It’s almost Tax Day. If you are an author, a self-publisher, a freelance writer or professional blogger and you derive income from your writing, that means you must get ready to file your taxes. If that seems daunting, this guest post from Georganna Hancock, author of IRS & Writers, will offer you a bit of help—from a fellow writer no less. She’s got some advice that will help you make the April 15 deadline.
IRS Coping Tips for Writers
By Georganna Hancock
First, a disclaimer. I am neither an enrolled IRS agent nor an attorney. This is personal narrative and not to be construed as professional or legal tax advice. My relationship with U.S. income taxes began in 1961, and I have prepared a federal tax return myself every year since then. The IRS has never even questioned any deductions, let alone audited my returns. The information I offer is based on my experiences and the help available to anyone with enough patience to wade through IRS forms, explanations and publications. Even if you use a tax service, you’ll come out better off if you understand what you need to do as a writer.
What Form of Business are You?
It is not necessary to get a tax number, form a corporation or come up with a business name in order to operate a writing business. This includes writing books you hope someone will publish and ones you self-publish. You don’t need an attorney. If you’re doing it alone, as most of us are, your business form is a sole proprietorship. Use Schedule C, Profit or Loss From Business, with your Form 1040 tax return. Sorry, you can’t use the short form if you run a small business unless you have a high amount of deductibles.
If one or more other persons are involved, say you have a co-author or a co-writer arrangement, your business is a partnership. The IRS says, “Partnerships file Form 1065, U.S. Partnership Return of Income, to report income and expenses. The partnership passes the information to the individual partners on Schedule K-1, Form 1065. The partners report the information and pay any taxes due on Form 1040. Because partners are not employees of the partnership, no withholding is taken out of their distributions ….”
See IRS Publication 334, Tax Guide for Small Business, available from the government’s tax website at http://www.irs.gov/pub/irs-pdf/p334.pdf for details about filing the Schedule C and Schedule C-EZ. You can also download copies of tax forms, schedules and instructions.
Can You Spell Recordkeeping?
It is vitally important that you keep accurate records for everything concerning your business. Set up a filing system for every piece of paper, and electronic files associated with your efforts. In fact, I’d go so far as to say that, in the beginning, you should keep receipts from all purchases, at least until you decide what items you will count as deductible writing expenses for the tax year. Documenting your activities in a business journal can help when you prepare your tax forms and especially if the IRS questions any deductions.
Keeping good, verifiable records is vital because of the way the IRS defines a business. If you can’t prove that you are trying to make money, a string of losses could put your activities into the “hobby” category, with all earnings taxable. The IRS says, “An activity is usually considered a business if it makes a profit during at least three of the last five tax years, including the current year.” This is a very important distinction. You can show a loss for the first three years of your career. When you hit the fourth year no gain risks an audit.
What can you do to preserve this 3:2 ratio of losses to gains? You can’t manufacture income, but nothing prevents you from not claiming deductions and generating a fiscal loss in a critical year. This is not even a tax loophole. No one can force you to consider an expense as a business deduction. That is entirely in your control. See the value of good recordkeeping? It is also important for the next section.
Figuring out whether or not you will need to pay the four-times-a-year annoyance is somewhat complicated, but generally you won’t qualify if you expect to owe less than $1,000 in taxes AND you expect your withholding and credits to be more than 90% of what you will owe or 100% of the previous year’s taxes. Clear as mud? Consult Publication 505, Tax Withholding and Estimated Tax at: http://www.irs.gov/publications/p505/index.html.
About the Author
She maintains A Writer’s Edge and a review blog GLHancock Reviews. She enjoys helping other authors by editing, consulting on publishing matters and evaluating manuscripts. You can find her on Twitter as @GLHancock.