Taxes and Writers
It’s April 15th, woohoo! One of my favorite days of the year.
NOT.
Awhile back I blogged about making a living as a writer (Part 1 and Part 2), so today we’re going to talk about the unfortunate side effect of getting paid for your writing. Yup, it’s….
Taxes.
Disclaimer: I’m not going to thoroughly cover the topic of taxes for writers. I’m not a CPA and I’ve never worked for the IRS so I’m not even going to try to tell you “all about taxes.” I am, however, going to give you a few tips regarding MONEY in general as it relates to your career as a writer.
So here are a few hints for you:
1. Treat your writing like a business.
This is the most important thing I want to impress upon you about handling the financial aspect of your writing career. It means budgeting for your writing expenses before they happen, and tracking them throughout the year. Even if you’re not making money yet, you need to do this, to establish in your mind that this is a business, and to prepare you for the day you are making money. How much will you spend on writing conferences, books, memberships, and office supplies? Even if you’re not yet to the point where you can write off expenses, keep track of them.
2. Set aside money for taxes from every check you receive.
When you make income as a writer, the taxes will not be taken from those checks before you get them. It’s up to you to pay the tax. And you may not have the money when April 15th rolls around if you don’t set it aside (plus the IRS will assess penalties if you wait that long). You should probably file estimated taxes on a quarterly basis.
Each time you receive a check, set aside about 20% for taxes (adjust as necessary depending on your tax bracket). The best strategy is to send the tax to the IRS the moment your advance check clears the bank. Get the correct address and procedure from the IRS website or call their information line. If you choose to wait, you still need to pay the taxes by the due dates for estimated tax payments, which are April 15, June 15, September 15, and January 15. If you made money in that quarter, you should pay your estimated taxes in that quarter. This will lessen the sticker shock come April 15.
WARNING: You will want to ignore this advice! You will agree it’s a good idea but you probably won’t do it. Trust me, if you don’t follow this advice, you will be sorry! I get my share of woe-is-me phone calls and emails from writers at tax time. Don’t be one of them!
3. Spring for a professional tax accountant.
When you first start making income as a writer, I recommend you pay a good tax accountant to do your taxes for at least the first couple of years, preferably someone who has handled freelancers and/or people with small home businesses. After that, if you want to start doing it yourself or paying one of those discount tax-preparation services, at least you’ll have those professionally prepared tax forms from previous years as a guide to keep you on track. (But my personal recommendation is that if you’re making money as an independent contractor, and writing off expenses including a portion of your household bills, you should probably hire a professional.)
4. Don’t spend your advance checks the moment you get them.
I recommend you try not to use your advances to pay bills or immediately purchase something large, even if it’s something you’ve been dreaming about. I think you should put your advance money away for three to six months, somewhere it’s not easily accessible, while you take your time deciding what to do with it. Pay your taxes, and let the rest sit.
5. But DO commemorate your success!
I DO recommend either buying something small and special to commemorate getting that check, or doing something celebratory that you wouldn’t normally do – a nice dinner out or a night in a hotel. You want to be wise, but you also want to take time to celebrate your achievement!
I’m not going to go over specific things like what the IRS allows as write-offs, when to file as an LLC or an “S” corporation, or how to avoid an audit. There are plenty of resources to help you with details. The most important thing for me to convey is that you need to be proactive about taking care of your finances. If you hope to make money from writing someday, now is the time to prepare. Get educated. Make a budget. Track your expenses. In other words, be a professional.
Any further thoughts on financial management for writers?
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