Happy Hump Day, WG2E-Land!
And speaking of getting over a huge hump…how ’bout dealing with taxes…as an Indie Epub Writer/Author?
Thanks to one of our superfab WG2E-Land regular commenters
Who’s an Indie Epub Author…
as well as an Accountant and Tax Specialist…
We’ve got the scoop for you!
Take it away, Alison…
For our US readers the season is almost here. No, I don’t mean Christmas, I’m talking about that other season we all loathe/dread/fear. TAX SEASON.
Now that you’re an author, like it or not, you are now running your own business and let me tell you, Uncle Sam wants as much of your hard earned royalties as he can get his hands on. It’s my (day) job to make sure he gets as little of it as legally possible.
I run my own business, AB Solutions, Tax & Accounting, when I’m not writing. Actually that should be reversed, I write when I’m not running my business.
My job today is to arm you with the knowledge to keep more of your royalties to yourself.
As soon as you start earning royalties you must fill out a Schedule C (Profit or Loss from business) and file it with your tax return. This may seem daunting at first but if you follow a few basic rules and keep your paperwork organized throughout the year it will make your life (or that of your tax preparer) much simpler come tax time.
One of the most important things when you set up a business is to have a separate bank account for your author income and expenses. I can’t stress enough how important this is because if you ever get audited the waters can become very muddied if the IRS are poking around in all your personal finances as well. The expenses you claim can be seen as potentially dubious if they are mixed in with all your household and personal expenses.
At the end of the year you will receive 1099’s (usually if you’ve been paid over $600 in the year but depends on each company’s policy. Some may send you a 1099 for as little as $10). These 1099’s will come from all the distributors who distribute your book, ie. Amazon, Barnes & Noble, Smashwords etc. You cannot file your taxes until you have received these. Companies have until Jan 31st to mail these out, so wait until at least February and make sure you have received them all. If you know that you earned money from a specific distributor but do not receive a 1099 from them, I would advise contacting that company to find out where it is. (A copy of every 1099 gets sent to the IRS, so if you file your taxes before you get them, your income won’t match what is on the IRS database and that will more than likely flag their attention, something you want to avoid like the plague).
Also, throughout the year keep a record of any income you make from book sales outside of what I mentioned above. For example, if you do a book signing and personally sell copies of your book, or you sell some out of the trunk of your car, you need to keep track of those sales.
Keeping a track of expenses is extremely important to help you limit how much Uncle Sam gets of your hard earned cash.
I always tell my clients to get a mileage book and keep it in their car. Every time they drive anywhere that is connected with their business they must make a note of where they are going and the mileage. This can add up a lot over the year when you can claim 55c a mile. Some trips may be obvious ie. driving to the bookstore to do a book signing. BUT even if you pick up a ream of paper or package of pens for your business on your weekly grocery run, you can write off the mileage for that trip.
This is mostly obvious – pens, pencils, paper, paperclips, printer ink etc etc. BUT you can also write off more expensive items like a new computer (you need it to write your book right?) a printer, software, a desk lamp, office chair, desk, waste bin. If you use it for your business, you can write it off (as long as you can prove it if you ever get audited). Also included in this category is the cost of paper versions of your books that you buy to resell.
This usually goes under office expenses (on the Sched C). You need an internet connection to run your writing business. You do research, you network, you read WG2E. You need it to upload your books and keep track of sales, the list goes on. If everyone else in the house uses it too, estimate the percentage of time it is used for your business and use that as your expense.
If you use The Edit Dude, his fee would go in this category. Any time you pay anyone for a professional service you can write it off: Editing, cover art, formatting, an agent, lawyer etc. Make sure to get invoices or receipts for all work paid for. A check can also work as a receipt if you forget to get one or lose it.
You can write off the cost of travel for your writing business. This is different to mileage. Say you need to fly across the country for a writer’s convention, you can write off the cost of the flight, the hotel room, taxi fares etc. Keep receipts for meals also. You can only write off 50% of the cost of meals because the IRS says that you have to eat anyway so they only let you claim half of it.
BTW you can write off the mileage to the airport (getting the gist of this writing off thingamibob now?)
This used to be a huge red flag to the IRS and almost always incited an audit BUT times have changed and because of the economy and the increase of home run businesses, the IRS has relaxed its stance on claiming a home office.
There are still strict rules to adhere to, though. You cannot claim the space of your kitchen table I’m afraid, it has to be a designated space for your writing business.
To claim a home office you claim the percentage of your office space to the total square footage of your home and then write off that %age of your home expenses which includes (but not limited to): Utilities, insurance, mortgage interest, rent, repairs & maintenance, and telephone.
Total sq ft of home = 1000sq ft
Sq ft of home office = 100sq ft
100/1000 = 10%
This means you can legally claim 10% of your everyday home expenses as a write off against your business.
It is extremely important that you keep receipts, invoices, bank statements and any other proof of expenses and income that you may have. Keep them safely in a file to be used at tax time. These will be needed in the event you ever get audited. I recommend you keep records for at least 7 years. Me, I’m a bit anal and keep ten years.
You will save yourself some money at tax time if you keep a spreadsheet of your income and expenses throughout the year or buy yourself a simple bookkeeping program. Quickbooks Simple Start is a good one and you can sometimes find it to download for free. Also Microsoft has a program called Microsoft Money, I believe it is part of their Office suite but I have never used it so can’t comment.
The IRS usually expects you to make a loss your first year of business but don’t push it. They also expect that you will make a profit at some point and usually give you a couple of years to do so. Generally you should show a profit for 3 of the first 5 years or they may start looking a bit closer at your taxes, something you’d much rather avoid.
If you don’t make a profit for several years, keeping your expenses to the amount of your business income could help keep you under the radar. That way the IRS treats it as a hobby and you are just breaking even at the end of the year, no taxes owed to the IRS on your business, but you’re not getting more back by a loss reducing your other income from day jobs or your spouse’s income on a joint return.
Hopefully this will help get you started. Just remember, if you keep good records you’ll be well prepared when you go to prepare your taxes.
If you have any questions please feel free to ask in the comments. If I don’t know the answer off the top of my head, I’ll research and get back to you. If you have a more personal question please feel free to email me at a_pensy(at)hotmail(dot)com.
Our very own WG2E Tax Expert…how superfab terrific is this?!
Thanks sooo very much, Alison!
Here’s more scoop on the waaay savvy Alison Pensy:
Alison has been in the accounting profession for 26 years, working for multi-million dollar companies down to small sole proprietors. She started doing taxes in 2008 after earning her diploma from The National Tax Training School in New Jersey.
In her “spare” time Alison writes YA urban fantasy and has enjoyed 2011, hitting the Kindle Children’s bestseller lists with both of her Custodian novels: The Amulet & The Emerald Staff. She is currently working on the 3rd book in the series, The Cypher Wheel.
www.absolutionstax.com - business website
http://www.alisonpensy.com - author website
Okay, It’s Your Turn, WG2E-Land: What tax questions do you have for Alison?
The Best of WG2E 1040 Wishes — D. D. Scott with Special Guest Alison Pensy