April 15 is coming up fast, and for anyone who made money writing, it tends to be rather traumatic. No matter how much you set aside from your payments, it never seems to be enough (for those of us in the U.S., that 15% Social Security payment is a perennial killer). And of course they always change the tax rules from year to year, which is why I recommend finding a good accountant. It’s possible to fill out the forms yourself – my ex-husband insisted on doing so for years – but believe me, having someone on your side whose full-time job is keeping up with the regs makes an enormous difference, and it’s worth every penny. And I don’t mean a tax-preparation firm that just fills out the forms – if that’s all you want, buy Turbo Tax or something similar.
As I’ve said before, writing is a business. It’s too late to make changes in what you actually did during 2010 (unless you have a time machine, and if you do, please e-mail me – I could use one myself), but if you made any money from your writing at all (and possibly even if you didn’t), you’re going to have to deal with the tax part in the next couple of weeks. That makes it a good time to consider both what you did last year, and how you’re going to keep your records this year.
Writing is not a particularly good tax shelter business – that is, expenses for starting up and continuing to run it tend not to be huge, so any losses are likely to be relatively small and not that great as tax deductions. You also cannot deduct nearly as many things as you would like to (though people keep trying). If you are allergic to record-keeping, don’t try this. You don’t have to start filling out the tax schedules until you actually have money coming in.
Nevertheless, if you are seriously trying to make a go of writing for pay, you can take all the appropriate business deductions, even if you haven’t had any money coming in this year and show a loss. Just be very sure that you have the records to back up every expense (that doesn’t just mean receipts; it means organized receipts and notes of what each is for) and copies of your submission records, enough to prove that you really are serious. (Hint: three short story submissions in a twelve-month period is not going to say “seriously trying to make money at this writing business” to the IRS.)
If you do have money coming in, you have to declare it somewhere, even if you had so many expenses that you ended up with a loss. Basically, the tax guys want a cut of whatever income you make. “Income” includes the full amount (before any deductions, such as your agent’s cut) of any checks you get. It also includes the dollar amount of any payments-in-kind (for instance, if you decide to take your advance money in books, rather than in cash, you still owe the tax – and the IRS will not take 250 copies of your novel as payment of the taxes you owe on the 1000 copies you have sitting in your basement now. They want money.) Income also includes money from school visits or other speaking engagements, even if it was only a token $25, and any money you make from selling copies of your book yourself, whether you’re going door-to-door, putting copies on e-Bay, or setting up a table in the dealer’s room at a convention.
If you are selling copies of your book directly to readers, you also owe sales tax to whatever state you sold them in (unless it was an internet sale, though that may be changing). That means you need a sales license, and you need to keep track of sales by state and find out what their sales tax is. The record-keeping is a nightmare, especially for Ohio (which not only has a state sales tax, but has county sales tax that varies by up to half a percent per county. Ohio is why I quit trying to do mail order sales of my books years back…though these days there’s probably software that’ll calculate it based on zip code, if you’re determined). If you sell wholesale to bookstores and distributors, and only wholesale to bookstores and distributors, you still need the sales license and you still need to do the paperwork, but you don’t actually have to collect sales tax (in the U.S., anyway; I don’t know how the VAT tax in the U.K. works).
Expenses are a different kettle of fish. You can deduct your direct expenses for writing materials, office supplies, postage, publicity – take a look at the line items on Schedule C. Some of them don’t apply to most writers – I don’t have any employees, for instance, so I don’t have anything to enter under the lines for wages, employee benefits, or pension and retirement programs. This is where your good accountant can really help a lot; they’re always changing what you’re allowed to deduct and/or how to calculate it. You also want professional advice about things like whether it’s a good idea for you to take the home office deduction and whether to depreciate your new computer or not.
Your life will be enormously easier at this time next year if you come straight home from your accountant and set up your Quicken categories so that the writing-relevant ones are the same as the lines on Schedule C.
And of course the usual caveat applies: Do Not Try To Stiff The IRS. Just don’t. When your accountant says you can’t deduct your dog as an employee, believe her. Really.