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