Freelancers: The IRS just made your life more difficult

For decades I was a freelance software engineer and writer. Nowadays, I’m mainly a writer.

As a freelancer, my income tax filing has been reasonably uncomplicated in the past. Enough so that I never used online software, preferring to use the fill-in PDF forms and then sending in the paperwork.  Then came the great tax cut of 2017, and everything has gone to hell.

First it was the ‘simplification’ of the 1040, leaving us with this bizarre pseudo-postcard thing that was really the original 1040 but with big chunks ripped out. Instead of a double-sided 1040, I now had a double-sided 1040 but with a lot of white space and a plethora of schedules, each referencing each other or the main 1040 form. I get seasick from having to whip my head back and forth from schedule to 1040, back to schedule, to another schedule,  and back to 1040 again.

When I discovered the new ‘simplified’ IRS forms mean that my previous four page tax filing would now be ten pages, I converted to using online software. I don’t like sending books through the mail.

Now, it’s another year and another filing. Because of complaints about the ‘simplification’, the IRS has simplified the forms again, amounting to collapsing a couple of those schedules back into the main 1040. Or 1040-SR if you’re a senior citizen.

On July 11, the IRS released a new draft Form 1040 reordering information and adding back to the Form 1040 data that had been on the supporting schedules. One commentator notes, with nostalgia and some exaggeration, that “everything old is new again.” Another says it’s still “definitely not a postcard. More like a greeting card. Or a sympathy one, maybe.”

The latest draft is more than a tune-up but less than an overhaul. Among the key changes from last year: It returns the standard deduction and income reporting and reconciliation to the first page of the income tax return (now including capital gains), it ends the page with taxable income, separates tax credits, moves signature lines to page 2, and pares those six supplementary schedules to three.

The forms aren’t simpler, and you still have to whip your head about, but three fewer pages is three fewer pages.  A modest improvement. But seniors? I wouldn’t get your hopes up that the 1040-SR will make up for decades of complicated tax filing.

What wasn’t noted in the mid-course correction, though, is that the IRS decided to upend the basket on those of us who are freelance workers. The IRS has done away with the Schedule C-EZ. Not only done away with it, but in a sneaky, stealthy way that flew under the radar and most people are only now discovering.

Good-bye Schedule C-EZ, our old friend

As a writer I have to provide a way of telling the IRS how much I’ve made (income), and how much I’ve had to spend to make that money (expenses). However, Stephen King I’m not. My income from writing projects and royalties is modest, as are my expenses.

In years past, I’ve been able to use Schedule C-EZ, which allows me to report my expenses as a lump sum without having to break out into any kind of detail. The purpose of the form was to simplify reporting for those who meet certain criteria, including having no employees, no home deduction, and less than $5000.00 in expenses.

Hello Schedule C, Spawn of the Devil

Now, I have to use the full Schedule C, and if you’ve seen it and its instructions, you’ll know that it is the IRS at its absolute worse. Line after line of so-called business deductions, most of them based on how business operated in the 1950s.  When you read the instructions you come away thinking that these were written by someone two months away from retirement, and they just didn’t give a shit.

So, you make guesses. A lot of guesses.

For instance, is web hosting advertising? Or is it a business expense? Is Dropbox a business expense? Or a license? And how the heck do you depreciate a digital book you bought for research? Bits don’t wear and tear.

You can search online for advice, but if you find four articles discussing how to list a Dropbox subscription, all four will give completely different advice.

I did discover an article noting that it really doesn’t matter what category you use. If you’re audited and you reported the item in the wrong line, the auditor will just move it at no penalty to you. However, when I started to relax from this advice, the author than noted that is is important to know where to place the deduction, because the IRS has automated triggers that will look at how much you made, your pattern of deductions, and automatically shunt you to the ‘audit’ bucket if you hit certain parameters.

So you think to yourself that maybe the best option is just to list most deductions as ‘other expenses’ and then spell them out…until you read that  you should limit how often you tell the IRS what the deduction actually is, as doing so could generate more questions and hence the possibility of an audit.

It is all so very stupid.

Small potatoes. The only reason I can think of for the IRS to eliminate the Schedule C-EZ is that it wants to increase the number of small potatoes people like myself who are audited. I can see no other reason for making this change.  As Paul Kiel from ProPublica noted in October of 2019, It’s Just Easier and Cheaper to Audit the Poor.

 

 

 

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