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Advice on Freelancers and Self-Employment Taxes

Jul 27th 2018
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Our long-time tax contributor Julian Block regularly receives commentary about his posts, as well as a multitude of emails from other practitioners. Here he has compiled a list of Q&As around many of the latest tax-related issues from other practitioners and business owners.

We hope you find it informative and as ever, feel free to add your own comments and questions to this as well.

I’ve received emails from accountants on how to craft responses to questions from clients. I’ve edited and condensed the questions for clarity and brevity. – Julian Block

Q.  I’m a freelance writer and photographer. According to some of my fellow freelancers, I should no longer report my book and photo royalties as income on Schedule C. Instead, I should report them as royalties on Schedule E. By doing so, I can skip paying the 15.3 self-employment tax, which consists of 2.9 percent Medicare and 12.4 percent Social Security. How will the IRS react?

A. The agency looks unkindly on writers, photographers, artists and other self-employed persons who try to escape self-employment taxes. Perhaps we have a case of semantics here. Yes, the word “royalties” is used on Schedule E, and yes, the IRS defines royalties as “payments for intangible properties”—for example, books and artistic works, which would include photos.

But the IRS is adamant that you report royalties for your creative efforts on Schedule C, making that income subject to self-employment tax. Schedule E is for reporting royalties received by other people—for example, those who purchase or inherit copyrights on books, photos and other material that they didn’t create. Limit your use of Schedule E for reporting royalties to listing those received from coal, oil or gas sites.

You’re playing the “audit lottery” if you report book and photo sales on Schedule E. True, your ploy might never be discovered, but should it be, expect to be hit with a hefty bill for back taxes, interest, and penalties.

Q. Who’s right? I have office furniture, machines and other equipment that I no longer use in my business as a consultant. Over the years, I claimed depreciation deductions on Schedule C that have reduced my tax basis in these items to zero.

My tax advisor says that the law allows me to donate these items to charitable organizations and take contribution deductions for their current market value. However, my mother-in-law insists that I’m not entitled to any deductions because I fully depreciated them.

A. She’s right on the money. Unfortunately, you’re not allowed any charitable write-offs. As their basis is zero, there’s nothing of value for you to deduct. 

Q. A university asked to reprint one of my magazine articles in its alumni publication. I gave permission without asking for any payment. Since this is an educational institution, am I entitled to a charitable contribution deduction equal to the fee I would have asked of a commercial publisher? Do I need a letter from the school? If so, what should it say? 

A. Sorry, a letter won’t help. You’re not allowed any deduction.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting). 

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