Category: taxes

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This post is part of my Business of Writing series. As part of this series, I discuss law and taxes, so it’s important for you to remember that I’m neither a lawyer nor a tax professional. This is not advice — it’s my understanding and, in many cases, what I do and why. You should take this as the base to develop your own knowledge and understanding, or consult the appropriate professionals. Also, I live in the US, so am really only speaking to US law and the US tax code.

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This will be a short post, but an important one. Picking the right tax professional can save you or cost you — a lot of money.

First thing to remember is that “tax professional” does not, necessarily, mean Accountant or CPA. Not all accountants understand taxes or do them regularly. You’re looking for a tax preparer — someone who knows the tax code inside and out, at least the parts that apply to your author small business.

You may find, depending on the size of your author business, that you want or need an accountant for other business matters. Who you choose for that may or may not be the same as your tax preparer. Finding both in one, assuming you need an accountant, is good, obviously, but here we’re going to talk only about the tax aspects.

The second thing to remember is that your taxes are different now than an individual’s. You have a business. Finding a tax professional for your business does not mean dropping a paper bag of receipts in the lap of whatever dude happens to be behind the desk at Walmart this tax season.

This is not a one-off, prepare the return and done thing. As a business owner, you should be creating an ongoing, multiyear relationship with your tax professional. You want someone who will do your taxes every year and be able to make recommendations based on their knowledge of your business’ past as well as projections about its future. This is because some tax decisions, which might save you a significant amount of money, have to be made at the beginning of the tax year.

So, you are looking for:

• A tax professional. Someone who understands and works with the tax code as their primary job.
• Moreover, a small business tax professional, not someone who specializes in personal taxes — neither are you interested in a specialist in big corporations.
• Preferably, and hardest, someone who does taxes for other authors, so they know the writing business.
• Someone you can work with for years, and throughout the year — so you can make an appointment and talk to them in August if there’s some significant change in your business.

If you’re a part of a local writer’s group, ask around of the more successful writer’s. They may have someone who meets the criteria.

You can also locate a tax professional through either National Association of Enrolled Agents or National Association of Tax Professionals.

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This post is part of my Business of Writing series. 

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In the last post, I examined why taxes seem to surprise so many authors whose books become moderately successful for the first time. In this one, we’re going to talk about the Estimated Tax requirement.

This is mostly for new authors or those who are just now hitting some level of success – say a few hundred or a thousand dollars a month (profit) or a first traditional contract of several thousand. After the first year of that, and getting bit by the penalty for not paying estimated taxes, most get it figured out.

Here’s what the IRS has to say about it: https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

The IRS recommends you use their multipage worksheet (https://www.irs.gov/pub/irs-pdf/f1040es.pdf), which involves estimating your income and deductions, both personal and business – and, since writing is a pretty variable business, you should do that worksheet for each quarterly estimated tax payment …

Which is sort of like having to do you taxes five times a year, in my opinion.

This is why I use a tool, which I’ll pitch up front, to do most of that for me.

I use Quickbooks Self-Employed (http://fbuy.me/d2DLB) and recommend it to anyone making enough for this to be a complicated issue. At $10/month, it’s worth it.

Quickbooks SE (and the version is important, they have, like, seven versions available, Self-Employed being a less-expensive and easier version to use), aside from all its other features, calculates your quarterly tax payments for you based on your real income and expenses. It also takes into account your day-job income, so knows what bracket your author earnings will fall into – and it’s real time.

That means it will calculate and recalculate right up until the quarterly deadline based on your real numbers.

There’s a lot else it does, and I’m going to recommend it several times during this series.

A quick method of dealing with estimated taxes that doesn’t cost a monthly fee for a tool is to just pick a percentage — 30% or 40%, depending on what bracket you fall in – and set that aside from all income, then just send it to the IRS quarterly. In this case, you’ll likely overpay, as you aren’t really tracking your profits and taking expenses into account, but you’ll get the extra back when you file your return.

I’m not a fan of giving the government interest-free loans, but you should make your own business decision about whether it’s worth the avoidance of time and energy spent on a more accurate quarterly calculation.

If you’re the sort who has difficulty with money laying about – such as wanting to “borrow” it for other things – then quarterly payments might not be for you. Even though the form from the IRS has quarterly vouchers, you can make estimated tax payments anytime if you do it online (https://www.irs.gov/payments). You specify the current tax year and that it’s an estimated payment, then send the money on your schedule. This is a good method if you want that money out of your accounts on a monthly basis, right after the royalties come in, so you’re not tempted.

“I can buy that 70-inch 4K TV now and just make up the taxes off next month’s royalties …”

So, yeah, if that idea would ever appeal to you, do the monthly payment thing. It works with Quickbooks SE too, you just have to do the math on what Quickbooks is calculating for the quarter, and it’s what I do.

If Quickbooks is saying I’ll have to send $3000 for the quarter and it’s the first month of the quarter, then I send $1000 as soon as my royalties for that month come in ($3000 / 3 months in the quarter). If the next month isn’t quite as good, then Quickbooks will recalculate it and track what I’ve paid. So the second month of the quarter might end with QB saying it’s now going to be $2000 for the quarter, and I then send in $500 ($2000 minus the $1000 I sent the previous month, so $1000 / 2 months left in the quarter).

It’s variable, but it works for me.

The important thing, whichever system or tool you use, is to make sure you’ve paid enough in estimated taxes to avoid the penalty.

Basically, you’re not allowed to owe them more than $1000 come tax day … they’re perfectly happy to owe you several thousand as your “refund”, though. Go figure.

Your first year of writing success will probably be safe from the penalty if you have a day job consistent with the previous year – this is because you’ll have paid roughly the same amount as last year in day-job withholding, which meets the “100% of the tax shown on the return for the prior year” requirement to avoid the penalty.

Your second year of success, though, won’t have this advantage because you’ll have that tax on book income that won’t have been covered by withholding – unless you typically receive a really large refund.

The bottom line:

At least four times a year you need to estimate your income and expenses then send a check to the IRS.

Use the IRS’s form (https://www.irs.gov/pub/irs-pdf/f1040es.pdf) or get a tool like Quickbooks (http://fbuy.me/d2DLB) to make the calculations.

Make the payments monthly (https://www.irs.gov/payments) instead of quarterly if you have trouble with setting money aside for several months.

Next up will be a post on deductions (coming soon), and why you should be tracking your expenses even if you haven’t published your book yet.

 

 

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This post is part of my Business of Writing series. As part of this series, I discuss law and taxes, so it’s important for you to remember that I’m neither a lawyer nor a tax professional. This is not advice — it’s my understanding and, in many cases, what I do and why. You should take this as the base to develop your own knowledge and understanding, or consult the appropriate professionals. Also, I live in the US, so am really only speaking to US law and the US tax code.

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It’s Tax Season in the US, and throughout the land there echoes amongst the hills and valleys of writers’ forums the wailing cries of horror, disbelief, and pain as writers who met some measure of success last year find out what it will cost them.

Short answer: A lot.

The long answer is that you should be working to understand your tax burden and minimize it even before your book is finished. The time to start working on this year’s taxes is today, not next January or, worse, April.

I’m going to delve into a number of tax-topics over the coming weeks, but, first, it’s important that I point out I’m not a tax professional. I must do that because there are laws about offering tax advice when you’re not that thing. So none of this is advice — it’s my understanding, and, in many cases, what I do and why. You should use it as a base for your own understanding, but then do your own research and make your own decisions — or hire a tax professional to offer advice.

That said, in this post I plan to address why taxes surprise so many writers and why you should be thinking about potential taxes now rather than later.

Why Taxes Surprise Us

The US tax system is complex and convoluted. As of this writing, it’s over seventy-four thousand pages. If you could read War and Peace in a week, it would take you a year to read the US tax code.

In addition, most of our interaction with the tax system is designed to hide its complexity from us and make it even more obscure. If you have a “regular” job as an employee, most of the tax system is hidden from you behind the withholding your employer does every paycheck. Most Americans neither know nor care how much they pay in taxes — if you ask them how much they make, the first words they say are usually, “Well, I take home …”

Most people’s interaction with “taxes” is solely the annual filing season — and because of withholding rules that ensure the government gets more than its cut from each paycheck, most people get a refund at the end of the year.

So the very idea of calculating taxes and writing a check for them throughout the year is entirely surprising and unexpected. What’s more unexpected is the amount you’ll have to pay. Let’s look at the US tax rates for 2016:

For an example, let’s use an author who’s single, has no children, and has a pretty good day job earning upwards of $40,000 a year. We’ll call her Sally.

Now let’s say that Sally doesn’t itemize deductions — she lives in an apartment and has no mortgage deduction, so she just takes the standard deduction and exemption the IRS allows. Her taxes are pretty simple every year — fill in the data from her W2 and calculate with the standard deduction and exemption. Let’s say that leaves her taxable income for the year at $37,650. If she followed the W4 withholding instructions, she probably gets a refund every year, even if it’s only a couple hundred dollars.

Sally published a book last year, though, and it did pretty well. It earned a few hundred or maybe a thousand dollars every month — say $10,000. Or she got a traditional publishing deal and got a $10,000 advance. Times are good for Sally!

But Sally’s like most people and lives paycheck-to-paycheck. That $10,000 advance went to pay off a couple credit cards, or the $1,000 every month helped her get by and provided a few luxuries. Either way, there’s really none of it left come April when Sally does her taxes.

Sally’s day job taxable income of $37,650 puts her right at the top of the 15% tax bracket, which means that the next dollar she earns, and those after it, will be taxed at 25%. That’s all of her author dollars. 25% plus 12.4% for Social Security (FICA on your paycheck) and plus 2.9% for Medicare — 40.3% of Sally’s writing income needs to be paid in taxes. That’s $4,000!

Even if Sally earned less from her day job and all her writing income fell into the the 15% tax bracket, that’s still 30.3% of every writing dollar that she’ll have to pay in taxes.

Can you write a check in April for $3,000 or $4,000?

Cue the annual wailing and gnashing of teeth by newly successful authors.

Mitigating this, by either reducing your tax burden through deductions or preparing for it by paying estimated taxes is your job throughout the year. It’s part of the business of being an author, and I’m going to talk about both of these in upcoming posts.

If you are already in this position for last year, then you should probably consult a tax professional now.

If it’s early January, then you have a chance to avoid penalties for not making estimated tax payments last year if you get enough in by the deadline (usually mid-January). Finding a tax professional does not mean taking a bag full of receipts to the dude at Walmart this tax season … you’re running a business, which means you need someone who understands business taxes (preferably someone who understands the business of an author, as well).

You can locate a tax professional through either National Association of Enrolled Agents or National Association of Tax Professionals.

My next post will look into Estimated Taxes, which you should be paying throughout the year.

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