In my last bit on taxes, I went into what I’ve learned as far as tax deductions. Now comes the less fun parts.
Writers, God(s) help us, are considered self employed. This has a number of effects upon the money we earn and the taxes we have to pay. As far as the US tax system and the IRS, being self employed puts most of the burden upon the writer.
There’s three types of tax that all US Citizens pay. There’s Social Security, Medicare, and then income tax. Normally, you only have to pay a net 7.65 percent of your income to social security and medicare. The problem is, your employer is paying the other 7.65 percent. As a writer, your employer is you (regardless of whether you publish with a big company or not, they push the onus of paying that to you), so you have to pay all 15.3% as the self employment tax. Now then there is income tax on top of this. What’s nice about being a writer is that your deductions come from both areas, because your income is what is left over from your earnings after your expenses. In case you didn’t notice, right off the bat you’re in around a 30% tax bracket. This is pretty painful if you’re writing with no other income. It is especially painful when you are supposed to pay your taxes quarterly, or face fines from the IRS, and you may not receive your royalties until months after the quarter (trust me, it’s happening to me now, it hurts, I’m paying taxes on income I still haven’t received, which comes from my savings…) Bringing those taxes down a bit you have the things I listed in the previous tax article, which is why keeping track of all that is essential to making sure you keep a little bit of that hard earned money.
Your royalties from book sales are income, much like a contractor. That’s how you should report it and that’s how you should take deductions. You report your income from 1099-MISC’s, which acts much like your W2 from a normal job. The exception, as stated above, is that you have to pay the full self-employment tax rate.
One caution: most publishers and publishing platforms don’t do automatic withholding. So you’ll need to balance your income between your normal job and writing. The last thing you want at the end of the year is to file your taxes and learn that you owe more money to the IRS. (It sucks). On the other hand, you want to avoid paying too much early on, so monitoring your sales and adjusting your payment to the IRS throughout the year is the best tactic.
This is important because if you are a professional author, this is your income. You’ve probably spent tens or even hundreds of thousands of hours writing, honing, and perfecting your craft. You’ve earned that income, you can’t avoid paying the taxes on it, but you can make sure that you only pay as much as necessary.
To make things more complicated, if you are buying covers or other services (Audiobook narration or editing, for instance) of over $500/year to a single person you have to file a 1099-MISC for that person’s income… and they have to pay taxes on it. Filing a 1099-MISC isn’t hard, you can get the form from the IRS and do it yourself or you can use Turbo-Tax’s 1099-MISC form. To make matters slightly more complicated, you only do a 1099-MISC when paying in cash or check. When you do a payment through a bank or a platform like PayPal, you have to do a 1099-K, because the bank tracks and reports the payment to the IRS. The annoying part is that you need the person’s Social Security Number in order to report it.
The good news is that since these payments are business expenditures, you get to deduct them from your income. If you aren’t otherwise tracking your earnings and budget throughout the year, you can quickly see if some things are paying for themselves. If, for instance, you spent $3000 for audiobook narration, $500 on a cover, and another $1000 on professional editing but only earned out $2000 from your book sales, you might want to reevaluate your expenditures.
One other thing. Because writing is a business, I highly recommend setting up a separate “writing” checking (and possibly savings) account for this. Not only does it show to the IRS your intent of making this work, but it also makes it far easier to track your payments and income as well as your expenses. Not only should you keep your receipts and document your expenses, but you should also monitor your income from book sales, track how your books trend up (or down). These things will help you as a professional, especially as you learn what works and what doesn’t.
As a disclaimer, I am not a tax professional, I’m heavily reliant upon the things I’ve learned from writing conferences (where they have tax panels) as well as using programs like TurboTax and even going to some tax professionals. Also, this is just an overview, more to get you thinking in the right direction than anything else.
Here’s some other links you may find helpful