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Handling Writing Income and Expenses
by Moira Allen

Return to The Business of Writing · Print/Mobile-Friendly Version

Note: The information in this article applies to writers who pay U.S. taxes. If you're not a U.S. citizen, or liable for U.S. taxes, you'll need to check with the tax agency of your country of citizenship or residence for information on how to handle your writing income.

Any income that you make as a writer is taxable -- including article sales, book royalties, advances, etc. This means that you need to know how to keep accurate records of that income, and of your expenses that relate to writing. Generally, this income falls into the category of "self-employment." (The exception is if you work as a contractor for a company -- e.g., doing business or technical writing -- and receive a paycheck from which taxes are withheld. In this case, you would treat that income as "wages" rather than as self-employment income, even though you may technically be considered a private contractor rather than an employee.)

If you don't expect to do a great deal of writing, or to earn much money from writing (e.g., less than $1000 a year), you do have the option of treating your writing income as "hobby" income. Hobby income must be reported to the IRS on the "Other Income" line on your 1040 (line 21). Hobby expenses (e.g., paper, postage, etc.) are deductible only if (a) you itemize deductions, and (b) those expenses exceed the 2 percent-of-income minimum. The only advantage of considering your writing a hobby is that you don't have to worry about such matters as saving receipts, keeping good records, etc. If you honestly don't care about giving the IRS more money, this is certainly an option.

If you consider yourself a "serious" writer, however -- if you write frequently, and if you're hoping to increase your skill, your output, and your income -- you need to think of your writing as a business. This is in your best interest even if, in the beginning, you do not make a great deal of money. After all, your goal is to make more later -- so it's best to get in the habit of thinking (and acting) like a professional as soon as possible.

One way to qualify as a business is to make a profit in three years out of five. Even if you do not, however, you may still qualify if you can demonstrate that you have made a reasonable effort to (a) make a profit and (b) conduct your business in a professional fashion. That means being able to demonstrate that you:

  • Spend a significant amount of time writing, or engaged in writing-related activities. Your business does not have to be "full-time," but you should be producing work regularly.

  • Actively attempt to market your work. This means seeking appropriate markets and submitting to those markets (even if you're rejected). The best way to prove this is by keeping track of your submissions and responses.

  • Keep accurate and businesslike records. This includes records of your income and expenses, and records of your work itself (e.g., tracking submissions, time spent, etc.).

Even if you're making no money whatsoever right now, these are good habits to get into, because they'll protect you once you do begin earning an income.

Tracking Your Business

In the "business" of writing, good records are important in two areas: To track your work, and to track your income and expenses. Tracking your work means keeping copies of your submissions, cover letters, queries, and responses (see chapter 25). It's also a good idea to keep a running log of submissions that notes what the item was (e.g., query or article), when it went out, to whom, when a response was received, and what the response was. This log will also help remind you to follow up on items that have received no response.

Tracking your income and expenses can be just as easy as tracking your submissions. No fancy filing system or advanced bookkeeping degree is needed for this. All you need is a few folders or envelopes, and some method of keeping a running account of your financial transactions (see below).

To track your writing income and expenses effectively, you'll need to keep them separate from your personal finances. This means getting into a few simple habits:

  • Purchase writing supplies (such as paper, printer cartridges, and postage) separately from other supplies. If you're making business and personal purchases in the same store, pay for them separately.

  • Store business receipts separately from personal receipts. My method is to stuff each month's receipts into a file folder that is clearly labeled with the month and year. When the month is over, I move this folder to the back of my file drawer and (hopefully) forget about it. If I need an old receipt, I know where to find it. At the end of the year, I move that year's folders to a storage box in the closet and start a new set. Record project titles on your receipts, if appropriate. This isn't necessary for office supplies, but is useful for travel and entertainment expenses.

  • Store (and use) writing supplies separately from business supplies, as much as possible. Granted, you probably won't swap "business" paper for "personal" paper in the printer just because you're writing a letter to your sister, but be realistic. If you attempt to deduct the cost of 50 manila envelopes and you can show that you've sent out 45 manuscripts, no one is likely to ask about the other five. But if you write off 50 and have sent out five manuscripts, that could raise eyebrows in an audit.

  • Open a separate checking account. This isn't a "must," but it's helpful. It needn't be a business account (which often costs more and may require a business license); your best bet may be a personal account that charges no fee if you maintain a minimum balance. Find out if you can get your checks returned (some banks charge a small fee, such as $1 per month, for this service); while canceled checks aren't an absolute necessity, they provide added security.

  • Consider investing in a separate telephone line, especially if you conduct a lot of writing business (such as interviews) by phone. Again, this need not be a business line. If you use a separate line for business, the entire cost of the line is deductible; if you use your personal line, you can only deduct the cost of the calls themselves. (A separate line also enables clients and editors to reach you even when you're surfing the Internet of checking e-mail.)

  • Maintain an ongoing record of your income and expenses. This can be as simple as a handwritten ledger, though I personally recommend using a computerized spreadsheet. At the minimum, your record should contain four entry categories: Date, Item, Income, and Expense. Whenever money goes in or out, enter the amount in the appropriate category. If you'd prefer to save time and effort at tax time, it's helpful to include additional columns that correspond to the numbered categories on the Schedule C (or at least those categories that you expect to use). If you use this method, it's best to "double-enter" your expenses: Once under the generic "expense" column, which will give you an ongoing total of your expenses, and once under the "category" column (such as "office" or "utilities"), which will give you a total for that particular category.

  • Keep your records (correspondence, tax forms, and income and expense receipts) for at least five years; some sources recommend seven or ten. While the IRS technically won't go back more than three years unless they suspect fraud, keep in mind that an audit may not be initiated until a year or more after a return is filed. (You can also scan records such as receipts; I recommend this approach for storing older files.)

Why All This Trouble?

Why is all this record-keeping important? After all, you got into this business to write books, not keep them! Some writers fancy that "words" come from one side of the brain and "figures" from the other -- and those of us who are good with words just don't have a head for figures. That's about as logical as saying "girls can't do math." Besides, we have computers to do the really hard work for us!

Getting into the "habit" of good bookkeeping is important for several reasons. Here are the top five:

  1. Good bookkeeping can protect you from an audit. If your tax figures make sense, your return is less likely to raise a "red flag" at the IRS. When you track your income and expenses over the course of a year, you can recognize areas where your expenses are outstripping your income, and make the necessary adjustments. For example, if you're hoping to show a profit (and thereby demonstrate that you're truly a "business"), remember that there is no law against not claiming all your deductions, even if you're entitled to them. (You can also "postpone" some deductions until the following year.)

  2. Good bookkeeping protects you if you are audited. I know; I've been there. Thanks to the fact that I had all the records I needed to support my claims (and knew exactly where those records were), my audit was neither scary nor particularly costly. I didn't have to waste time wondering whether the IRS was going to "uncover" some ghastly accounting or reporting error. Believe me, there's nothing like the confidence good records give you when if an audit notice arrives in the mail!

  3. Good bookkeeping can help you determine how successful your various writing ventures are. By tracking income and related expenses, you can determine which projects are profitable, and which are actually costing you money. (For example, if you pay a $50 phone-interview bill for a $25 article, you may want to rethink your marketing strategies.) Good records will also show you areas in which you may be overspending: If you're like me, for example, you may find that you're spending a lot of money on writing books that you don't have time to read.

  4. Good bookkeeping is essential if you have to pay estimated taxes. This occurs if (a) you have a tax liability (you owe money) and (b) no taxes are being deducted from your income to cover that liability. When you receive a paycheck, your taxes are deducted each time you are paid; when you're self-employed, however, you have to make that "deduction" yourself -- often long before you actually receive the money you're expecting. Good records are essential to help you figure out how much money you're likely to receive in a given quarter, and how much tax you're likely to owe.

  5. Good bookkeeping drastically reduces your stress level at tax-time. When you've kept a record of your income and expenses throughout the year, all you have to do is plug the totals into your tax form and you're done. Then you can get back to your real job: Writing.

Preparing Your Taxes

Believe it or not, declaring your writing income and expenses really isn't that complicated (most of the time). Let's start with the simple stuff, then move on to the exceptions.

When you operate a sole-proprietor business (such as writing), you declare income and expenses on the Schedule C. (If you have no more than $2500 in business expenses, only one business, no depreciation or amortization, and do not claim the home office deduction, you may be able to use the Schedule C-EZ.) The Schedule C is remarkably straightforward (for an IRS form); it asks a few basic questions, offers a few categories to fill in, and you're ready to go.

First, you'll be asked to fill in your name, address, social security number, and "Principal Business Code." For writers and artists, that's 711510. Your principal "business or profession" is "writing" (or "author"). Your accounting method will be cash; that means you claim expenses when you pay them (by cash, check, or credit card) and income when it is received. Did you "materially participate" in your business? Yes, unless someone else is doing your writing for you!

Next you'll list your income, which is all the money you've received from writing during the year. This includes royalties; don't be confused by Schedule E, which involves a completely different kind of "royalties." You'll almost certainly enter the same amount on lines 1, 3, 5 and 7; ignore the other lines. (By the way, don't assume the IRS doesn't know how much you earned: If you received more than $600 from any single source, that source will file a Form 1099 with the IRS declaring that income.)

Deducting Expenses

Now for the fun part: Expenses. Fortunately, you can deduct any expense that is directly related to your writing efforts, including (but not limited to) the following:

  • Office supplies, such as paper, envelopes, postage, printer cartridges, pencils, pens, computer disks, etc. (You can deduct these under "office" or under "supplies."

  • Printing and photocopying, such as tearsheets, business cards, etc.

  • The expense of an Internet connection, if it is used primarily for business. If you "share" your connection with other family members, figure out the percentage of time spent on business and pro-rate the expense accordingly.

  • Telephone calls related to writing, such as calls to editors, interviews, etc. If you have a separate line, you can deduct the entire cost of the line (under "utilities"); if not, you can only deduct the cost of the calls themselves. If you have extra services related to writing, such as a "distinctive ring" number for your business or fax, you can deduct that as well.

  • Books, magazines, and similar materials that relate to writing or research. This includes sample magazines for market research, and subscriptions to magazines relevant to your field or to writing in general (within reason). Books are a tricky issue: If a book is for short-term use only (e.g., if it is for research for a one-time project, or if it is an annual such as Writer's Market), it can (possibly) be deducted under "miscellaneous." If, however, you keep the book as part of your "professional library," it must be amortized or "expensed" (see below).

  • The cost of attending a writer's conference, including 50 percent of your travel and meal costs.

  • Business fees, bank fees, professional fees (such as the cost of an accountant or lawyer), fees paid to an agent, etc.

  • Dues paid to societies and organizations that are related to writing, or to a specific area of expertise that you write about.

  • Taxes, such as state and local taxes incurred on your writing income, and sales tax on large purchases.

  • Repairs to office equipment, and rental of office equipment (such as a postage meter).

  • Classes, reference materials, and other resources that are designed to improve your skills in your existing profession are deductible. Thus, once you have decided to establish yourself as a "professional writer" (even if you have made no sales as yet), you can deduct the cost of writing classes, reference books, magazine subscriptions, etc. (However, if you have not yet begun to do any actual writing, you may not be able to deduct the cost of a course designed get you started as a writer.

These are the simple deductions. Now let's look at some of the more complicated expenses you may incur as a writer.

Mileage

Certain auto expenses are deductible. If you can claim a home office deduction, for example, then you can also deduct the cost of using your car to drive from that office to, say, the office supply store, or on an interview, or whatever. If, however, you do not claim the home office deduction, then you can't claim the expense of driving from home to a work-related location. However, you may be able to claim the cost of driving from one work-related location to another. For example, if you drive from home to the office supply store, and from there to the post office, and from there to an interview, you could deduct the cost of driving from the store to the post office and from the post office to the interview -- but not the cost of driving from home to the store, or from the interview back home again. (The drive to and from your home is considered "commute.")

For those mileage costs that you can deduct, you can either deduct "actual expenses" (by prorating the costs of maintenance, gas, etc.) or "mileage." Check with your account for the current per-mile rate, as this changes from year to year. (Auto expenses are handled on Form 4562.)

Depreciation, Amortization, and Expensing

Some expenses cannot be deducted directly. Items that have a long "lifespan," such as equipment, furniture, autos, etc., generally must be depreciated or amortized. This requires a separate form and some rather complicated calculations. In brief, some of the types of expenses that must be depreciated include:

  • Computer hardware, including monitors, keyboards, printers, scanners, modems, etc.
  • Office equipment, such as fax machines, copiers, telephones, answering machines, etc.
  • Furniture, such as chairs, computer desks, carpeting, lamps, etc.
  • Computer software (unless updated annually, like a phone disc or tax software); this must be amortized.
  • Books that become a part of your permanent professional library.

The good news is that you may elect to "expense" many of these items rather than depreciate them over the course of 3-7 years. You can "expense" up to $17,500 of depreciable equipment (but not items that must be amortized) by using Section 179 of Form 4562. The amount you expense, however, cannot exceed your total writing income.

I've heard varying opinions on whether books should be expensed or amortized. My own accountant claims they must be amortized, but others say they can be expensed. When in doubt, discuss the question with an accountant (or two). So far, every accountant I've talked to agrees that computer software must be amortized unless it is something that you have to replace every year.

Travel

Some travel and entertainment expenses are deductible. However, this deduction is shrinking fast. Also, the IRS frowns on deductions that look like "I took a $5000 dream vacation to France, and now I think I'll see if I can sell a $100 article on it." If you're going to deduct travel, you'll do better if you have an assignment in hand before you leave (then you can claim that you're traveling for business purposes, not trying to wring a business deduction out of personal travel). When you can deduct your travel costs, you can deduct 100% of transportation expenses (e.g., the cost of getting to and from the destination), car rental, taxis, and hotels, as well as some other expenses. You can only deduct 50% of meals and "entertainment," however.

The Home Office Deduction

Writers are entitled to take the home office deduction, which is the "cost" of the space you use for an office. You can deduct a percentage of your rent or mortgage, based upon the percentage of space used by your office. For example, if your home is 2000 square feet and your office takes up 100 square feet, you can deduct 5 percent of your mortgage interest or rent (you cannot deduct mortgage principle payments) plus 5 percent of your utility bills. You can also deduct the appropriate percentage of property taxes, homeowners insurance, and in some cases home improvements. To claim this deduction, however, several conditions must be met.

  • Your office must be a clearly defined location, such as a bedroom, an attic, a nook, a closet, etc. You cannot deduct "a corner of your living room" or "10 percent of the kitchen."

  • Your office must be used exclusively for business purposes. Pay your personal bills somewhere else, and don't use that space for personal storage. Clean the games off your computer!

  • Your home office deduction cannot be used to create a loss. For example, if your total deduction were to come to $2000 per year, but your writing income is only $1000 and you have $400 in other expenses, the maximum home office deduction you will be able to claim is $600.

It has been said that the home office deduction "raises red flags" at the IRS and makes an audit more likely. Most business magazines, however, say that the IRS encourages this perception to discourage people from claiming deductions to which they are entitled, and that one shouldn't forego this deduction out of fear of an audit. If in doubt, it would be wise to get the advice of an accountant.

If you plan to sell your home, and you have been claiming a portion of it as an "office" on your taxes, you may find that you have to pay taxes on a portion of the income of your home sale. Since you have declared a portion of your home to be "business property," when you sell your home, a corresponding portion of the revenue from the sale is now "business income" (i.e., income that you gained by selling the "business" portion of your home). If you anticipate moving or selling your home, talk to your accountant about this issue before declaring a home office deduction.

Estimated Taxes

While we all dread April 15, the truth is that taxes aren't actually due on that date. They are technically due when your income is earned. When you earn a paycheck, your taxes are deducted automatically. When you work for yourself, however, you don't have that advantage -- and chances are that you will have to pay estimated taxes not only to the IRS but also to the state.

According to the IRS, you are expected to pay estimated taxes if your anticipated tax liability for the coming year is $1000 or more. For example, if, in April 2003, you were required to pay $1000 or more in taxes for the year 2002 (over and above the taxes, if any, that were deducted from your paycheck), then you will probably be required to file estimated taxes for 2003, beginning in April 2003. (In other words, you'll be filing last year's taxes plus the current year's estimated taxes for the first quarter at the same time.)

Estimated taxes are due quarterly, beginning in April. The problem, of course, is that you must pay them in advance -- i.e., before you actually know what your income will be. As a writer, it's often difficult to predict one's income from one quarter to the next, but that's exactly what you're expected to do. It's better to overestimate than underestimate; refunds are better than penalties.

If your writing is not your sole source of support, or if you or someone else in your household is earning a paycheck, one way to reduce your estimated tax liability is to increase the withholding tax on that paycheck. While that may mean slightly less cash now, it can help offset your tax burden later.

According to the IRS, you can also pay your self-employment tax (another little goody you'll be hit with when you make a profit as a writer) through estimated taxes.

Surviving an Audit

The thought of an audit seems terrifying, but in fact they are not that common. Audits are more common in some regions than in others (Las Vegas and Los Angeles are high on the list). Don't let the fear of an audit prevent you from establishing a writing business. And even if you are audited (as I have been), the event is not as terrifying as you might think. Your best defense against an audit is good records.

  • Keep all expense receipts; never claim a deduction you can't verify.
  • Make sure you know where your receipts are. File receipts by month and by year.
  • Keep copies of all writing correspondence, which proves that you are "working."
  • Make sure your ledger numbers are accurate.
  • Don't make stupid claims, like huge travel expenses that will get an auditor's attention.
  • Don't give an auditor more than s/he asks for. Simply provide the requested receipts.
  • Don't panic!
  • Hire an accountant!

When it comes to the more complicated aspects of tax preparation, such as depreciation, amortization, mileage credits, the home office deduction, etc., there is often no substitute for a good accountant. Yes, an accountant costs money. On the other hand, so does an audit (usually), and an accountant is usually far more friendly than an IRS agent. The IRS is also (theoretically) somewhat less likely to audit small business returns prepared by an accountant, because these are (theoretically) less likely to contain errors than returns prepared by the taxpayer.

(NOTE: This advice is not meant to substitute for the advice of a qualified accountant. If you have any questions about how to handle writing income and expenses, speak to an accountant; it's also worthwhile to have a qualified accountant handle your business tax returns.)

Copyright © 2003 Moira Allen
Excerpted from Starting Your Career as a Freelance Writer.

This article may be reprinted provided that the author's byline, bio, and copyright notice are retained in their entirety. For complete details on reprinting articles by Moira Allen, please click HERE.


Moira Allen is the editor of Writing-World.com, and has written nearly 400 articles, serving as a columnist and regular contributor for such publications as The Writer, Entrepreneur, Writer's Digest, and Byline. An award-winning writer, Allen is the author of eight books, including Starting Your Career as a Freelance Writer, The Writer's Guide to Queries, Pitches and Proposals, and Writing to Win: The Colossal Guide to Writing Contests. In addition to Writing-World.com, Allen hosts VictorianVoices.net, a growing archive of articles from Victorian periodicals, and The Pet Loss Support Page, a resource for grieving pet owners. She lives in Maryland with her husband and the obligatory writer's cat. She can be contacted at editors "at" writing-world.com.

 

Copyright © 2017 by Moira Allen. All rights reserved.
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