Taxes and Writers

Taxes and WritersIt’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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  • Andrew Budek-Schmeisser

    A couple of further suggestions –

    Know the rules on travel, dining out, and entertaining, and be conservative in taking deductions. Also be sure you thoroughly understand home-office deductions. They’re there to help you, but not for you to flimflam.

    Definitely pay quaterly ‘estimated’ taxes when you start making any money. When you pass a certain threshold it becomes a requirement, and if you’re late past the quaterly due dates, there’s a fine.

    Don’t stress. If you get it a bit wrong, you’ll get a notice of additional taxes due – or a bigger efund check. Unless you’re making a ton of money, or are very famous, the IRS probably won’t audit you, since writers don’t have a lot of loophols through which they can slip to try to avoid taxes.Other businesses have a lot more potential for that.

    And thanks, Rachelle, for reminding us of the day. I’m filing an extension, and I almost forgot!

    http://blessed-are-the-pure-of-heart.blogspot.com/

  • Andrew Budek-Schmeisser

    A couple of further suggestions –

    Know the rules on travel, dining out, and entertaining, and be conservative in taking deductions. Also be sure you thoroughly understand home-office deductions. They’re there to help you, but not for you to flimflam.

    Definitely pay quaterly ‘estimated’ taxes when you start making any money. When you pass a certain threshold it becomes a requirement, and if you’re late past the quaterly due dates, there’s a fine.

    Don’t stress. If you get it a bit wrong, you’ll get a notice of additional taxes due – or a bigger efund check. Unless you’re making a ton of money, or are very famous, the IRS probably won’t audit you, since writers don’t have a lot of loophols through which they can slip to try to avoid taxes.Other businesses have a lot more potential for that.

    And thanks, Rachelle, for reminding us of the day. I’m filing an extension, and I almost forgot!

    http://blessed-are-the-pure-of-heart.blogspot.com/

  • Andrew Budek-Schmeisser

    A couple of further suggestions –

    Know the rules on travel, dining out, and entertaining, and be conservative in taking deductions. Also be sure you thoroughly understand home-office deductions. They’re there to help you, but not for you to flimflam.

    Definitely pay quaterly ‘estimated’ taxes when you start making any money. When you pass a certain threshold it becomes a requirement, and if you’re late past the quaterly due dates, there’s a fine.

    Don’t stress. If you get it a bit wrong, you’ll get a notice of additional taxes due – or a bigger efund check. Unless you’re making a ton of money, or are very famous, the IRS probably won’t audit you, since writers don’t have a lot of loophols through which they can slip to try to avoid taxes.Other businesses have a lot more potential for that.

    And thanks, Rachelle, for reminding us of the day. I’m filing an extension, and I almost forgot!

    http://blessed-are-the-pure-of-heart.blogspot.com/

  • Andrew Budek-Schmeisser

    A couple of further suggestions –

    Know the rules on travel, dining out, and entertaining, and be conservative in taking deductions. Also be sure you thoroughly understand home-office deductions. They’re there to help you, but not for you to flimflam.

    Definitely pay quaterly ‘estimated’ taxes when you start making any money. When you pass a certain threshold it becomes a requirement, and if you’re late past the quaterly due dates, there’s a fine.

    Don’t stress. If you get it a bit wrong, you’ll get a notice of additional taxes due – or a bigger efund check. Unless you’re making a ton of money, or are very famous, the IRS probably won’t audit you, since writers don’t have a lot of loophols through which they can slip to try to avoid taxes.Other businesses have a lot more potential for that.

    And thanks, Rachelle, for reminding us of the day. I’m filing an extension, and I almost forgot!

    http://blessed-are-the-pure-of-heart.blogspot.com/

  • Andrew Budek-Schmeisser

    A couple of further suggestions –

    Know the rules on travel, dining out, and entertaining, and be conservative in taking deductions. Also be sure you thoroughly understand home-office deductions. They’re there to help you, but not for you to flimflam.

    Definitely pay quaterly ‘estimated’ taxes when you start making any money. When you pass a certain threshold it becomes a requirement, and if you’re late past the quaterly due dates, there’s a fine.

    Don’t stress. If you get it a bit wrong, you’ll get a notice of additional taxes due – or a bigger efund check. Unless you’re making a ton of money, or are very famous, the IRS probably won’t audit you, since writers don’t have a lot of loophols through which they can slip to try to avoid taxes.Other businesses have a lot more potential for that.

    And thanks, Rachelle, for reminding us of the day. I’m filing an extension, and I almost forgot!

    http://blessed-are-the-pure-of-heart.blogspot.com/

  • Sheena-kay Graham

    Great tips. No one wants the IRS at their door.

  • Jo Murphey

    As a former accountant, I couldn’t agree more.

  • Sue Harrison

    Such a timely blog post, Rachelle, and such great advice. I’ve never regretted spending money for a good accountant.

    Another bit of advice that I wished we would have followed! We’d set aside a good amount of money from one of my advances on royalties – enough to get us through a year, pay our taxes and to tithe. We had a request from a family member for a large loan to be paid back in 6 months. (Before we would need the money.) That was in 1992 or 3. We’re still waiting for the “paid back” part.

    The advice? Don’t feel guilty if you suddenly begin making money on your books. God has chosen to allow you that stewardship. Guilt impels recklessness in a strange kind of way. And guess what? The family member feels terrible, too, because he fully intended to pay back the money, but can’t.

    Be wise. Invest, give to good causes, set aside retirement money, pay off your debts. Not necessarily in that order!

    Again, thank you, Rachelle!!

  • Jeanne Takenaka

    Great ideas, Rachelle. I hadn’t considered setting it aside (less taxes) for a few months. I can definitely see the sense in doing that. Thanks for this!

  • Meghan Carver

    Spot on, Rachelle. I especially appreciate the advice not to spend the advance right away. Savor the success for a while!

  • Eileen

    I used my first advance (minus taxes!) for a painting. I’ve always loved art and wanted a “real” piece of it. It also felt somehow like good karma- taking the first real money I earned in writing to pay another artist. Every time I see it in my house it makes me happy and reminds me of that achievement in a way that paying bills wouldn’t have done.

  • Jessica C

    Wow, I knew the taxes would be more detailed, but I thought anyone could do it easily themselves the first time around. I guess it’s better to play it safe and let the pros do it.

  • Roxannne Sherwood Gray

    As I transition from writing as a hobby to a career, these tips are so appreciated. Thanks so much!

  • J Keith

    Very useful info as I someday want to make a living being a writer

  • Gabrielle Meyer

    Great advice! I pulled all my expenses together and was amazed at how much I had spent on my writing career this past year! I attended a conference, two retreats (hotels, airfare, food, etc.) and bought a LOT of writing books. Wowzer. But it was good to have that figure in mind as I budget for this year. My husband and I both look at the expenses as investment in a business.

  • http://twitter.com/ConnieAlmony Connie Almony

    Excellent advice. Thanks for this!

  • http://www.danerickson.net/ Dan Erickson

    Oh the advantage of being a self-published, non-best-selling author. I would dread the taxes, too, but I’ll be ready when they come, in part, thanks to your post. Thanks for sharing.

  • R, Tezak

    Great advice!

  • http://www.CreativityUntamed.com/ J. M. Tompkins

    Thank you Rachelle – I would reinstate getting a professional that understands the deductions. When you work from home, there are many little helpers for tax write-offs. You don’t want to miss out on those!

  • http://twitter.com/PJCasselman P J Casselman

    Find out who does your pastor’s taxes. Minister taxes are complex and those who can handle them well will be capable of understanding a plethora of expense variables. Also, since most pastors are financially poor (I am my own evidence :P), their accountants are not on Park Avenue.

  • http://www.facebook.com/connie.grudzinski Connie Grudzinski

    I not only learn from you, but also from your followers. Thank you for posting this, it’s good advice. I just set up my tax number today and am moving on to the next step. Note: my head is bursting, my anxiety has peaked, I need something stronger than water in my glass. It’s so much easier to just write!

  • Krista Phillips

    I actually enjoy the tax process a little bit… super sad, this I know!! Another suggestion for those who writing is a side job and you still have a day job (or have a spouse with a day job)… you can elect to withhold addt’l taxes from your payroll taxes on your W4 instead of estimating taxes. It might take a little more work on the budget end, but for us it works nice because it is seemless every payday and I can just recalculate if we have a bigger payment or a smaller one (hubby and I also do outside non-writer contract work and use the same method) And I don’t have to remember to hold out large chunks out of checks or accidentally forget to make a quarterly payment!

  • http://www.peterdehaan.com/ Peter DeHaan

    Another thing (from a non-expert) to keep in mind is being able to prove you are making a
    viable effort at writing and selling your work. If you’re audited and you can’t do this, the IRS could declare your writing is a “hobby” and disallow all your deductions.

  • http://www.jfsmithbooks.com/blog jfsmith

    Excellent tips! I would also advocate the home office option. Make sure you follow the IRS guidelines – that the space you’ve set up is used ONLY for writing, and that way you’re doubling your return in that you’re investing in an area just for yourself.

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