Here is the second part in a GNN series designed to help you with your US taxes — especially beneficial to folks like me who haven’t done them yet! Today, Julian Block, an expert on tax issues related to freelance artists, writers and photographers, will answer some common questions about how to report income on 1099’s (when some include reductions for expenses, and others do not) and if we can take deductions for articles donated to non-profit groups…
Question 1: I write for several magazines. One magazine’s 1099 form reports not only the fees they paid me during the year in question, but also includes sums that compensated me for sizable out-of-pocket expenses for hotels, meals, air fares, car rentals, telephones and the like. Of course this doesn’t agree with my records; I don’t count those payouts as expenses, since I know that I’m going to get them back — and I don’t count expense checks as income, either; it’s just a wash. Suppose I receive a 1099 form that shows $9,687.53, which actually includes payments of $6,500 for articles and $3,187.53 worth of reimbursement for travel and so forth. It doesn’t make sense that I’d have to include the latter amount in totaling my income for line 1 of Schedule C, since it wasn’t income.
Answer: Contrary to what many freelancers and other self-employed people mistakenly believe, it’s not “just a wash.” This is much like the question below about payments from agents; again, you should make sure your return reflects the consistency that will keep the IRS computers in a calm, unagitated state. You should include in total gross receipts the full amount shown by the magazine, $9,587.53. Then, as with the agent’s commission, include the $3,187.53, though reimbursed, with your other deductible expenses, since you should not be paying taxes on it. That way, you avoid an overstatement of net profit on Schedule C and overpayments of self-employment taxes and income taxes.
Question 2: I am a self-employed writer and have authored fiction and nonfiction books. Presently, I am represented by two agents —- one for nonfiction and another for fiction. Under my agenting contracts, each gets a percentage of my earnings. When filing time rolls around, both agents send me 1099 forms; copies also go to the IRS. The 1099 forms show what they have sent me during the year in terms of advances, royalties received from publishers, and other payments related to my books. But they do different kinds of bookkeeping! One agent’s 1099 lists the gross (full) amount she received from the publisher as my income; that is, she does not allow for the commission subtracted by her up front before sending a check for the balance to me. The other one handles things differently; his 1099 lists only the net (after commission) payment he actually sent to me. How should I report these payments on my return? I know that I have to include payments received from agents in the total figure shown on the line for gross receipts on Schedule C of Form 1040, but I’m not sure which figures to report!
Answer: Let consistency be your guide. The amount of income you declare should be consistent with the figures shown on your 1099 forms. Otherwise, the IRS’s ever-vigilant computers might go bananas, with unpleasant consequences to you. When it comes to monies you received via an agent, what you should declare depends on whether the agent submits a 1099 form for you that shows the gross amount (total paid by the publisher) or the net amount (amount actually paid to you after the agent’s commission is deducted).
Does the 1099 filed by the agent list the gross amount? Then that’s the figure you should include in totaling your income to come up with your gross amount on Schedule C — and remember to include the agent’s commission, which is deductible on the line for commissions and fees.
And if you fail to do that? First, you overstate your net profit. Second, you overpay your self-employment taxes and income taxes — federal, and, perhaps, state and city. You should not count on the IRS to catch your mistake. These kinds of miscues are spotted, if at all, in the course of audits. Does the 1099 from your agent instead list the net amount, the sum on the check actually sent to you after the agent’s commission taken off the top? Then you should use that amount in arriving at your gross income figure – and you should not deduct the commission on the line for commissions and fees, since it’s already been subtracted from the income figure.
To make that perfectly clear, here’s an example. Say your agent receives a check from your publisher in the amount of $50,000, deducts the 15-percent commission of $7,500, and sends you a check for $42,500. After that year’s end, you receive a 1099 form that shows $50,000. You should include the full $50,000 in your reported gross income and deduct the $7,500 commission on the line for commissions and fees. If, on the other hand, the 1099 shows only the amount actually sent to you, $42,500, you should include only $42,500 in gross income and deduct nothing. Either way, you pay tax only on the $42,500; either way, the serenity of the IRS’s computers will be preserved.
Question 3: 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, can I take 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?
Answer: Sorry, a letter won’t help. You are not allowed any deduction.
Julian Block, an attorney in Larchmont, N.Y., has been cited as “a leading tax professional" (New York Times) and "an accomplished writer on taxes" (Wall Street Journal). This article is excerpted from the book, Tax Tips For Small Businesses: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum. For more of his articles or to order books, visit www.julianblocktaxexpert.com. Copyright 2007 Julian Block. All rights reserved.
Thank you so much for your articles on Tax Tips.