Income Tax Basics for Writers

Sadly, over 40% of every dollar earned goes back to the government in taxes. Income tax, employment tax, and sales tax take big bites out of cash flow and writing time. But you can simplify the process and save money.

If you follow the steps outlined in my earlier posts about business set-up, then you are well on your way to managing your taxes. The payoff comes at tax time.

What follows is a general summary of the U.S. income tax issues that affect indie authors.

Income Tax

What is Income? Your writing income includes royalties (whether paid by check or electronic transfer), direct sales receipts, and speaking fees. If someone lends you money, the loan amount is not income unless the lender forgives the debt.

Most likely, your accounting will be done on a “cash basis” and not an “accrual basis.” (Explaining the difference would take an accounting course, so take my word for it.) This means you do not count income until you receive it. For instance, you may know on November 30, 2017, what royalties you earned for the month, but if you do not receive payment until January 2018, then the royalties will be considered income in 2018, not 2017.

What is Deductible? Ordinary and necessary expenses of operating your business, including costs for freelancers, office supplies, postage, research, professional magazines, bookmarks, advertising, software, web-based services, contests, copyright registration, and a portion of your car and home expenses, can be deducted from your total gross income. I discussed this in my last post.

Tax calculations are rarely simple, however. In some cases, you may not deduct expenses in the year in which you pay them. For example:

• Capital Assets. If you purchase a new computer, printer, scanner, or other asset that will be used for more than one tax year, you may have to allocate the cost over several tax years. The technical term for this is depreciation.
• Costs of Goods Sold. The expense of buying inventory (books you have on hand) is not deductible until you sell, use, or dispose of that inventory. Suppose in one calendar year you buy 500 copies of your books from your POD provider, and you resell 200, give away 100, and toss out 10 because you spilled coffee on them. In that year you may deduct the cost of 310 books. Notice I say “cost,” which means printing plus shipping costs, not the retail price. The cost of the remaining 190 books is not deductible until you sell, give away, or dispose of the books. For this reason (among others) it’s important to keep track of how many copies you order and how and when they go out the door.

Reporting Payments to Freelancers

If in any calendar year you pay an independent contractor who is a U.S. taxpayer (other than a corporation) $600 or more for services or $10 or more in royalties in connection with your trade or business, then tax law requires you report those payments on a 1099-MISC and the equivalent state form. Most likely, you are going to pay an editor, cover designer, website designer, or publicist $600 or more. Remember, this does not apply to payments to a corporation such as BookBaby, CreateSpace, or IngramSpark.

Ask the freelancer for a W-9. It is a simple form and merely verifies the freelancer’s Social Security Number or EIN. You can download the form from the IRS website.

Then, no later than January 31 of the next calendar year, complete a 1099-MISC for each freelancer, file it with the IRS, and deliver a copy to the freelancer. You can’t download a 1099-MISC because it has multiple, carbon-copy pages. You can get them from a CPA, office supply store or post office. Or order them from the IRS website.

If you report the freelancer’s payments on a 1099-MISC, then you are in a better position to deduct the expense from your income. In fact, many CPAs recommend that you send a 1099-MISC to all independent contractors, even if you pay them less than $600 in a calendar year. This provides more support for your business-expense deductions.

Self-Employment Taxes

If your taxable net income (income less deductible expenses) from writing and publishing is $400 or more in any calendar year, you are required to pay self-employment taxes equal to approximately 15% of your writing/publishing income. You calculate the amount of self-employment taxes at the same time you prepare your annual tax returns.

Paying self-employment taxes may be a new task to most writers. If you are used to getting a paycheck, then your employer has been paying 50% of your self-employment taxes. However, when you are self-employed, you pay the employer and the employee portions of Social Security tax and Medicare tax. You have to pay self-employment taxes even if your total income is so low that you do not have to pay regular income tax. Ouch!

Making Big Money?

If your taxable income is more than $100,000, then the rules get more complicated. It is time to start working with an accountant. This is the problem of success, one I hope all my readers experience. These complications include the following.

Estimated Taxes

If you are making so much in writing/publishing income that taxes on that income are $1,000 or more per year, then you are required to pay estimated taxes, the equivalent of tax withholding.

When you work for someone else, your employer withholds a portion of your income to cover tax obligations. When you are self-employed, you take care of withholding by making estimated tax payments four times a year. If you don’t pay enough in estimated taxes, you could be hit with a penalty equal to 10% of the underpayment. And yes, you probably have to pay estimated taxes to your state as well.

Cheat Sheet

Here’s a chart summarizing these tax thresholds:

If you pay an individual	More than $600 in any year	You must get a W-9 from and deliver a 1099-MISC to that individual.
If your taxable income from your self-employed business is	$400 or more in any year	You must pay self- employment tax on that income.
If your taxes on your self-employed income are	$1000 or more in any year	You must pay estimated taxes on that income.

About the Author

Helen Sedwick is an author and California attorney with thirty years of experience representing businesses and entrepreneurs. Publisher’s Weekly lists her Self-Publisher’s Legal Handbook as one of the top five resource books for independent authors. Her blog coaches writers on everything from saving on taxes to avoiding scams. For more information about Helen, check out her website at helensedwick.com.

On June 8, 2017, Helen released the second edition of Self-Publisher’s Legal Handbook. This updated edition covers new topics including using pen names and disclaimers and includes an expanded chapter on using real people in your work. Check out the new edition on Amazon.

Disclaimer: Helen Sedwick is an attorney licensed to practice in California only. This information is general in nature and should not be used as a substitute for the advice of an attorney authorized to practice in your jurisdiction.

Photo courtesy of Irina Siryanova / 123RF.com.