Taxes…I can already hear you hissing with dread. It’s a topic that bores or terrifies nearly everyone, but taxes are a reality writers have to deal with more than most.
This post isn’t going to be a line-by-line breakdown of how to do your taxes. Why is that? Well, taxes vary from person to person, and that would be horrendously dull. This is going to be a simple introduction to tax planning and how-to’s for the writer who has never had to pay taxes before, a guide to what you absolutely need to know. As both a tax accountant and an author, I’m going to do my best to make this as painless as possible.
This post is going to be focused on the tax year of 2017. For information regarding the tax reform and how it will affect your 2018 taxes, scroll down to the bottom of the post.
*Important Note: For specific questions and concerns, please consult and verify with your CPA.
Who Should Be Reading This Post?
- Debuting Authors – Authors who have recently signed a book deal AND have been paid contractual money in 2017
- Authors who just want more tax knowledge
- Writers who hope to pay writer taxes one day (Wait, I meant publish books one day. Same thing, right?)
Meet Our Author Character
Let’s meet…Ann! Here are some quick facts about Ann. (Is Ann a thinly disguised foil for me? You betcha! My 2016 tax year serves as a really great example, actually.)
- Ann lives in Pennsylvania, USA.
- Ann is represented by ABC Literary Agency, which is located in New York, NY, USA.
- Ann has spent her past 2016 holiday break trying very hard not to worry about her submission process for her potential debut novel.
Now let’s look at Ann’s 2017 tax year.
- In January, Ann closed a two-book deal with a major US publisher! Go Ann! She’ll have a book coming out summer of the following year (2018), and the spring to follow (2019). The deal was for world rights.
- In May, Ann signed her freshly negotiated contract and got paid for the first time!
- In September, Ann turned in the finished, polished version of her debut novel! And she got paid more of her advance!
When Do Authors File Taxes?
Authors file taxes up to five times each year. That is because they need to file their 1) typical annual taxes, as well as 2) up to four quarterly estimated taxes, which are for the self-employed. Writers fall into this category!
Quarterly Taxes: Here are the 4 quarters
- Q1: January 1 – March 31st
- Q1 Estimates Due Date: April 18th
- Q2: April 1st – May 31st
- Q2 Estimates Due Date: June 15th
- Q3: June 1st – August 31st
- Q3 Estimates Due Date: September 15th
- Q4: September 1st – December 31st
- Q4 Estimates Due Date: January 16th
Annual Taxes: Due on April 15th
You might be wondering to yourself…why is Q2 so short and Q4 so long? I have no idea. Ask the IRS. Ann and I are both annoyed about it. (Note: The estimate due dates fluctuate from year to year. But if you always file by the 15th of whichever month, you’ll be fine.)
What is different about self-employment taxes?
Well, basically, you pay a lot more. On a salary income, your employer pays a portion of your Social Security and Medicare tax for you. As a self-employed person, you are your employer, so you have to pay both portions. This means you pay a percentage higher than your typical tax bracket on your self-employment income.
For the money you get paid throughout the year, I typically recommend setting aside 40-45% of it for taxes. You probably will end up paying closer to 30-35%, but it is far better to be safe than to splurge your entire advance check and then owe $5,000 in cash taxes a few weeks later.
What are quarterly estimates?
If you expect to owe at least $1,000 in taxes for the whole year, and you’re self-employed, you MUST to pay quarterly estimates, otherwise you will be charged penalties. You pay them for the quarters in which you were paid (Note that you probably will not receive payments every quarter, simply by the delayed nature of advances and royalties). These tax payments are basically estimates of what your taxes would be for that quarter.
If you were a salaried employee, you’d have taxes withheld automatically from your paychecks. This is sort of like the federal and states government doing that for self-employed people, except it’s only four times a year.
You pay quarterly estimates through the form 1040-ES. There will be information below about your organizational and filing options. Here is a link to the form.
So let’s look at Ann.
Ann was paid twice this year, once in May and once in September. That means Ann gets to pay quarterly estimates for Q2 and Q4. Even if Ann incurred expenses in other quarters, she is not required to file estimates for Q1 and Q3 because she didn’t earn income. Ann can include those Q1 and Q3 expenses on her annual return and then file a Form 2210 to explain why she didn’t pay estimates in those quarters–that way Ann avoids unnecessary penalties.
What Qualifies as Expenses?
This is where tax planning and organization is critical. It might be a lot of work, but effective planning can save you a lot of money.
If you’ve never filed a business return, here is a very basic idea of what I mean by expenses. Because they are DIFFERENT than deductions, which are on your personal return.
Business Revenue (Advances/Royalties)
– Business Expenses
In typical business, the goal is to make your income/profit as high as possible. You want to get rich! In tax, the mindset is the opposite. The idea is to have the lowest taxable income possible (This isn’t a political statement. This is just how tax planning works.). So keeping track of your expenses sounds like a lot of work, but it will ultimately save you money. The better you plan/organize your expenses, the less your taxable income, the less tax you pay.
Let’s say Ann made $100,000 for simple math. And she had $40,000 of expenses. That means, rather than being taxed on $100,000, she’s being taxed on $60,000. That can save a LOT of money! (If Ann’s tax bracket is 20%, she just saved herself $8,000 cash, for example.)
List of Things You Can Expense (Basically, anything directly related to your work as a self-employed person, and what purchases you need to exist and succeed)
- Travel expenses to events (including mileage, tolls, hotels, flights, ubers, trains, etc.)
- Subscriptions, such as Publisher’s Marketplace or writing-related magazines
- Organizational dues, such as SCBWI or RWA
- Website design and maintenance expenses
- Work technology, such as a laptop**
- Swag and promotional materials
- Advertising expenses
- Freelance editor costs
- Postage for giveaways and promotion
- Printing, notebooks, supplies…if you’re into that hard-copy stuff
- 50% of restaurant expenses when you wine and dine your editor or a writer colleague
- Home office***
*Not every book you purchase is actually relevant. As a YA author, I only deduct YA books, or books that discuss the craft of writing.
**If you only own one computer, you probably split it for personal and business use. You need to come up with a fair percentage splitting that time, then do the formula — Business Use Percentage x Cost of Laptop.
- You will have the choice to expense your laptop all at once or in installments over the course of 5 years. Would you rather lower your taxes in this year or gradually? That is your decision. I personally expensed mine all at once.
***Home office expense formulas look like this
(Square footage of “office”/square footage of whole residence) * rent or mortgage
- You can do this even if you don’t have a separate room. I’ve done it for a “desk space” before. Just needs to be a designated area.
- I highly, highly implore you to keep track of this. It can add up dramatically. This calculation saves me hundreds of dollars every year.
- Conservatively, I would not recommend expensing your home WiFi bill. Most homes have WiFI regardless of the homeowner being self-employed. Your CPA might have a different opinion.
You might think of some other relevant items that qualify–this is a list of common, not all, items.
How do I organize and file my estimated and annual taxes?
Options for organizing:
- Good old Excel
- Get a business use only credit card + probably some minimal Excel use
- Quickbooks – Costs about $17/month
Options for filing:
- TurboTax Self-Employed – Costs about $100 (If you want TurboTax, you must use the self-employed option)
- Quickbooks – For estimated filing purpose–syncs with Turbotax
- Hire an accountant
Obviously, hiring an accountant will be the easiest, but also the most expensive. It will also still require large amounts of organization on your part, and if you want to save some money, you still need to be savvy on your own about tax planning.
I know math isn’t typically a concept that thrills writers. But I want you to know, even if you failed Algebra I your freshman year of high school, you absolutely can do your own taxes. The option I’d recommend for most people that I personally find the most cost effective and somewhat low stress is a combination of TurboTax (for filing) and having a Business Only Credit Card (for organizing). More on that and other options below.
However, you might have some special circumstances. If your literary agency is foreign, thus your payments are coming internationally, that can affect your taxes. You might be making enough money that you should incorporate yourself (discussion on this below). These sort of things get complicated, in which case, it probably would be best to rely on a CPA, or at least consult with one. But otherwise, your taxes are totally something you can handle. I believe in you.
How to file estimated taxes
I have used two methods for this–directly writing into the form line-by-line, and Quickbooks. Quickbooks is much more expensive, but it does all the math for you. It also does a lot of organizational stuff, which I’ll discuss in the next section.
Your second option requires more math on your part, and maybe a tiny bit more stress, but it is essentially free. Download the Form 1040-ES and fill it in directly with a pen. I actually fill it out on Excel first, creating a layout that resembles the 1040-ES, so that Excel does all my math for me. Then, when I get my final answer and it all seems reasonable and correct, I write it into the form, keep a second copy for my records, and mail it to the IRS. The form is full of line-by-line instructions, and the math doesn’t get harder than some multiplication and addition/subtraction. The IRS never sees the full Form 1040-ES–notice that the bottom of Page 9 is the only part you mail, and it looks like little more than a bank check. The IRS doesn’t look at all your calculations on the other pages.
Remember to file with your state as well! In PA, for example, the Form 40-ES compliments the federal Form 1040-ES. The rules will vary state-by-state.
How do you keep track of your business expenses?
If you decide to go with Quickbooks, it will sync to your credit cards and/or bank accounts. If you hire an accountant or do your taxes sans Quickbooks (even with Turbotax), you will need to keep yourself organized.
The absolute easiest way to do this is to acquire a Business-Only credit card. ONLY use it for business. Then you can just sum up your statements each quarter. It couldn’t be easier. The only items you’d have to do are ones that won’t show up on the credit card, like home office expenses, mileage costs, and any full-year subscription expenses that you need to divvy up by month.
But if you’re not interested in opening another credit card at this time, you can keep track of everything manually. What I do is create an Excel file. I create four tabs–one for each quarter. And I enter in each business purchase with this information:
- What the item was
- Date purchased
I also keep track of business miles, as well as monthly expenses like my website upkeep, in a separate column (the yellow).
I put in some example expenses here. If you follow the numbers, you can see how the formulas all work together.
How do you pay your annual taxes?
I definitely recommend getting TurboTax as opposed to doing it by hand, because your annual taxes will probably include a lot of items your estimates won’t, like your personal credits and deductions. And that’s confusing. Plus, TurboTax covers you if you make mistakes.
Because I work a day job, I have to wait for two separate forms–the 1099 from my agency for my writing income, and the W-2 from my employer for my day job. Once I have them, around early February, I upload those into TurboTax. Quickbooks syncs your estimated tax information with TurboTax, but you can input those numbers manually if you didn’t use Quickbooks. Your estimated tax payments lower your tax owed dollar for dollar. So if you owe $10,000 of taxes for 2017, you already paid $9,000, you’ll only owe $1,000. Or they will help you get a nice refund check.
Even if you do all your annual income tax correctly, if you forgot to pay estimates and were supposed to, you will be charged penalties. So keep on top of this!
Should you incorporate yourself?
I’ve gotten this question from a number of writers as well as random family members. Setting legal considerations aside, there are benefits to changing your tax status as a writer from Sole Proprietor to S-Corporation. But those benefits only apply once you reach a certain income threshold.
This post isn’t meant to be a breakdown of S-Corp taxes, as those are much more complex than individual taxes. But here is a basic rundown of what I mean by a threshold, so you can consider if it might work for you (and then promptly discuss your options with your CPA).
As an S-Corp, you can essentially break down your income sources into two separate categories: 1) a salary you pay yourself, as though the “Corporation” is paying you a wage; 2) dividends you get as the owner of this corporation.
Your salary is an arbitrary number that you make up. Or, well, that you reasonably estimate. I Googled the average salary of a technical writer in the area where I live, and I got roughly $50,000. That means your S-Corp is paying you $50,000, and that $50,000 is subject to your regular self-employment taxes, just like everything we discussed above.
But let’s say your net income was higher than $50,000. If you remember Ann, Ann made $100,000 in 2017, had $40,000 of expenses, and ended up with $60,000 net income What could Ann do with that extra $10,000? Well, Ann’s S-Corp could pay her that money as a “dividend,” which means she could avoid the extra self-employment tax on that portion of her income. It would save Ann a fair bit of money.
But if you make under $50,000, what then? Well, incorporating not really worth it. Nothing would change for you, and sometimes, your state government will make you pay extra money just to file as an S-Corp, so you would probably end up costing yourself more. But your status you elect this year isn’t permanent. Perhaps, in the future, the S-Corp status will have more benefit to you.
I’ve seen a lot of false posts floating around writer Twitter about tax reform. Shoving all political opinions aside, to the best of my understanding, your “Writer Taxes” will not be affected by tax reform. Expenses are not the same thing as deductions–you as a business have expenses, you as a person have deductions. I cannot say whether or not you will personally benefit or hurt as a result of the tax plan, but the writing portion of your taxes should not be materially affected. You can expense what you always have.
If you’re wondering about information you saw discussing the cuts to “business expenses” taken by an individual, those are for salaried employees. For example, a teacher buying school supplies for her classroom. Teachers are salaried employees–they aren’t self-employed. Writers are. And writers also don’t seem to have been included in any negative cuts made to those working in the fine arts.
Again, this is to the best of my knowledge. I’m still doing a LOT of reading on tax reform, especially on catching up regarding the finalized bill versus some of the earlier versions. If you have anything to add or clarify about this, feel free to comment! And remember, this doesn’t apply to the taxes you file this year. This applies to Tax Year 2018.
I hope this was helpful to you! I’m unsure if this post has made you more or less intimidated by doing your taxes, but if you learned a thing or two about tax planning, your filing requirements, or filing methods, then I’d consider it a success.
To put your mind at ease, I screwed up my estimated taxes the first quarter I paid them–due to a calculation error. It was the first time I’d paid taxes ever, let alone all the special self-employed rules. And I ended up owing a penalty to the state of PA of a whopping $7. Not that this is a flat penalty rate, but I just mean, I stressed myself out about getting everything perfect, I felt totally lost, I did it all by hand and on my own with my phone calculator, and my worst case scenario ended up being $7.
Because I have to keep saying this over and over, if you do have specific concerns, please verify and consult with your CPA. I work at a CPA firm, I have a masters in accountancy, but I am not a CPA. And I am also a human who is prone to error.
So, good luck with your 2017 taxes! And congrats to all the writers who are suffering through them for the first time. It’s pretty dreadful, and definitely not a glamorous part of this career–but it means you’re earning money doing something you love, and that’s something to celebrate!
If you found this sort of writer finance post helpful, let us know! Perhaps we can do a Financial Planning for Writers post in the future.