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Your tax & finance questions, answered: a Q&A with Yanely Espinal
We recently invited Yanely Espinal, a personal finance expert, to chat with our Substack fellows about their tax- and finance-related questions.
When we realized these are common questions that many independent writers face, we sat down with Yanely afterwards and asked for her advice in Q&A format.
Yanely Espinal, aka MissBeHelpful, pairs her love for teaching with her passion for personal finance, creating a popular YouTube channel for people to engage with topics like budgeting and investing. She’s also the Director of Educational Outreach at an education non-profit called Next Gen Personal Finance.
(Note: the following are generalized answers about tax and finance, and they shouldn’t be taken as personalized advice. If you have specific questions about your situation, you should consult a tax or finance professional.)
Revenue-wise, when’s the right time for independent writers to consider an LLC?
When you have a consistent stream of income and you can forecast the continuation of this income or more income in the future, you’ll know it’s a good time to consider an LLC for your business. Creating your LLC does come with fees, so you should not be taking this step unless you are generating income to cover those costs.
From the Substack team: Create an LLC
As an independent writer, what are the benefits of using an LLC to manage my income?
If anyone chooses to sue you in the future for anything related to your work under the LLC, they will only be able to come after assets under the LLC account. That means that your personal assets and bank accounts will be 100% protected in court. That helps you sleep so much better at night!
Many people think that there are tax benefits [to LLCs], but the reality is that a sole proprietorship and a single-member LLC will have the same exact tax treatment. The difference is that legal protection!
How do I know if I need a single-member or multi-member LLC?
If you are the only person working on your business and you do not have any business partners, you will need a single-member LLC. This means that you are the one and only owner of your company.
If you want to share ownership of the company with others, then you will need to go with a multi-member LLC. With a multi-member LLC, you are not only sharing ownership, but also sharing control of the company with at least one other person.
Do I need a separate business checking account to manage the money I make?
If you are generating income more than once for your business-related work, you will want to create a business checking account so that you can keep your personal finances completely separate from your business finances. This will come in especially handy when you file taxes and need to present specific dollar amounts of spending that you put towards your business.
If I hire and pay freelancers, do I need to complete a 1099?
This will depend on whether the amount you paid the freelancer was less than, equal to, or more than $600. Any freelance work that you spend less than $600 per year on will not need to be reported unless you want to report it. But if the freelance worker or contractor was paid $600 or more in the year, then you are required to complete a 1099 to show the total dollar amount that you paid them for the whole year.
You will want to be sure to track the invoices you collect from your freelancers and ask them for a W-9 form if you anticipate that you will pay then $600 or more throughout the year. The W-9 form will provide you with all the details you will need to submit a 1099 form correctly.
How do I know whether I need an accountant to prepare my taxes?
Generally speaking, if you own a business that generates income and requires business expenses, you should work with an accountant. The accountant will review your tax situation with a fine-toothed comb and help you structure your finances better. There are laws surrounding your bookkeeping and business tax situation that an accountant will know all about so that you don't need to spend time researching that, and you can devote more time to your business instead.
As an independent writer, what types of business expenses can I claim as tax-deductible?
First of all, know that all business expenses must be both "ordinary" and "necessary" for your business. If it isn't commonly used or accepted in your writing field, then you can be flagged with the IRS and that can lead to an audit. You want to be sure you get this right.
Common expenses that are both ordinary and necessary for freelance writers would include: home office space (not the entire rent amount), software, courses, conferences, networking, laptop, business events, mileage or travel expenses, research costs like books and subscriptions, hiring freelancers, agent fees, office supplies, internet service, business phone, marketing and promotion or social media ads, business cards, media kit, legal/professional services, tax expenses, photoshoots, website costs, promotional goods like bookmarks or stickers, memberships, business-related meals (up to 50% only), and health insurance as a personal deduction (if you pay out of pocket and do not get this via a spouse or employer).
If I’m making money independently, what are my options for saving for retirement?
This is my favorite topic! The easiest first step is to open up an investment account with a brokerage firm. You want to make sure that the account has retirement benefits like tax-free growth or tax-free withdrawals at retirement.
The most popular account is the IRA, which stands for Individual Retirement Account. You can have a Traditional IRA, which allows you to get a tax deduction now or a Roth IRA, which does not give you a tax deduction now. Instead you must pay taxes on the income when you file taxes, but when you withdraw the money at retirement later in life you will be glad that you already paid taxes and you won't have to worry about that later! The maximum contributions allowed for the 2020 year is $6,000 for the year. That averages to $500 per month and you can continue to add money into an IRA through April 15th of the following year, which is usually the tax-filing deadline, but was changed in 2020 because of COVID-19.
From the Substack team: How to file taxes on the money you’ve made on Substack
If you’re a writer with paid subscriptions on Substack, you’ll need to pay taxes on the money you make. The amount you’ll owe varies based on how much you’re making, as well as personal circumstances (filing status, deductions), but many independent earners put away 30-35% of their income for taxes.
You can find the most up-to-date information about how to file taxes on your Substack income on our help page.