"They just write it off." "Write it off what?" Tax question!
July 9, 2015 9:24 PM Subscribe
What does "writing it off" really mean? Explain it to me like I am a small child. When people say, "At least you can write it off on your taxes," is that really a silver lining? My personal scenario inside.
I had an opportunity to do something as a freelancer and I spent roughly $4500 on travel alone -- that's flights, hotels and car rentals. Then when you include incidental things like parking and gas, it goes higher. If you include all my meals on the road, it goes way higher. I also drove my own car for parts of it as well, so I'm not sure if I get to include that beyond the gas I bought. But let's say I spent $6000 total on this job opportunity. Let's also say I earned about $6000 from this opportunity with flights, hotels, car rentals, food, etc. (Yes, I only broke even but it was something I wanted to do.) They didn't take taxes out of what they paid to me.
What does the write-off on my taxes mean? How much money will I save or get back? How does it work? Also relevant: I have a real salaried job that is my primary source of income. I'm single, no kids, and I make about $80,000. Is this whole "writing off" thing that helpful to me? How much should I worry about including everything come tax time?
I had an opportunity to do something as a freelancer and I spent roughly $4500 on travel alone -- that's flights, hotels and car rentals. Then when you include incidental things like parking and gas, it goes higher. If you include all my meals on the road, it goes way higher. I also drove my own car for parts of it as well, so I'm not sure if I get to include that beyond the gas I bought. But let's say I spent $6000 total on this job opportunity. Let's also say I earned about $6000 from this opportunity with flights, hotels, car rentals, food, etc. (Yes, I only broke even but it was something I wanted to do.) They didn't take taxes out of what they paid to me.
What does the write-off on my taxes mean? How much money will I save or get back? How does it work? Also relevant: I have a real salaried job that is my primary source of income. I'm single, no kids, and I make about $80,000. Is this whole "writing off" thing that helpful to me? How much should I worry about including everything come tax time?
It's a bit complicated when you get into writing off car expenses - in your income tax filings you need to list the actual car you used (that you owned) and keep track of mileage (including a record of unrelated mileage for that tax year, I seem to remember). But you can write off (that is, subtract from the total income you received for that work) slightly more than 50 cents per mile you drove (which covers gas and depreciation) for that work, if you are in the US. It's all in the tax forms.
posted by BillMcMurdo at 9:38 PM on July 9, 2015
posted by BillMcMurdo at 9:38 PM on July 9, 2015
What they are talking about are itemized deductions for business expenses if they were unreimbursed business expenses incurred in your W2 job. Or, alternatively, expenses on your Schedule C that offset Schedule C income. The problem you might run into is that the IRS might consider it a hobby rather than a legitimate business if you keep doing it and making no money after expenses.
The idea is to not pay tax on the cost of doing business, but only on profit (actually net income, IIRC) instead. You don't get anything back except to the extent that you otherwise overpaid tax during the year. It's not like the government reimburses you for the expenses, they just refrain from taxing you on it.
It is pretty important in the sense that you will pay an extra $1680 in income tax plus another 800ish in self employment tax if you don't list your expenses on Schedule C to offset the income. (The income tax number assumes you'd have a 28% marginal income tax rate for anything you earn on top of your W2 job. Substitute your actual marginal rate for a closer estimate of what you will save)
TaxAct does a decent job of getting all this right if you answer its questions correctly. This answer assumes you're in the US, of course.
posted by wierdo at 9:40 PM on July 9, 2015 [1 favorite]
The idea is to not pay tax on the cost of doing business, but only on profit (actually net income, IIRC) instead. You don't get anything back except to the extent that you otherwise overpaid tax during the year. It's not like the government reimburses you for the expenses, they just refrain from taxing you on it.
It is pretty important in the sense that you will pay an extra $1680 in income tax plus another 800ish in self employment tax if you don't list your expenses on Schedule C to offset the income. (The income tax number assumes you'd have a 28% marginal income tax rate for anything you earn on top of your W2 job. Substitute your actual marginal rate for a closer estimate of what you will save)
TaxAct does a decent job of getting all this right if you answer its questions correctly. This answer assumes you're in the US, of course.
posted by wierdo at 9:40 PM on July 9, 2015 [1 favorite]
Assuming that you are in the US, you would file a schedule C form to report your business income and expenses. (Instructions here) You subtract allowable expenses from the income and get the net income which is what gets added to your other income (like your salary) for calculating taxes. Plus you have to pay the both the employee and employer's share of Social Security as well all the regular taxes.
figuring out exactly which of your expenses are allowed can get tricky especially around travel and meals. You can take a standard deduction for miles driving for business purposes in your own car (it takes into account both gas as well as wear and tear)
If you don't take an expense that you are entitled to, it just makes the net income higher and you will pay take on that extra amount. (So, if you have a $100 deductible expense, and your tax rate is 25%, it saves you $25). If you take more than you are entitled to and you get audited, you would owe the extra tax + interest + penalties.
posted by metahawk at 9:42 PM on July 9, 2015
figuring out exactly which of your expenses are allowed can get tricky especially around travel and meals. You can take a standard deduction for miles driving for business purposes in your own car (it takes into account both gas as well as wear and tear)
If you don't take an expense that you are entitled to, it just makes the net income higher and you will pay take on that extra amount. (So, if you have a $100 deductible expense, and your tax rate is 25%, it saves you $25). If you take more than you are entitled to and you get audited, you would owe the extra tax + interest + penalties.
posted by metahawk at 9:42 PM on July 9, 2015
Heya! Long-time independent agent here.
First: you will owe taxes on that $6k.
All work you earn as a freelancer (1099 income) will be accounted for on a different section of your income taxes than your regular W2 job. (Schedule C). You will owe federal, state and city (depending on where you live) and 15% for FICA.
Second: to "write something off" as a business expense simply means you can deduct its total cost from your taxable 1099 income. So let's say you pay an annual tax rate of 30% when all is said and done. That means you saved $1800 (30% of $6000.)
posted by jessca84 at 9:46 PM on July 9, 2015
First: you will owe taxes on that $6k.
All work you earn as a freelancer (1099 income) will be accounted for on a different section of your income taxes than your regular W2 job. (Schedule C). You will owe federal, state and city (depending on where you live) and 15% for FICA.
Second: to "write something off" as a business expense simply means you can deduct its total cost from your taxable 1099 income. So let's say you pay an annual tax rate of 30% when all is said and done. That means you saved $1800 (30% of $6000.)
posted by jessca84 at 9:46 PM on July 9, 2015
Response by poster: Ok, I don't think it will go down as a hobby because I have been paid at other points throughout the year without incurring any real expenses at all. So it will be profitable over the course of an entire year -- just for the specific trip I took, I wasn't going to profit. I don't really know what I will make over the course of the year, but at least an additional $2000 I would say, hopefully more. It sounds like writing this stuff off will prevent me from paying a significant amount of taxes, so I guess it's definitely worth it to me to find every expense.
Is there anything I need to know about meals or food? I didn't dine at fancy restaurants or anything like that, but I also needed to dine out because I was staying in hotels the whole time. I also grabbed snacks at grocery stores sometimes. Meals account for a lot of expenses, so I'd love to include it in the write off or deduction or whatever it's called. I was in a different country for the entire duration of this travel assignment. (Yes, I reside in the United States.)
posted by AppleTurnover at 9:48 PM on July 9, 2015
Is there anything I need to know about meals or food? I didn't dine at fancy restaurants or anything like that, but I also needed to dine out because I was staying in hotels the whole time. I also grabbed snacks at grocery stores sometimes. Meals account for a lot of expenses, so I'd love to include it in the write off or deduction or whatever it's called. I was in a different country for the entire duration of this travel assignment. (Yes, I reside in the United States.)
posted by AppleTurnover at 9:48 PM on July 9, 2015
Is there anything I need to know about meals or food?
IRS Publication 463 is your friend here. As a rule, you don't need receipts until meals get $75 fancy and above, but you do need 'adequate records' (like a contemporaneous travel notebook of all your expenses) and receipts do count as records. Meals when travelling for work are treated differently to meals when not travelling.
I was in a different country for the entire duration of this travel assignment.
Again, that's Publication 463.
posted by holgate at 9:58 PM on July 9, 2015 [1 favorite]
IRS Publication 463 is your friend here. As a rule, you don't need receipts until meals get $75 fancy and above, but you do need 'adequate records' (like a contemporaneous travel notebook of all your expenses) and receipts do count as records. Meals when travelling for work are treated differently to meals when not travelling.
I was in a different country for the entire duration of this travel assignment.
Again, that's Publication 463.
posted by holgate at 9:58 PM on July 9, 2015 [1 favorite]
You should get an accountant to answer these questions (and then deduct the accountant's fees as a business expense.)
posted by PhoBWanKenobi at 10:44 PM on July 9, 2015 [3 favorites]
posted by PhoBWanKenobi at 10:44 PM on July 9, 2015 [3 favorites]
Response by poster: One final follow-up: If I say I spent $6,000 in business expenses for something where I earned maybe $8,000 or $10,000, how likely do you think it is I'd be audited? I am not trying to falsify my records or get any deductions I am not supposed to. I just think being audited would be a giant hassle. And what if they determine I am off by $100 or $1,000 or something? No more questions from me -- thanks for all the info so far, really helpful!
posted by AppleTurnover at 11:00 PM on July 9, 2015 [1 favorite]
posted by AppleTurnover at 11:00 PM on July 9, 2015 [1 favorite]
Do you file your own taxes, or do you see an accountant for that?
When I was working as a subcontractor I would keep a record of income and expenses (with receipts wherever possible) and then go to an accountant. Accountants are very good for knowing about what you can and can't claim on your taxes, and for knowing when you do and don't need receipts. eg. Where I was living and for the industry I was in, I was allowed to claim a certain amount of laundry costs without receipts.
According to this, you are still liable for any mistakes that your accountant makes on your tax return, but many accountants will offer some degree of guarantee/assistance in case of a mistake or audit. If you do go and see an accountant, talk to them about that if you're worried. But I would be a lot less worried about mistakes and audits when filing through an accountant, since I think they would be less likely to make a mistake than I am.
posted by kinddieserzeit at 4:14 AM on July 10, 2015
When I was working as a subcontractor I would keep a record of income and expenses (with receipts wherever possible) and then go to an accountant. Accountants are very good for knowing about what you can and can't claim on your taxes, and for knowing when you do and don't need receipts. eg. Where I was living and for the industry I was in, I was allowed to claim a certain amount of laundry costs without receipts.
According to this, you are still liable for any mistakes that your accountant makes on your tax return, but many accountants will offer some degree of guarantee/assistance in case of a mistake or audit. If you do go and see an accountant, talk to them about that if you're worried. But I would be a lot less worried about mistakes and audits when filing through an accountant, since I think they would be less likely to make a mistake than I am.
posted by kinddieserzeit at 4:14 AM on July 10, 2015
Keep other things in mind as well. If you buy a new computer that costs $1,000, that is using $1,000 of the money that is left after you paid taxes on what you earned. We call that "after-tax" money. If it is "predominantly" for work, though, that $1,000 is a legitimate work expense and deduction, meaning you are using "before tax" money. If you are paying about 20% of your income in taxes, the "effective cost" of that purchase is $800 rather than $1,000.
Nolo's Deduct It can be a good reference. Use it, not to substitute for an accountant, but to be a knowledgeable client to the accountant.
posted by yclipse at 5:00 AM on July 10, 2015
Nolo's Deduct It can be a good reference. Use it, not to substitute for an accountant, but to be a knowledgeable client to the accountant.
posted by yclipse at 5:00 AM on July 10, 2015
One thing I've learned is that people who say, oh just write it off. Or talk about awesome tax savings are quite often full of shit to be polite.
Sounds like you've got a legit write off here, but be wary of improbable things that people tell you.
Like writing off medical expenses....sounds good in theory, but you only get to write off anything over 9% of your income. So you make $40,000 you can only anything over $3,600. Every time I've felt like I have paid in way too much medical it ends up being magically just under the number I would need to see any benefit. =(
posted by MadMadam at 6:04 AM on July 10, 2015 [1 favorite]
Sounds like you've got a legit write off here, but be wary of improbable things that people tell you.
Like writing off medical expenses....sounds good in theory, but you only get to write off anything over 9% of your income. So you make $40,000 you can only anything over $3,600. Every time I've felt like I have paid in way too much medical it ends up being magically just under the number I would need to see any benefit. =(
posted by MadMadam at 6:04 AM on July 10, 2015 [1 favorite]
Accountants are often worth what you pay them for this sort of thing. The important thing is, before then, to save receipts and do a good job tracking ALL your expenses and then they can help you determine what is deductible or not. You can also use a tax preparation program which will guide you through the steps as if you knew very little about this. I found it helpful to at least understand what was and wasn't deductible.
So I have one of those weird situations where I have some money I make as an "employee" (I get a W-2) and some I make as a contractor (I get a 1099) and some is just random (I do not get tax forms but I need to file anyhow, think "Thanks for fixing my computer, here's $100" stuff). I keep track like this
Regular job money: I do this regular job at home and I have a home office (there are complex rules about what you can and can't claim as a home office, ask a professional or do your research) which means I get to deduct a fraction of my rent and home bills. There is a "standard deduction" the IRS will give you but if you have more to deduct than that number, it's better to itemize.
1099 money: I usually travel for these jobs and so I keep track of all my expenses. So if I had a job where I made $1000 and then I had $600 worth of unreimbursed expenses (oversimplifying but that is the general idea) I'd only pay taxes on $400. This is very useful for me. I can also claim things like mileage driving myself to the airport and other things that I usually would not get reimbursed for. NOTE: if you do get reimbursed for any of these expenses, you can't also claim them as your own expenses on your taxes. Or, you write them down but they don't reduce your tax liability. Again, this is complicated but once you've been doing it for several years it begins to make more sense.
Random money: I get paid for little jobs which, because I make more than $600 at total, I should tell the IRS about. There are other expenses for these jobs (think stuff like postage, driving, meals with clients) and those get written down and eventually claimed. A lot of this stuff is the "break even" sort of stuff you're talking about.
Other things to think about as a sometimes freelancer: making donations to an IRA, having a Health Savings Account, what you can and can't do with your medical expenses, whether you should buy things for your business before the end of the tax year. An Accountant can help you with this and with the income you're making, it's a worthwhile investment.
Also as far as the IRS. You are a lot less likely to be audited than you are to get a letter from the IRS being all "We checked your math and you owe us $X extra, please pay us" They're overworked and in the past they loved to audit people with small businesses, this has been less true in the past ... decade maybe? So you get a letter and it's scary but you pay them and you are good. I've had all manner of crap to deal with with the IRS over the past few years (dealing with estate taxes and a lot of confusing paperwork) and they have actually been totally reasonable.
posted by jessamyn at 7:29 AM on July 10, 2015
So I have one of those weird situations where I have some money I make as an "employee" (I get a W-2) and some I make as a contractor (I get a 1099) and some is just random (I do not get tax forms but I need to file anyhow, think "Thanks for fixing my computer, here's $100" stuff). I keep track like this
Regular job money: I do this regular job at home and I have a home office (there are complex rules about what you can and can't claim as a home office, ask a professional or do your research) which means I get to deduct a fraction of my rent and home bills. There is a "standard deduction" the IRS will give you but if you have more to deduct than that number, it's better to itemize.
1099 money: I usually travel for these jobs and so I keep track of all my expenses. So if I had a job where I made $1000 and then I had $600 worth of unreimbursed expenses (oversimplifying but that is the general idea) I'd only pay taxes on $400. This is very useful for me. I can also claim things like mileage driving myself to the airport and other things that I usually would not get reimbursed for. NOTE: if you do get reimbursed for any of these expenses, you can't also claim them as your own expenses on your taxes. Or, you write them down but they don't reduce your tax liability. Again, this is complicated but once you've been doing it for several years it begins to make more sense.
Random money: I get paid for little jobs which, because I make more than $600 at total, I should tell the IRS about. There are other expenses for these jobs (think stuff like postage, driving, meals with clients) and those get written down and eventually claimed. A lot of this stuff is the "break even" sort of stuff you're talking about.
Other things to think about as a sometimes freelancer: making donations to an IRA, having a Health Savings Account, what you can and can't do with your medical expenses, whether you should buy things for your business before the end of the tax year. An Accountant can help you with this and with the income you're making, it's a worthwhile investment.
Also as far as the IRS. You are a lot less likely to be audited than you are to get a letter from the IRS being all "We checked your math and you owe us $X extra, please pay us" They're overworked and in the past they loved to audit people with small businesses, this has been less true in the past ... decade maybe? So you get a letter and it's scary but you pay them and you are good. I've had all manner of crap to deal with with the IRS over the past few years (dealing with estate taxes and a lot of confusing paperwork) and they have actually been totally reasonable.
posted by jessamyn at 7:29 AM on July 10, 2015
I get paid for little jobs which, because I make more than $600 at total, I should tell the IRS about.
Just to be clear, you must report all income, not just income more than $600. It is a common fallacy that income less than $600 does not need to be reported. It may be the case that someone hiring you may not file a 1099 reporting your income if it is less than $600, but that does not mean you are not required to report it. Legally, you are even required to report the $20 you got for jury duty on line 21 of Form 1040.
http://www.irs.gov/uac/Reporting-Miscellaneous-Income
posted by JackFlash at 9:04 AM on July 10, 2015
Just to be clear, you must report all income, not just income more than $600. It is a common fallacy that income less than $600 does not need to be reported. It may be the case that someone hiring you may not file a 1099 reporting your income if it is less than $600, but that does not mean you are not required to report it. Legally, you are even required to report the $20 you got for jury duty on line 21 of Form 1040.
http://www.irs.gov/uac/Reporting-Miscellaneous-Income
posted by JackFlash at 9:04 AM on July 10, 2015
Unless your total income for the year is something ridiculously low (I think $600 is accurate), you do have to file and report all income, but if you are below that threshold, you do not.
The filing threshold is actually higher (around $8k last year IIRC), but applies only if less than the $600 is subject to self employment tax.
Also note that everything in this thread has only been speaking to federal income tax. If you live in one of the 48 or so states that also levy an income tax, and/or a city that levies its own, you must also follow their rules, which usually differ in some substantial way from the federal income tax rules.
posted by wierdo at 6:24 PM on July 10, 2015
The filing threshold is actually higher (around $8k last year IIRC), but applies only if less than the $600 is subject to self employment tax.
Also note that everything in this thread has only been speaking to federal income tax. If you live in one of the 48 or so states that also levy an income tax, and/or a city that levies its own, you must also follow their rules, which usually differ in some substantial way from the federal income tax rules.
posted by wierdo at 6:24 PM on July 10, 2015
This thread is closed to new comments.
The particulars (ie, what proportion of your expenses you can deduct from your taxable income) depend on your jurisidiction. Where are you?
Is this whole "writing off" thing that helpful to me?
Yes.
How much should I worry about including everything come tax time?
That depends on how much money you are earning from your freelance work, and how high your expenses are. Keep your receipts for your work related expenses. Hire an accountant.
posted by His thoughts were red thoughts at 9:32 PM on July 9, 2015 [1 favorite]