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…
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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.
Income
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.
Expenses
Keeping a track of expenses is extremely important to help you limit how much Uncle Sam gets of your hard earned cash.
Mileage
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.
Supplies
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.
Internet
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.
Professional Fees
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.
Travel
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?)
Home Office
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.
Example:
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.
Records
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.
Misc Info
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.
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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
Thanks for being here, Alison! Taxes are something I just don’t mess with. I own my own business out side of writing, so I have an accountant that takes care of both writing and my other one.
Thank you for the great list to remind authors to keep any and everything they can write off!
Thanks, Tonya. I find it so much easier to prepare someone’s taxes if I also do their bookkeeping throughout the year. I don’t need to ask so many questions because I already know the answers.
Thanks Bunches for this superfab informative post, Alison!
Can you believe I actually enjoy doing Schedule C’s?!
And what matters most, regardless of whether you do your taxes yourself or have them professionally prepared, is that you keep all your receipts and have an organized accounting of them.
Even when you have a professional like you do them, doesn’t it help you tremendously if your client keeps an Excel Spreadsheet or some sort of notebook or ledger and has the deductions/expenses outlined and added-up according to the Schedule C categories?
When my DH created our Excel Spreadsheet, I just had him use the Schedule C categories so we’d be all set to just plop-in those numbers. Then, we’ve been using Turbo Tax.
This year, however, because of sooo much income growth, we probably will hire ours professionally done too…but we’ll take all our spreadsheets to the preparer, which should help a bunch, right?
Thanks for giving me the opportunity to give back, D.D.
You have a very good idea, to get a copy of the Sched C and use those catagories on a spreadsheet.
(If anyone is interested in doing this you can download a copy of the Schedule C from the IRS website http://www.irs.gov go to forms and publications and do a search on form sched C.)
It will help your tax preparer a great deal. I always love it when a client hands me a spreadsheet or even a comprehensive written list of income and expenses. I inwardly groan when I get handed a box full of receipts in no order whatsoever
Unfortunately, some people are just not born to organize, but I look on the bright side; it’s job security for me 
Thanks for such a lucid & helpful post about an important subject. Greatly appreciated.
DD, since you enjoy doing Sked C, how’d you like to do ours? I’m sure you’ll get plenty of other customers, too. They’re already lining up outside the WG2E portals…lol
Uhm…yeah…Thanks Bunches, Ruth…but I get all the fun I need where that’s concerned with my own. LOL!!!
Thanks, Ruth.
D.D. I imagine a Benny Hill skit with everyone chasing you, holding up their spreadsheet LOL!
Oooooo…I’m a huge, Huge Benny Hill fan too!!! That music is just a hoot!!!
Thanks for the tips! I’m definitely passing this one along to my tax manager… my hubby!
I’m sure he’ll find this very useful, as I do also!
Hi, Tamara
I hope he finds it useful. It’s not an exhaustive list (my annual tax book is around 2 inches thick!) but it will give you a place to start.
Alison, thank you so much for such a wonderfully informative post! I don’t need to do my taxes until April, thank goodness, but I try to stay on top of my expenses spreadsheet as best I can!
Thanks, Talli
I wasn’t sure how helpful this would be to our overseas readers/writers. But I’m sure some of the same rules apply no matter where you have to prepare taxes.
They do! Especially the bits about what you can write off, and making sure to keep good records.
I read somewhere that authors have to be well read, they must read, read, read as well as write, write, write! So, given that, and the fact that authors exchange books for reviews, can book purchases be written off as an expense? Great advice on here!! Thanks so much.
Hi, Deborah
This would be a very grey area if you were ever to be audited. Yes, you could write off books you bought to improve your craft ie. books on grammar, plot construction etc etc. If you were a reviewer also, you could write off any books you purchased to review. BUT as for books that you read for entertainment even though you may be getting inspiration from thoses books I would be very hesitant in using them as a write off. If you decided to use them just be aware that if you were ever audited the IRS may well disallow it and then you would have penalties and interest to pay on any extra tax you may then owe.
Personally, I wouldn’t risk it, but I do have several clients who will risk expensing items that could go either way. I just make sure I warn them of the consequences then I know my conscience is clear if they ever get audited. Hope that helps.
Great and informative post. Having owned my own business(es) I’m already familiar with a lot of this info even though I used a accountant. Even though I haven’t made any significant money yet I still have a separate bank account, keep spread sheets for expenses and sales, etc. Better to stay on top of it now before the sales start flying in!
I’d like to see updates before April 15th, or there are changes in the laws, etc.
Thanks!
Thanks, Jamie.
You certainly sound like you’re set up and ready to go
As for any updates: it still boggles my mind that the government can leave it right until the last minute to change things. I can’t even imagine the stress that puts on all the software programmers. I imagine them waiting with bated breath, hands hovering over keyboards until Dec 31st. Then they go crazy and smoke is flying off the keyboards as they try and get the programs finished for us to use.
Only last night I heard on the radio that the government are at a stale mate on some tax or other and if they don’t make their minds up in 11 days everyone’s taxes will increase
I was VERY lucky when I first began writing for profit in 2007. I ran across the Small Business Administration and attended a week of tax related classes for I think $25. They have a TON of business resources on their website and free business coaching for a few sessions at their local offices. It’s a government agency ran to help promote success in small businesses. sba.gov
One thing they gave to me was a spreadsheet that mirrors the Schedule C. I have blocks for advertising, professional fees, office supplies etc. I keep track of my income and expenses on a monthly basis, so at the end of the year, it’s SUPER easy.
I do have a few caveats for other writers. Learn your STATE tax laws too. For example, my company is based in SC. I do not write off my computer. Why? Because even with depreciation, every year I’d owe 10% every year on the value of the computer. Since I don’t claim it on my federal taxes, I get the maximum depreciation (it’s a personal computer) and only pay like $4 or $5 in taxes. But this could EASILY get large if I started writing off my desk, my printer, etc. I’m not saying evade taxes (and I’m not, these things are mostly personal items occasionally used for business) but you can plan ahead to avoid excessive taxes with smart decisions.
Also, don’t forget your withholding. If you’re going to OWE more than $1,000 at the end of the year, the IRS expects you to make quarterly payments just like an employee has federal withholding taken out of every paycheck.
Finally, things you might not think to write off include website hosting fees (if it’s a business website), advertising (the ads you purchase, keep your paypal receipts) and software licenses (if the software is primarily used for work, like your office suite if you paid to upgrade that or program you use to convert ebooks).
Good point on the withholding and the quarterlies, especially the quarterlies.
Hi, Elizabeth
Good point on the State taxes. SC sounds very converluted. I’m in MO and their taxes are very simple. As each state’s taxes are so different it would be a very good idea to check with a tax preparer in your state to check these things out as I can’t help you with that, sorry.
Also, a great point about the quarterlies. Thank you for mentioning that. I Can’t believe I forgot to put that in as I have to calculate several client’s estimated taxes. *hands up, my bad* Good catch Elizabeth Ann
How do you do the Quarterly payments?
Go to irs.gov and you sign up. http://www.irs.gov/individuals/article/0,,id=241919,00.html
I am signed up with EFTPS. I also have a Federal Employer Identification Number (free to anyone in business, you don’t HAVE to have employees). I use this because back when I was freelancing, I had to frequently give either my Social Security number of a FEIN. By using my FEIN, I’m not giving my SSN to a bunch of different websites.
You decide what your quarterly payments should be, based on not running afoul of the penalty of owing too much tax at the end of the year. If you over pay, you just get it back as a refund at the end of the year, just like if you were working for another company and had federal withholding taken out of your check. If your state also has income tax, you need to look into those taxes too and quarterly payments.
There isn’t a penalty to get your money back at the end of the year (you just lose out on any interest you’d have received IF the money had sat in an interest generating bank account). I have freelancing friends who calculate to the penny, others just put 30% away and enjoy a nice refund at the end of the year, right after Christmas. It’s your choice.
Sweet, thanks. I’ve just e-mail myself a reminder so I can bookmark this awesome post at home. :}
As I live in the UK, and have published under Smashwords and Amazon, I have to wait until I earn a certain amount before I do anything. They then email me the relevant form that I have to take the to the Embassy. I have been collecting all my receipts and invoices in a box. And had been writing down in an organiser what I’d been sending off in the post, its cost and what prizes and monies I’d been getting. Have created a folder in my email for email receipts.
Hi Julie
Overseas writers certainly have to go the extra mile with your royalties from the US. Another great tip you gave. Keeping an email file for all your email receipts. Even if you print them off you have a back up on your email server too. Very sensible.
Julie, are they withholding 30% because you are a non-resident alien? You can file a 1040 NR form if you have a TIN (tax indentifier number, it’s free) and you’ll get most of it back (I was looking at the tax tables and up to about $8,000 it looks the only taxes they keep out of the 30% they withhold is about 10%).
Allison, Thank you so much for your post.
Really a very good record to have.
For those who use Paypal, they now provide you with monthly statements, which is great because you have every transaction you’ve made like sending and receiving money recorded.
Thanks, Abbey
Online providers are certainly starting to make our lives much simpler. More and more they are providing us with all the means neccessary to keep a track of our sales and expenses.
Great info Alison, I am keeping this post on file, so I can refer to it when we do our taxes.
Thanks C.G. I hope I was able to give everyone a good place to start.
Excellent post! Thanks for this. I’m a professional tax preparer as well and so many of these kinds of posts leave out the all important Hobby/Loss rule. I’m so glad to see it here. I would reiterate Elizabeth’s comment about state laws esp pertaining to personal property tax. Here in MD you have to file a PPT return even if you have no property just because you run a business. The filing fee alone is $300. It’s lunacy but you can get in a lot of trouble for not doing it. And yes, if you owed taxes last year, chances are you were supposed to be making quarterly tax payments. The full amount is due by Jan 15th so get those in or you will be fined.
Thanks for this, it is definitely one of the best posts on this topic I’ve read.
Pav
Thanks, Pavarti
Very interesting about your state’s tax rules.
It never ceases to amaze me that each state can run things so differently to Federal rules. Again, reiterating that you should definitely seek the advice from a local tax preparer in your state when it comes to filing your state taxes.
I live in MD… what does a PPT entail?
(can you tell I let my hubby do the taxes, which really consists of us collecting out 1099s and such and handing them to a tax consultant)
Great info here! I’ll have to check into whether or not the home office deductions will work for me.
Thanks Allison.
Thanks, Stacey
Home office is a great deduction if you have a dedicated space you use.
Oh, here’s another question, Alison…
For new computers (PCs, laptops and tablets) and printers, I’ve been depreciating those on a schedule…
Is that necessary?
Are there any hard and fast rules – say dollar amounts or types of purchases – that need to be on a depreciation schedule?
Hi D.D.
If you have been depreciating certain equipment you need to continue to treat it the same until you finish depreciating that piece of equipment, ie. over 5 years. BUT if you purchased a new piece of equipment in 2011 you can write off the whole amount up to $500,000 (for 2011) As long as it is used for more than 50% for your business.
It’s called a Section 179 expense. Examples of qualifying property include:
Machinery, Equipment and Furniture
Software and databases (off-the-shelf computer software)
So if you bought a laptop for $500 this year, you have the choice of depreciating it over 5 years or taking the whole deduction in this year. Which obviously means you can’t then take any of that expense in 2012.
There are other catagories but those are mainly aimed at the agricultural business.
There is a $25,000 limit on writing off SUV’s for 2011
Please bear in mind that this is the Federal regulation (for your 1040/sched C) and may have to be treated differently in your state for state taxes.
Great post! Thanks so much for the helpful info!
Thanks, Olivia
I’m glad to be able to give authors a place to start with their bookeeping.
Wow this is great information. I knew when I decided to write things would change. I use to do my own taxes, but since I started writing, I wanted to get right, and make sure I didn’t miss anything and that Uncle Sam got his fair share and so did I! So this year, I’ll put money out for a CPA. After reading this article, it made me see, it will be money well spent. Thanks for all the great information…
Carolina
Nothing wrong with hiring a CPA etc, just make sure you have an inkling of how the tax preparation should go because at the end of the day, it’s YOUR money.
I totally agree with you Elizabeth Ann. I have been able to get some new clients lots of money back because the company you mentioned did not file their taxes correctly. It’s one thing to have a program to enter the information into but if you don’t understand the information you’re entering, the program doesn’t “think” for you.
A tax preparer needs to know the right questions to ask and know the correct catagory to enter the information into.
Word of mouth is always a good recommendation when you are looking for a good tax preparer. Big franchises usually tend to be more expensive than smaller tax preparers and their employees probably just went through a training course just before being let loose on you taxes, rather than someone who has been doing it for years and has the experience to know which questions to ask.
Elizabeth, aye chihuahua!!! Cali has terrible state income tax laws. It’s a pain in the extremo! I’m using a friend’s husband who is a retired cop. Since I’m still working, proud blue for SFPD, fingers crossed no mistakes. He does most of the guys in my unit. The company you mentioned really screwed up a friends son’s income tax, (you know her Lee Lopez) so badly, and he didn’t catch it, he had to pay for two years on back taxes. I’m going to pay very close attention to everything!! Aye crumba!! Taxes scare the hell out of me. Like Tonya said, something you don’t want to mess with.
Okay so here’s my question from the actual post (rather than my follow ups to others…)
So when you first start your business at 0 dollares. Now you open that account so you can trak expenses properly, but first you have to put money in there… For me that money will probably come from my personal savings, how does that work for tax purposes, because it’s income to the business account, but it’s not really income to you.
(I’m totally going to have to start re-orgoranizing how I think, I’m so one account orriented.)
Thanks!
:} Cathryn
Hi Cathryn
That is a good question. Glad you asked it.
When you open an account with your personal money it is treated as Owner’s Equity. It can be treated as a loan you made to your business. If it is treated as a loan it becomes a liability to your business In accounting terms it is dealt with as a Balance Sheet item and NOT a profit and loss item. It will not show as income to you on your taxes.
Also, while we are on the subject of bank accounts. If you take money out of your business account for personal use you would list this as “owners draw” under current liabilities. That way it does not show as an expense in the profit and loss account.
Hope this answers your question.
Um I think so… :} the terms are a bit puzzlilng, but essentially your saying “there’s a category for that”
Follow up question now is: Can Pay Pal be used as the Business account? Or is it better to have a ‘real’ bank account?
Thank you!
I would definitely open up a ‘real’ bank account. Paypal would be a bit limiting. When you really start getting into business mode, not all your expenses can be paid via paypal.
Paypal is great if you are buying things over the internet but what happens when you want to buy stamps at the post office, or pens and paper at Wal-mart. Simple everyday expenses add up over the course of the year and it’s much easier to use a debit card or checks.
It is very easy to have any income that is paid into paypal transferred to your bank account.
Check out accounts that don’t carry a monthly bank fee. Some of them will be fee free if you link to a savings account. I know US Bank does this and I’m sure many others out there are still fee free.
Sweet. Thanks for the tip. I completely forgot about those other things, like stamps… I think I’m beginning to get the hang of this. :}
This is a fantastic post. Thanks so much Alison (& TWG2EP) for encouraging us to get our tax asses in gear! I’ll be sharing
Thanks, Laura
It’s important that everyone be as well prepared as they can be.
Thanks so much for all this valuable information, Alison. I’m going to bookmark this one!
Thanks, Anne
Glad I was able to give some helpful tips.
Really helpful Alison. You and I must have similar creative minds. My massage therapy and personal training business is called ABSolute Fitness and Therapeutic Bodywork, and I have a manuscript yet to be revised called The Amulet, LOL.
Thanks for all the terrific info.
LOL! Sharon, What a coincidence
After I had put my 1st book out there I wish I had changed the title. The Amulet is a very popular title and until my book had been downloaded so many times I couldn’t even find it in the search engine on Amazon, it was lost in a sea of other Amulets. I would suggest thinking about a possible different title before you settle on that. It will give you so much more visibility.
For example. I write YA (no sex, no swearing etc) There is a book out there called “Amulet” and it is an EROTIC novel. When you do a search that book usually comes up underneath mine. EEK!!! I would be devastated if a young person downloaded that by mistake. I would definitely change my title if I could
Geez, thanks for this information, Alison. I’m filing this away for future purposes. XOXO
Merry Christmas, all.
I have a question. If I don’t get a response I’ll write to Alison directly, but I thought it may be best to ask here in case someone else has the same question. I hope I didn’t accidentally skip over it in the comments here.
Sales – do I report them on the cash or accrual basis? I’m an accountant (well, I WAS an accountant, now I write) with over ten years of financial statement / month end close / heavy GL experience with public, private, and government entities, but none of those had anything to do with publishing so I don’t know the industry standard. Example: Just received Amazon payment a few days ago for October sales. Should I have recognized those sales with an offsetting receivable in October, or would I recognize them in December, the month I received the cash? In any other industry I would say “October” but that may not be correct in publishing, an industry that typically pays royalties in arrears. I realize I will receive 1099s at the end of the year that were prepared using the cash basis, but I plan to stay accrual. For my 12/31/11 year end financials (that I will use to prepare our tax return), would I show a receivable for November and December sales? Or does it even matter? I know it might sound like an odd question but I know from working in public accounting that “industry standard” often reigns supreme. I really don’t know the preferred method of recognizing sales in the publishing industry. FYI – I have an LLC (S Corp) as of September 2011.
I appreciate your help and I sincerely hope I didn’t confuse you!
I probably could have asked that question in far less words.
Thanks,
Shaina