Wednesday, July 27, 2016

The T Word (Taxes)

A popular post from May 2010

By Josi S. Kilpack

I am convinced that every blessing comes with a counterweight--some necessary evil you have to accept in order to have the good of that blessing. Kids = whining,  spouse = sharing the TV, losing weight = less pop tarts--you get the idea.

There are several counterweights to writing, and one of them is the taxes. When you publish a book you get paid directly, without taxes being withheld but you still have to pay them. You have to determine for yourself the best way to handle that, but I've recently been looking into this and thought I would share what I've learned.  I am not in any way or on any planet any kind of experet and I strongly suggest sitting down with an accountant and discussing this. I had read a lot of things, talked to a lot of people but it took a 10 minute conversation with a CPA who does this all time time for me to 'get it' and not feel overwhelmed. You know that they say, if you don't have time to do it right the first time, how will you have time to do it again.

1) Entity. One option is opening up a 'business' of some kind and running all your income and expenses through it. Many authors do this and have their royalties paid to the entity rather than themselves. For instance, I could open up an LLC (limited liability company) or an S-corp (some kind of corporation) in the name of Josi Kilpack INC. or Josi Kilpack Enterprises. This requires filing paperwork with the state, getting a business license and filing business taxes. Some people already own a business and can run expenses and taxes through that company and the company bank account--be sure that the perimeters of that business allow something like books to be sold. The perk I can see is that having an entity keeps it all very 'contained' and it has a professional look. However, it's not necessarily necessary.

2) Schedule E. A schedule E is attached to your personal tax return and is specifically for rental property income and royalties. Both are considered 'passive' income, meaning you don't get paid directly for labor, but you get paid 'passivly' due to ownership of some kind. Royalties are not taxed as untaxed income or self-employment income--which is nice. You also have a list of things you can expense (more on that later). You don't need an entity to use a Schedule E, basically royalties are treated like additional income. This, in my opinion, is a simpler option and it's what I do, it's prepared as part of my household tax filing.

3) Expenses. Regardless of which method you choose to account for your income, you also get to account for expenses that are 'ordinary and necessary' for your career as a writer. Ordinary and Necessary is determined by basically asking if the majority of other writers would have these same expenses. For instance, the majority of other writers buy ink and paper, have computer upgrades, incure postage expenses and buy books for research. Since most writers have those expenses, they are considered ordinary and necessary to your job as a writer. On the other hand, I might have my hair highlighted for an event, or buy thank you gifts for my beta-readers, these expenses are based on my preference, not on ordinary and necessary business practices, thus they are not expensible. You need to keep track of your expense receipts and you need to come up with some kind of report or spreadsheet that 'proves' these expenses. You only need the receipts if you get an audit, but you'll want them if that happens. I find the easiest way for me to keep this information organized is to get an expandable file with the months of the year. I stuff receipts into each month and then figure it out a the end of the year. Heather Moore gave me the idea of making notes on the receipts so I know what they are for. She also helped me realize that you can deduct half of a meal if you have it for business reasons such as traveling for an event or discussing book related issues with a colleague. I'm sure there are lots of rules I don't know; look into it, but keep track so you can minus those expenses from your royalties. I have only just started doing this and am kicking myself or the thousands of dollars I could have saved by simply keeping track. Grrrr.

4) Bank account. Regardless of how to handle the entity or no entity question, it's a very good idea to have a separate account for your writing income and expenses. It will make it much easier to track and prove if needed. This was my accountants very first question when I sat down with him. When I told him I did have a separate account he smiled and said, "You're off to the right start then."

5) Sales Tax. If you sell books you need to pay sales tax. It sounds overwhelming, doesn't it? But it's the law and it's not as hard as it seems. You don't have to have an entity to get a sales tax number, just go to your local tax office or google your state and 'sales tax number' for online instructions. It's a relatively simple process to get the number and then you'll pay your tax every quarter (usually, check the rules of your state). You'll need to keep track of the books you sell, of course, but once you start it's not that hard to do.

I'm sure I missed several things, so if you're aware of something please leave it in the comment section. The business side is not my favorite part of this career, but with a little education and organization it provides priceless peace of mind.


TCE said...

My royalties as a songwriter are considered self-employment income, which, frankly, I don't understand. So why aren't royalties from writing books considered self-employment income?

Melissa J. Cunningham said...

I think the T word that might trump taxes would be teenager! They are way more scary!

Rebecca Talley said...

My state tax rep said I only had to charge sales tax on those who purchase within my state, otherwise I don't charge sales tax on books. Since my state requires a deposit to use against the nticipated sales tax and has some ridiculous equation for charging people in my state, I'm not sure i even want to mess with selling books.

Great post.