As it happens, I’m doing my taxes today (I’m expecting a refund, so there’s no reason to wait for April), and so I thought I would share a bit of information about professional writers and their tax process. For those of you not yet making a living at writing, don’t despair: You will see income eventually, and when you do you’ll need to know how to do some of this stuff.
I do my own taxes using TurboTax. I’ve gotten fairly efficient at using the software, and so I don’t really begrudge the time. Plus, I’m a control freak, and I like to know that I’m taking all the deductions that I feel comfortable taking, no more and no less. But I have lots of writer friends who hire accountants to handle this stuff for them. You need to decide which approach works best for you. Remember though that either way you need to save receipts and keep close track of expenses. And remember as well that the cost of the tax software and/or the fees charged by your accountant are fully deductible!
I work at home and have a dedicated home office and so I take deductions for the expense of that office. This basically means that I have measured the office, figured out what percentage of the total area of my house it represents, and can deduct that percentage of utilities, homeowners insurance, mortgage interest costs, and property taxes from my self-employment income. I also use my car for business, in that I drive to conventions, conferences, signings and the like. Those miles are also deductible. But remember to keep a written log of all your business miles, including the date of each trip, the number of miles, and the event. Also, at the beginning and end of each year, write down the total mileage on your car. The IRS will want to know how many total miles (business and non-business) you put on your car each year.
Any costs connected with my internet presence, including server costs for this site, similar costs for other sites and online memberships (LiveJournal, for instance) and the monthly fees I pay my internet service provider are also deductible. So are the costs of any software I use for writing — Scrivener, Dreamweaver (for my website), word processing programs — any professional memberships (SFWA, for instance), magazine and journal subscriptions, and the costs of research materials (which basically means every book I buy and often some DVDs as well). I have friends who also deduct the costs of their cable or satellite television and their Netflix accounts, on the grounds that these too are a form of research expense. I have a hard time justifying that and have never done it.
All my travel expenses for conventions, conferences, etc., including convention fees themselves, hotel bills, air fares, parking, internet access fees charged at hotels, and either one-half of all my meals or a food per diem as determined by the IRS, are also covered.
If you buy your own health insurance, as a self-employed person you can deduct up to half the cost of that coverage. I’m covered on my wife’s health insurance plan through her job, so I have no write-off there.
Many literary agencies have taken to reporting the entirety of royalty and advance income to the IRS on 1099-msc forms. This means that writers need to be careful to deduct the 15% agency fee their agents collect. This is a miscellaneous expense that we need to remember to report, but it’s also a very important one, because those fees add up quickly and can amount to thousands of dollars.
As you can see, there is a lot to keep track of. I have a folder into which I put all my receipts throughout the year. Come tax season, I tally up my totals and jot them down. I keep these sheets from year to year, so that I can keep track of expenses over the years, and so that in the unlikely event of an audit, I can present evidence for all my deductions. As your career begins to pick up momentum, I also recommend designating a single credit card for all your business purchases. This will make your life much, much easier when you go through your tax records.
Self-employment taxes tend to run higher than regular income taxes, for the simple reason that most of us who work as contractors with publishers and the like do not have social security and medicare taxes taken out of our payments. So we are not only paying income taxes, we’re paying the social service taxes as well. That’s one of the reasons it’s so important to keep track of all those deductions. I have friends in other states who have incorporated themselves in order to take advantage of lower corporate tax rates. This can be a somewhat expensive proposition — there are legal and bureaucratic costs associated with the incorporation process — but it can save you significant money in the long term. My state, as it happens, does not have a personal income tax but does have a corporate tax, so incorporation has not made sense for me.
One final thing to keep in mind: Because we have no withholding on our payments, writers who start to make significant money should consider paying estimated taxes during the year. Failure to do so can lead to a big tax bill in April, and it can also result in penalties imposed by the IRS. I pay estimated taxes every year, quite often in the form of IRS refunds that I simply roll over into next year’s taxes. This costs me nothing out of pocket and keeps me from having to worry about those penalties I mentioned.
No one likes paying taxes, not even a bleeding heart liberal like me. But with a little foresight and some careful record-keeping, the tax returns associated with your burgeoning literary career need not be too unpleasant. Best of luck!