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Business matters
Getting your business organized

The first question a journalist should ask when thinking about the business of freelancing is, “Do I plan to make money doing this?” That’s because the IRS asks this question first when considering how to tax most income other than salary, interest and dividends.

If the answer is “no” (you don't intend to make money freelancing), the IRS will consider your freelance activities to be a hobby, and a lot of the business issues discussed in this Guide may not matter to you. You won’t have to keep detailed records of your freelance expenses, and your tax filings will be simpler.

Even so, you will have to report the income you receive from your freelance activities — if you don’t report it, the IRS will come after you for taxes you didn’t pay on that income. Also, you might not be able to deduct some business-related expenses. In all likelihood, you will end up paying more taxes to the federal, state and local governments than if you acknowledge that you want to make money freelancing.

Whether you are just starting out or have been freelancing for a while, no doubt some level of government has some rules you should know about. Here are some issues to think about.

Licenses and permits

The kind of licenses and permits you need for freelancing depends on where your business is located. Some states require every business to register and obtain a license, while others leave the question of business licensing and permits to county and/or local governments.

In general, business licenses must be renewed every year or two. If your business has a name (other than your name), you might need to register the business name as well, and you also may have to renew that registration periodically.

If you work at home, zoning laws may require that you have a permit to work there. This is because local governments have an interest in restricting business activities in residential zones that bring traffic to the neighborhood. In recent years, some local jurisdictions have issued one-time permits for home-based businesses at less than $50. Some jurisdictions offer an exception for home-based businesspeople who have no employees and do not meet clients in their home offices.

Form of business

From a tax perspective, businesses can be structured in three ways: as a “sole proprietorship,” partnership or corporation. Which form your business should take depends on some careful considerations. Although some are tax-related, other factors may affect your decision. For example, do you need to protect yourself from potential liability claims related to your freelancing? If so, forming a corporation or limited liability company will help protect your personal and family assets.

The sole-proprietor structure is designed for, and restricted to, business owners who work alone and reap all the profits from their business activities. This structure is the most basic — it doesn’t require any paperwork or set-up expense — and gives you the most flexibility in contracting and decision-making. At tax time, you fill out a Schedule C to figure out how much profit your business made for tax purposes, and you report that profit on your individual income tax return.

One drawback is that because you are “self-employed,” you must pay the employer’s as well as the employee’s portion of Social Security and Medicare taxes. The IRS also expects you to estimate your profit four times a year and make quarterly deposits to cover any taxes that will be due with your tax return.

If you work with someone else or several other people and you share profits with them, you may want to consider forming a partnership or corporation. Even just considering these business structures will force you and your co-owners to discuss essential agreements about how you will run the business and how you will split the profits. Writing down these details will help you clarify them and become the basis for your incorporation or partnership agreement.

The decision to form a partnership or corporation should not be taken lightly. These structures are more complicated to administer and require that you file more complex tax forms at the state and federal levels. However, the benefits of shielding the partners and shareholders from potential liability — possibly a big consideration for political and investigative reporters, for example — may outweigh the inconvenience. You may want to consult a professional (lawyer or certified public accountant) before deciding.

Changes to the tax laws in 2017 have made it disadvantageous for freelancers to operate as a corporation that’s taxed under Subchapter C of the tax code. Even before these changes, many freelancers working alone or in small groups have chosen to form corporations and elect to be taxed as “S corporations” (named for the former Subchapter S of the U.S. tax code). Such a business is formed under the laws of the state in which it is incorporated and is subject to licensing and permit rules in the same way as any other corporation.

The S corporation files Form 1120S with the IRS, an arrangement that separates the business’s finances completely from the individual’s tax return, other than any amounts paid to shareholders as employee compensation or dividends. Simply incorporating offers a level of protection from creditors if you end up owing money due to your business activities.

Many freelancers who operate as S corporations take all or most of their business earnings as compensation reported on Schedule K-1 of Form 1120S, and then on Schedule E of the individual tax return. Some tax advisers advocate taking some of your profit as compensation and either leaving the rest in the business at the end of the year so it will remain untaxed, or taking a portion as a dividend that’s subject to a lower tax rate.

In recent years, the IRS has begun looking more closely at businesses that make payouts to owners as employees as well as shareholders. They want to ensure that your business pays your salary at a competitive market rate, rather than dodging employment taxes and higher income taxes on the dividend portion. If you plan to go this route, it would be prudent to consult a business adviser (lawyer or CPA) about how much of your business income should be subject to self-employment taxes.

Home alone — or not

Another consideration is whether you want to work from home on your own or have an outside office of some sort. Depending on your family situation, it could be anywhere from beneficial to essential to work outside the home. New co-working spaces seem to crop up almost daily and are worth considering if you prefer to get out of the house to do your freelance journalism work; these and other outside offices can provide services you might not have or want to pay for in a home office — meeting space, fax lines, secretarial help, etc. — and protect your home and privacy.

Using an outside office adds to your costs, but is a deductible business expense that can be easier to quantify than a home office. It can also be a way to overcome the isolation of freelancing — and might even lead to new clients among other users of the space. Contributors: Dana Neuts, Hazel Becker, Bruce Shutan, Ruth E. Thaler-Carter

Resources:

• City Applications website provides information about city and state business license requirements
• Everything Freelancers Need to Know About Their Big New Tax Break from Money

Last updated: December 2018

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