s the benefit of forming an LLC if the tax rate is the same? Purportedly, an LLC offers what its name indicates: you can’t be held personally liable if the business fails. So if your business took on debt to support itself, couldn’t pay, and went bankrupt, you wouldn’t lose your personal assets (house, car, savings) to pay that debt.
I’ve heard from different sources that 1) it’s a good idea to have an LLC because you need the liability protection and 2) the LLC is really just a false front that doesn’t offer any real protection. I suggest doing some independent research there, like talking to someone who actually runs an LLC or chatting with an IRS representative, your accountant, or your lawyer. However, all that said, I don’t really see the point of an LLC structure for a freelance writing business. There is basically no overhead to work from your home as a freelance writer. If you get into setting up an office outside of your home or buying a new laptop every month, you can acquire some debt, sure. But generally, freelance writers are able to keep their expenses very, very low. So setting up a structure to provide liability protection for a company that doesn’t really have liability seems rather redundant. The only other scenario would be the possibility of a lawsuit that could result in large bills. So don’t write anything rude about people… - Finally we come to the corporate structures, the S Corp and the C Corp. The
C Corp is how the big businesses are set up. The
S Corp is an option for businesses that don’t want to offer public stock options, and it allows
pass-through taxation, which basically means that the corporation doesn’t pay taxes, only the “employees” do on their actual income.
Neither one is very hard to set up, but you want to pay attention to tax documents, annual reports, and other required forms and filings. As with an LLC, however, a corporation seems rather over the top for a sole proprieter(freelance writer) except that it offers liability protection and, in some scenarios, a savings on taxes.
Now the disclaimer, and I mean it: I am NOT a lawyer or an accountant, and what I’ve said should in no way be treated as legal or professional tax advice. I am a freelance writer, like you. The research I’ve done has been for the purpose of understanding tax options and making decisions for my own income. I have simplified and shared what I know, which isn’t much. The point is to get you started thinking about the best route, so you don’t just wake up in April and realize you have no idea what to do. Whatever you do, be sure you keep accurate records, report honestly, and set your business up legally.