This is the time of year when I run across folks – newly published writers, generally – who have forgotten one of the most basic facts about their writing careers, and who are about to pay a painful price.
What fact? The fact that they’re running a business, and they’re going to have to pay taxes on the net income.
It amazes me the number of folks who behave as if their writing income is a non-taxable freebie if they already have a day job. They don’t pay quarterly tax estimates or up the withholding from their day jobs; they don’t set aside part of their payments so that they’ll have the cash on hand when tax day rolls around; some of them even try to skip including their writing income on their tax forms entirely. And then they complain in bitter surprise when the IRS comes around demanding its cut.
The IRS doesn’t care whether you’re having fun or pursuing your dreams or making a contribution to great literature: if you made money doing it, they want their share, and if you didn’t send it in, they charge penalties. Fairly draconian penalties. Nobody likes this, but it’s a fact of life that can’t be avoided by hiding one’s head in the sand.
I have slightly more sympathy for those who thought about this aspect of writing, but drastically underestimated how much of a cut the IRS was going to want. This is usually because they either forgot about FICA (Social Security taxes, to most of us), or didn’t realize that they were going to be paying twice the rate that’s withheld from their day job paychecks. That’s right, twice. Writers count as self-employed, which means we have to pay the employee half of the FICA tax and the employer half. That’s roughly 15% of the check, right off the top, no matter what tax bracket you’re in.
I take that back: if you made more than $106,800 in 2009, you hit the FICA ceiling and only have to pay the 15% on the first $106,800. But there aren’t many writers who make that much in a year, and there really aren’t very many new writers with that kind of income.
Those who forgot to set money aside (or didn’t realize) don’t have a lot of options. I’m told the IRS will negotiate, if they think you acted in good faith. People who just skip filing tend to end up with their wages garnisheed or their houses and cars being seized.
And let’s not even start on “sneaky” ways to avoid taxes. The IRS has been around for a long, long time, and they’ve seen just about every loony tax write-off you can think of (and probably a lot you can’t imagine). You can’t deduct your cat as an employee or “inspiration.” You can’t deduct your sweatshirt and jeans (or your evening gown or tuxedo) as a “work uniform.” And you can’t avoid taxes by taking payments “in kind.”
I know someone who tried that. She was published by a small press, and elected to take her advance in books instead of in cash. She traveled around and sold the books at her autographings and speaking engagements (she was really quite good at that part), and then spent all the money buying more books to sell, in the smug certainty that she didn’t owe any taxes because she didn’t have any money in her account. And then was completely appalled when she got a 1099 form from her publisher for the full amount of her advance, on which she had taxes due. She was even more appalled to realize that she also owed tax on the sales of her book, even though she’d spent all the money buying more books.
See, as far as the tax people are concerned, she got paid her advance and then spent it on books (even though the publisher never sent her an actual check, just the books themselves). The tax people don’t care what she spent it on; they care that she got paid, and they want their cut. Then she sold books, and they want their cut of that. Of course, she could deduct the cost of the books (the advance) from the income she got from selling the books…but she hadn’t kept track, because she was so positive that as long as she didn’t build up any cash in her bank account, it was all non-taxable. She had a hard time scraping up enough cash that year, but I believe she learned her lesson.
Obviously, a lot of the specifics of this are going to differ, depending on what country you live in, but the principle is the same: check out the tax rules earlier, rather than later, and don’t play games with the tax people. Me, I have an accountant…and not because I make tons of money (I don’t), but because the tax rules are so complex and ever-shifting that it is a full-time job keeping up with them. And I already have a full-time job.
I am a long, long way from making any money off my writing, but I’m storing this advice away for the day when I do. 🙂 Thank you!
That is some very practicable advice and certainly something I haven’t heard many authors bring up before. Thanks!
Speaking as one who regards the taxman with even less than the common affection, I should like to say: absolutely, with a big candied cherry on top!
Firstly, whilst I take no pride in my annual contributions to my Mundane Godfather’s benevolent fund, I hope I will never be such a prize fool as to try to get cute with him about it.
Secondly, if hypothetically there were ever any little enterprise of mine with whose details I felt no need to burden him –
– it would not be one where the business plan involves as many people as possible knowing who I am, and buying stuff with my name all over it!
Gray: I think “Mundane Godfather’s benevolent fund” is hilarious. May I quote you?
Fortunately I’ve been running my own business since 2003, so I’ll be prepared when I do start earning from publishing.
And also fortunately, I run my business out of Canada which seems to LOVE small businesses much more than many other countries.
do you have any sketches of the dragons in your novel Dealing with Dragons.
Superscout – No, I don’t have sketches of the dragons; unlike my sisters, I am a terrible artist and can’t even draw stick figures to save my life.
Alex – You’re way ahead of the game. Most people who go into writing seem to start off without even consciously realizing that writing is a business, let alone that they are going to be self-employed and running it. The closest most people get is figuring that they’re going to have to do some publicity.
nct2: Why, thank you, and of course you may! The more freely such phrases are bandied about, the sooner shall my Secret Evil Master Plan be accomplished! Mwahahaha!
Er, that’s the SEMP which does not, of course, exist. And which, if it existed, would certainly report all its income and outgoings to the appropriate tax authorities by the due date. Because at Secret Evil Master Plans Which Positively Do Not Exist, we would value good corporate citizenship.
I assume its very much like being a freelance artist, which I have researched and in which I have dipped a toe. (my wee small teeniest toe)
for all the publicity, talks and lectures and stuff, I assume they pay your travel expenses. do you have to include that in your taxes? i’m thinking, if one wins the lottery, one has to pay taxes on that “gift”. Well, I guess you aren’t being given money, but it is some financial transaction on your behalf. do you have to pay taxes on any of the publicity stuff?
accio-aqualung – Yes, you have to pay taxes on publicity stuff – speaking fees, mainly. The travel expense is a wash, because if they pay you directly for it, you get paid and then you can deduct it as an expense.
David – That’s my understanding, too; if you are acting in good faith, they’re much more likely to work with you than if they think you aren’t. In fact…
My parents ran a small manufacturing business. One year they got audited. The IRS guy came in February, and Mom put him in her office with her. Being thrifty, Mom always had the heat turned down, and it was quite cold. They worked there for a couple of hours, then Mom said, “Do you think it’s cold in here? I’m going to turn up the heat!” Later, after they’d gotten to know each other over the week or so of auditing, he told her that he’d been completely flummoxed – apparently, lots of people being audited put the IRS guy in a cold room, hoping to make him go away faster, and his reaction was always to throw the book at them. But here he was in a cold room with this woman who just worked away like it was normal! And then asked to turn up the heat! They had a good laugh about it.
I think the tax authorities are slightly more lenient on those who file an honest return but say “I don’t have enough money yet; what are your easy terms?” than those who pretend that they don’t have to pay at all. If necessary, file with an explanation or plea.
thank you for commenting back on the sketches.