The 2021 tax filing season is officially underway with the IRS accepting and processing 2020 tax year returns until April 15, 2021.
The pandemic disrupted so much, journalists may be wondering what changed when it comes to taxes.
We reached out to tax lawyer Kelly Phillips Erb, team lead, insights & commentary at Bloomberg Industry Group, to learn what both salaried and freelance journalists need to know about filing, deductions and reimbursements.
Disclaimer: The information provided in this Q&A is not intended as legal advice and is for general informational purposes only. Please reach out to a finance professional with specific questions.
As businesses adapted to working remotely during the pandemic, what are the top considerations for newsroom journalists when filing their 2020 taxes?
Phillips Erb: One popular misconception is that the pandemic has somehow changed the rules for home offices. That’s not true. As a result of the Tax Cuts and Jobs Act of 2017, employees may not claim the home office deduction for the tax years 2018 through 2025: There is no pandemic exception.
But some pandemic-related tax breaks are worth a look for taxpayers. Notably, the CARES Act waives the 10% early withdrawal penalty on distributions from retirement accounts — up to $100,000 — if those withdrawals are pandemic-related. The CARES Act also waives the RMD rules for certain defined contribution plans and IRAs during 2020 (but not for pensions). The takeaway? Keep an eye out on those Forms 1099-R and make annotations if necessary.
Taxpayers who made cash donations of up to $300 in 2020 may be eligible for a charitable deduction when they file in 2021. As part of the CARES Act, the deduction is available to taxpayers who choose to take the standard deduction rather than itemizing their deductions.
And don’t forget about those stimulus checks: If you didn’t receive the full amount — or if you’re entitled to more because of a change in your income — you can claim it as a credit on your 2020 tax return (look for “Recovery Rebate Credit”).
Because W2 employees cannot deduct home office equipment in their filings, how should they approach their employers about reimbursements if they haven’t already?
Phillips Erb: This is such a great question.
Many employers already offer reimbursements for cell phones, internet and other costs related to working from home. If you haven’t heard about reimbursements, it could be that you’ve just never needed to know before: Definitely ask about existing programs.
Other money-saving measures — like discounts through your employer — may also be available. If you don’t see what you’re looking for, just ask.
And if you’re missing out on some of your favorite things like your computer monitor or favorite chair — I know Bloomberg employees are partial to their keyboards — ask your employer if you can take them home rather than buy new. That can save you (and your employer) money.
If your employer doesn’t offer cost-effective options for working from home, consider asking them to implement a program. I know it feels bold, but an employer may not have thought about it being an issue and may be open to making changes: Most would find that to be a lot more efficient and economical than finding a replacement for you.
What types of deductions should freelance journalists — or other 1099 workers — include when filing their taxes?
Phillips Erb: Under tax law, for an expense related to your business to be deductible, it needs to be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business.
When it comes to freelancers, deductible expenses include those associated with doing your job and the costs related to promoting your business or brand. That means that design and logo fees for your website, as well as hosting and domains, are likely deductible, as well as add-ons like SEO services and web advertising. Typically, the price of getting your name out in front of your potential hires is deductible: Just make sure that it’s both ordinary and necessary. If you rely on professionals for services — from headshots to accounting — those may also be deductible. Ditto for professional affiliations, subscriptions and conference fees. While some of these deductions disappeared — along with the home office deduction — for employees, they remain deductible for independent contractors.
Keep in mind that not all expenses are treated the same. Some expenses, like meals and entertainment, may be subject to limits, and others, like start-up costs, may need to be amortized rather than deducted. Keep excellent records so that you can sort it out at tax time.
What are the most common deductions that you see independent contractors leave out of their filings?
Phillips Erb: The home office deduction is a big one: While it’s gone for employees, the deduction is still available for independent contractors. Some folks avoid claiming the home office deduction because they worry it’s an audit flag: While it’s true that independent contractors can be an audit target, that should encourage you to keep excellent records and to be consistent in your reporting.
I also see many freelancers leave smaller expenses on the table — like postage and transportation — because those costs may seem trivial as you go. Those expenses can add up, especially when combined with other deductible expenses like office supplies and the charges of doing research.
Here’s my advice: Keep records of everything related to your business. Scan in receipts (some apps let you do this on your phone) and either annotate them or track them in a spreadsheet. At tax time, your tax professional can help you whittle down what makes sense to deduct and what might be more appropriately characterized as a personal or other expense.
What advice do you have for freelancers who are managing multiple income streams where taxes might not be taken out upfront? What about if you’re a W2 worker who also freelances?
Phillips Erb: It can be challenging to manage your taxes when income streams are from multiple sources, or they are inconsistent. Again, keep excellent records. It makes reporting more manageable and comes in handy if you’re audited (you won’t have to scramble to figure out what you’ve done). And you don’t have to use a fancy software program: Many freelancers I know simply use spreadsheets.
I also recommend hiring a tax professional. I know this feels extravagant, but you’d be surprised at how affordable it can be: Not only can you save on potential underpayment penalties and interest, but the time you save not working on your taxes can be used to pitch stories, promote your services and write more copy. Also, a tax professional who checks in with you a few times a year can help you make adjustments mid-year when you have a great month — or a not-so-great month.
If you are getting paid as a freelancer, be sure to make estimated payments during the year. You will need to make estimated payments if you expect to owe at least $1,000 in tax for the 2020 tax year after subtracting your withholding and credits, or you expect your withholding and credits to be less than the smaller of 90% of the tax to be shown on your 2020 tax return or 100% of the tax shown on your 2019 tax return. To figure your estimated tax, you can use Form 1040-ES, Estimated Tax for Individuals.
If you’re a W2 worker who also freelances, it can be a little easier. You can elect to have your employer withhold more tax from your regular paycheck to offset the tax liabilities from your independent contractor income stream. You can figure out how much additional to withhold by using the IRS tax withholding estimator.