Tic Tax Dough

How do taxes work in the publishing world? By trade, I’m a booth-renting hair stylist, and I set a portion, (about 30%) of my income and set it aside for taxes. I talked to a tax person not too long ago, and she wasn’t versed in tax laws for writers, but she did say she thought that the tax laws were different than a “regular” business.

you mean like a business that makes money?

As a writer you are the owner of a small business. Welcome to the world of Schedule C. You keep track of your expenses and income. You read the instruction book carefully. You DO NOT CHEAT. By this I mean when you go to Miss Congenialty's Strip Club and Novel Writing Seminar, you only claim the novel writing seminar part as a deductible expense.

When you get a big fat advance, Miss Snark sends you a check. At the close of the fiscal year (cause she's organized in a linear fashion it is 12/31) Miss Snark sends you and the IRS a form detailing how much you've gotten.

What your tax person may be referring to is when expenses are accrued. I am NOT NOT NOT an expert on this. If you have enough money to matter (ie you're making more than pocket change from your writing) I advise you to seek advice from an accountant who knows publishing law. Do this NOW not April.

My business runs on what is called a cash basis. I spend money and make money and at the end of the year I account for all of it. Some writers accrue expenses..that is list them before they occur or hold them over to a year when they will actually earn income. This is legal if it's done right. Get advice.

She also may be referring to the fact that you actually have to earn money at some point for your writing to be a business. You can't keep expensing things without showing income. I think three years is the limit but again...GET ADVICE.


Christine said...

Actually, if you declare a loss three out of five consecutive years, the IRS considers it a hobby.

Do what MS said - get advice.

E. Dashwood said...

Christine, does the IRS penalize you--e..g, make you pay back tax savings--if they declare it a hobby?

I'm assuming it doesn't raise red flags if you're starting out on a book project. This year is mostly expenses incurred for landing an agent, mostly postage and office supplies. Next year, I'll be raking in the dough and looking for a sly accountant.

Christine said...

I don't think so. You just can't declare it a business anymore on that fourth loss year. So you lose the deductions, etc.

My dad worked for the IRS for 30 years, so that's how I know all this stuff - but I'm not an expert or anything.

I have expenses myself, since I did some promoting for a book that I won't see royalties for until next year. Hopefully I'll also have an agent and a big fat advance to declare next year :)

C.E. Petit said...

(1) Christine's statement is backwards. The "two out of five" rule--profits in two years out of five--means that the IRS will not treat it as a hobby. It's a good general guideline, but there are ways to qualify as a business activity without showing a profit. They're not for the faint of heart, nor for the unsophisticated accounting-wise.

(2) Miss Snark's comment about her year ending on 31 December should apply to almost all authors who file Schedule C; natural persons (that is, not corporations and partnerships) ordinarily can't get permission to have a fiscal year ending any time other than 31 December.

(3) Miss Snark's comment about being on a cash basis should also apply to almost all authors who file Schedule C, and even many (if not most) authors who have incorporated or established another business entity and file Form 1080 or 1120 in March before doing their personal taxes in April. The IRS has cracked down on acrual accounting, particularly in service industries; one needs permission before adopting it, and it virtually never applies to sole-ownership entities or natural persons.

rachel said...

I seem to recall (from way back during my fabulous comic book career) that one is also required to pay quarterly tax estimates, if one anticipates actually earning money.

Accountants are worth every penny!