As Benjamin Franklin once famously stated, “…in this world nothing can be said to be certain, except death and taxes.” And as a fantasy writer who crafts stories about perilous adventure and tragic characters, I much prefer reading about the former!
As creative professionals, we have undergone intensive effort to hone our crafts, laborious research in the techniques of writing as well as the ins and outs of the elusive publishing industry. Writing is our dream, and we work hard for it. But for all the effort we have invested in educating ourselves on word choice and plot structure, how many of us have put even a fraction of that effort into understanding our taxes?
Most of us probably haven’t, and I don’t blame you. I would much rather be researching esoteric dragon mythology or 14th-Century secret societies than IRS regulations. But for as outlandish and intimidating as taxes can seem, as self-employed individuals, we face more rules and deadlines than most. And it’s important we tackle every aspect of our career with the same pride we put into our art.
Sorry, but this post isn’t going to be a line-by-line breakdown of how to do your taxes. Why? Well, taxes vary from person to person, and let’s be honest… that would be horrendously dull. Instead, this post is going to be a simple introduction to tax planning 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. Hopefully, by the end of this guide, you’ll feel motivated to make your expense book as tight as your word counts.
*Important Note: For specific questions and concerns, please consult and verify with your CPA.
I am returning a year and a half later to 1) update this post per regulatory reform, and 2) thank you all for making this guide Writers Block Party’s most viewed post ever. I am seriously honored—we have some way more interesting posts in our archives about romance and magic. But again, thank you. The group of us are definitely planning to put out more financial guides in the future.
Who Should Be Reading This Post?
- Debuting Authors – Authors who have recently signed a book deal AND have been paid their first contractual installment
- 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? Are all my characters thinly disguised foils for me? I’ll let Kirkus decide.)
- 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 winter holiday trying very hard not to worry about her submission process for her potential debut novel.
Now let’s look at Ann’s 20XX tax year.
- In January, Ann closed a two-book deal with a major US publisher! Go Ann! She’ll have a book releasing summer of the following year (20XY), and the spring to follow (20XZ). 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 tax payments, which apply to self-employed individuals. Writers fall into this category!
Quarterly Taxes—Here are the four quarters. Please note that the due dates here apply to the 2018 tax year, and they will vary year-to-year.
- 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 absolutely no idea. I don’t make the rules; I just file your taxes.
What makes self-employment taxes different?
To put it simply, you pay a lot more. On a W-2 salaried 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 extra portion is a payment added onto the percentage you already pay as part of your general tax bracket.
As you are paid throughout the year, I recommend setting aside 40-45% of it for taxes. You probably will end up paying less than that, but it is far better to be safe than to splurge your entire advance check and then owe thousands of dollars in cash taxes a few months 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 estimates of what your taxes would be for that quarter.
If you have ever been a salaried employee, you might remember how your taxes were withheld automatically from your paychecks. Think of your quarterly estimates like that. They are the government’s way of collecting those taxes steadily throughout the year rather than having to wait for them all at once in April.
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. (If you are reading this article in the future, aka not 2018, simply Google “1040-ES” to find the current year’s.)
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/Etc.)
– 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 by remembering to record them, you will ultimately save yourself a lot of money—money that you can then spend buying that Barnes & Noble Exclusive Edition you’ve been eyeing since last April.
Let’s say Ann made $100,000 this year 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 the 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
- Work technology, such as a laptop**
- Swag and promotional materials
- Advertising expenses
- Freelance editor costs
- Postage for giveaways and promotion
- Printing, notebooks, supplies
- 50% of restaurant expenses when you wine and dine your editor or a writer friend
- 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.
- TurboTax / H&R Block will prompt you about this and do the calculation for you—don’t worry!
***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.
- Yes, TurboTax / H&R Block calculates this, too. Just don’t forget to include it!
- 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:
- Excel / Google Sheets
- Get a business use only credit card
- Quickbooks – Costs about $17/month
Options for filing:
- TurboTax / H&R Block Self-Employed – Costs about $100 (If you use these softwares, you must purchase 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. You’ll also still be responsible for the organization of your expenses, but an accountant will make sure you aren’t missing out an expense you could be taking.
I know math is a subject that intimidates many 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 matters 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. You don’t actually mail in the form; you only mail in the tiny tear-off check at the bottom of Page 9 with the amount that you owe.
There is a third option that I am hesitant to recommend, but in the interest of transparency, this is the option I take. Whatever my net income that quarter, I multiply it by 40-45%, write that into the check, and mail it off. Estimated taxes are just that—estimates. As long as you are not wildly overpaying or wildly underpaying, you will not be charged penalties, and you will receive a refund or cut a payment for the exact amount at the end of the year.
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 use Turbotax / H&R Block, you will need to keep track of your expenses yourself.
The absolute easiest way to do this is to acquire a Business-Only credit card. ONLY use it for writerly expenses. Then at quarter-ends or year-end, you can just sum up your statements to calculate your total expenses. It couldn’t be easier. The only items you’d have to add in separatedly 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 apportion monthly.
But if you’re not interested in opening another credit card at this time, you can keep track of everything manually in an Excel file.
How do you pay your annual taxes?
Getting an accountant is obviously the straightforward answer, but if you would prefer not to, I recommend getting TurboTax as opposed to preparing your taxes by hand. I used to have to fill out taxes directly on the form in my Intro to Taxation class, and I do not recommend—the IRS is a harsh grader. TurboTax will guide you through the process and ensure you don’t make any major mistakes.
Because I work a day job, I have to wait for two separate forms to arrive in my mailbox–the 1099 from my literary 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. TurboTax then asks me how much I’ve paid that year in estimated taxes, since those payments lower my annual tax liability dollar for dollar. For example, if you owe $10,000 of taxes for 20XX and you already paid $9,000 in estimates, you’ll only owe $1,000 on April 15th. Or, if you overpaid estimates, the IRS will cut you a nice refund check.
Even if you do all your annual income taxes correctly, if you forgot to pay estimates and were supposed to, you will be charged penalties. So keep on top of this! You cannot avoid them!
Should you incorporate yourself?
I get this question frequently from other writers. 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 writerly income 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 20XX, had $40,000 of expenses, and ended up with $60,000 net income What could Ann do with that extra $10,000 (60,000 – 50,000)? 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 15%, aka the self-employment tax. Or $1500 cash.
But if you make under $50,000, what then? Well, incorporating is 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 than you would pay otherwise. But the status you elect this year isn’t permanent. Perhaps, in the future, the S-Corp status will have more benefit to you.
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.
And if you can take away anything from this post, it’s that quarterly taxes exist, you probably owe them, and you could really consider signing up for a designated writerly credit card.
Because I have to keep saying this over and over, if you do have specific concerns, please verify and consult with your CPA. I’ve worked at CPA firms, 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 20XX taxes! And congrats to all the writers who are suffering through them for the first time. That means you’re earning money doing something you love, and that’s something to celebrate!