Taxes

Taxes, reporting royalties, and dealing with the IRS for writers, authors and other independent contractors.

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By EelKat Wendy C Allen


"How do I handle taxes?"

Legally I can not tell you how to handle your taxes, because I am not a banker, accountant, tax adviser, or any other type of money guru. I can only tell you what it is I do, and than from there it's up to you to find an accountant to tell you if they agree or not.

The first choice you have here is to decide are you going to do your own filing or are you going to hire a professional to file for you?

Me personally I file my own taxes and I do it "long form" which means I save all receipts all year long and I itemize every single item, right down to my grocery lists. I know where every penny I spend goes. I know where every penny I earn came from and went to, and I know what is a deductible and what is not.

I keep such good records of my budget, earnings, and expenses that people looking over my records have joked "You keep records like a stingy old Scotsmen."

To which I answer, "Well, duh! I AM Scottish after all, what do you expect?"

Next thing you need to ask yourself is: "Am I a professional writer running a business and making a living off my career as an author? Or am I a hobby writer writing in my spare time and making a little bit of money here and there in the sidelines?"

It makes a difference. And it is one of the questions you will find asked on the IRS forms. It'll be worded more like: 

"Are you running a business out of your home or is this a hobby income" or something to that effect.

They change the wording every year, so it's always different but basically they want to know are you bringing in this income as a full time career or a part time hobby. They will ask you to fill out different forms depending on how you answer. And than while filling out the forms. if your income is deemed too high to be a hobby or too low to be a business, than they will ask you to change forms and fill out completely different forms. Just follow the instructions as you go and change forms when they tell you to. It's not as hard as it sounds.

How can you tell if you are employed as a writer or just writing for a hobby? Ask yourself these questions and find out:

  • Are you a full-time writer, earning your entire income (little as it may be) from your writing?
  • Are all your eggs in this one basket? (Writing is your only source of income.)
  • Do you have many baskets of eggs? (Multiple streams of income, one of them being writing.)
  • Are you living off your life savings, your spouse, your parents, your siblings, your friends, and or your kids while you write that Great American Novel or bestselling Romance or a series of epic fantasies (or whatever other genre you got hiding up your sleeve and pulling out your ass)?
  • Have you set aside a separate office space (even if it's just a desk in the corner of your bedroom) in your house where you can write undisturbed?
  • Are you working towards making a living from writing, even if you have another job (or person) supporting you while you earn only pennies a month?
  • Do you have a regular type 9-to-5 job and write articles here and there for extra income?

If you answered yes to any of these questions than the IRS sees your writing as an occupation or career and thus you are running a business whether you think you are or not and you have to declare yourself as self employed. Writing is your career, your occupation, what you do to earn a living, and now you have to answer to the IRS.

There are differences between businesses and hobbies (or what the IRS calls a business verses a hobby, which may not be what you would personally call a business or a hobby) in how you report your income , so the first thing you need to establish is whether you are involved in this as a full time career or a hobby that pays you money. And than if the IRS disagrees with which ever one you decide you are, than go with what they say you are, because in the end it's pointless to argue with the government.

Whatever the IRS tells you you are, that is what you are. And remember that losses from hobbies are not allowed. Big no-no with lots of bad juju here. When you receive income from a hobby, you must include the gross income (whatever you got, without deducting any expenses against it) on the "other income" line of your tax return.

You can't just say "Oh, it's a hobby, I only made $400 last year from it. It doesn't count."

Yes it does. Don't matter that it is under $600 if you made more than $600 elsewhere. You got to add it IN ADDITION to any other incomes you may have.

Before you start filling out forms, the first thing you need to know is that as a writer, you are a self-employed independent contractor.


You have no boss over you taking out your taxes from your pay.

 We are special because we get paid with royalties, so we have to fill out special forms.

You need those 30 to 40 page extra-long, long-forms that the IRS provides for people like us.

Also April is not the time to start thinking about the IRS. Nope. It isn't. You will need to worry about the IRS, and soon, in fact BEFORE you publish your book, because as a self-employed tax payer you need to get your tax forms now (long ones) and start keeping careful records of every expense you make save all your store receipts (for paper, printer, computer, desk, munchies, etc) now so you can tell the IRS every penny you spent in the production of your book.

You should have been thinking about the IRS long before you started creating your first character or plot line.

Why?

Because they'll charge you $250,000 and 25 years in prison if you don't pay taxes on any royalties you receive for your book and they expect you to have kept a record of every penny you spent, otherwise they'll be knocking on your front door to do an audit. There’s no way around paying self-employment tax.

If you've never been self employed before you are in for a shock. Why? Because it’s going to be a lot more than you imagined! Let's say you are in the 15% tax bracket. That means you pay 15% of your income come April right? WRONG! It means you pay 30% of your income, PLUS that little bit extra (about another 7%) that goes into your Social Security and Medicare fund.

That's right. If you are in the 15% bracket, that means you are handing 40% of your income over to the Internal Revenue Service.

Why you ask? Well, when you work for someone else, your boss pays half your taxes all year long. AND your boss also pays your Social Security and Medicare fund for you. Wasn't that nice of him? Why you never knew he was a such a sweetheart now did you? He must really have liked you, what paying half your taxes for you like that and all, right?

No. Not really. He wasn't doing it because he liked you, he was doing it to keep his ass out of prison. He was required to do it, and he didn't do it out of his own money either. No he did not. He took it out of your pay check. o.0

Doesn't sound like such a nice guy anymore, huh? Well, hold your horses, because now that he's out of the picture you gotta put on your big boy pants and pay those fees yourself now.

What this all means is that every time you earned $1,000 your boss took out 15% ($150) and paid it to the IRS (each pay check, all year long) and also took out 7% ($70) and paid your Social Security and Medicare fund. So every time you earned $1,000, you actually received a paycheck of only $780. But than come April you also had to pay 15%, so you than paid an additional $150 for each $1,000 you earned throughout the year, only you paid it all at once in April, instead of $150 a week at a time all year long.

So, for every $1,000 your earn you only get to keep $630 of it. $1,000 -15% - 15% - 7% = $630 in your pocket. So if you earned $24,000 throughout the year on your book royalties, you owe the IRS $8,880 come April.

(Tax rates change yearly, so be sure to check the current figures.)

And if you weren't paying that 15% + 7% weekly, than you sure as better hope you have that $8,880 laying around in your mattress somewhere, or growing on a tree in your backyard, because if you don't hand it over on April 15th the IRS is going to start adding some hefty interests rates on it.

Yes, that does mean if your earned $24,000 this year that your ACTUAL income was only $15,120 minus expenses.

See if you had been paying your 15% + 7% throughout the year (like a boss would have done) than you'd only owe $3,600 on April 15th.

And if instead of putting on your macho big boy parts you went a put on your fancy dancy frilly smarty pants, well than you'd been really smart, and you would have just taken 40% off the top of every paycheck and mailed it in to the IRS on a weekly basis.

Why is this smart? Because on April 15th, the IRS would be sending YOU a check. They'd calculate how much you sent verses how much you actually owed (which is less than 40%, but you sent 40% to be on the safe side in case you over looked anything) and they sent back any extra that you over paid during the year.

Yay you! Boowah!

Plus, you'd have shown the IRS that in spite of your pink polka dotted smarty pants you are wearing, you ain't just clowning around here, you mean to be around a long time, you mean to make this business venture a successful career, so you did your homework and did your job like a professional.

You are a writer now. You are running a business. You are self employed. You need to start acting like a business owner, and as a business owner, you pay your taxes on time every week, not once a year.

As a writer you are a service provider, the type of self employed that the IRS called an independent contractor. You are your own boss. Ain't it great? No one telling you what to do, when to do it, you can sleep in, work late, skip work a few days, take month long vacations, work in your pajamas, answer emails while wearing a clown suit, do all those crazy fun things being your own boss let's you do, including paying those weekly 15% of your pay to the IRS and that weekly 7% to the Social Security and Medicare fund, so come April you only have to pay that other 15% as a one lump sum ...

Whoops, oh dear, so it's April next week and you're telling me you never heard of any of this, you spent all your income on that new car and new home office complete with entertainment system, you couldn't afford those pink polka dotted smarty paints because you spent all your cash on a smart phone instead (which isn't seeming so smart right now is it?) you're strapped for cash, you couldn't possibly come up with 15% in a week, let alone 40% what are you going to do?

Well, prison is probably in your near future so you'll have 2 or 3 years of sitting in a cell to think about it and tell yourself how stupid you were for not looking up the tax laws before you started writing your first book.

As an independent contractor, you are responsible for reporting all taxable income earned through the sales of your books, articles, poems, scripts, and short stories.  Including all those taxes and Social Security and Medicare fees that your boss used to pay throughout the year. Just because you are your own boss now, don't mean you can get out of paying all those weekly income taxes your boss used to pay for you. You’re the boss as well as the employee now, so you gotta pay both sides of the coin now!

It's time for you to stop being a baby, put on your Jedi uniform, and grow up. Repeat after me:

You are an independent contractor. Say it:

"I am an independent contractor."

You are your own boss. Go on. Say it:

"I am my own boss."

You must shape up or ship out. You must get off your ass and start acting like you are the boss. You must pay taxes every week throughout the year.

Your turn...

"I will shape up or ship out. I will get off my ass and start acting like I am the boss. I will pay my income taxes every week throughout the year."

These are not the droids you are looking for...

You do not see a dancing StormTrooper...

If your income is more than $600 per year, you will receive a 1099 form from the company/publisher who pays your royalties.

For example if you self-publish your books through Amazon Kindle or Lulu, or if you are published via a traditional publishing house such as Harlequin or Scholastic , they (Amazon, Lulu, Harlequin, or Scholastic) will send a 1099 form to you every February.

If you have printed your book up via a vanity press, do tread carefully with the IRS. The IRS views authors who publish via vanity press as tax dodgers, and they correctly assume as much because most of the vanity press authors are in fact tax dodgers, though not intentionally.

 Vanity Press published authors often get in trouble with the IRS over not keeping good records. When it comes to the IRS working with Vanity Press can be too tricky to handle unless you are really good at tracking every penny in and every penny out.

EVERY penny.

Also you may think you are running a business, running your ass all over hell and back advertising and marketing and shipping out books, but if you are using vanity presses to print up books that you keep in a storage unit or your neighbors attic or wherever you found to fit those 10,000 copies of your book you paid for, the IRS is more likely than not, going to call you a hobbyist and tell you that you are not eligible for all those office supply deductibles you been keeping track of. If your writing is a hobby, then your gross income from it would be included on your IRS forms, but your expenses can not produce a loss.

Because you pay (often in excess of $20,000) up front to have a thousand or so books printed (and than stacked floor to ceiling in your garage, till you can find a place to peddle them), you have literally purchased your books wholesale price and are reselling them at retail, and thus there is no one paying you royalties, and likewise no one mailing that 1099 form out to you come February.

Remember the ISBN number you had to slap on your book? The IRS tracks those numbers as a way to see how many copies of your book sold. They compare those figures to your tax records come tax time, so if you don't report your sales, they will know, because they already know.


The IRS can't track your ISBN if you are selling at a craft fair or off your website. That's what the ISBN number is for: to keep authors honest come tax time.

Your publisher (Harlequin, Amazon, etc) keeps track of those ISBNs for you (and this is why they ask you for your SSN when you publish the book - so they can say to the IRS, this SSN sold this many ISBNs and here a copy of that 1099 we sent them). Vanity Presses don't ask for your SSN because they don't track your ISBN or report to the IRS or send you a 1099, and that is what the difference is between a self-published book and a vanity press book.

What's even worse are the authors who skip the ISBN all together. ("I don't need to buy an ISBN, I'll sell my book without it.") The IRS sees them as outright criminals, not only avoid taxes, but avoiding telling them you even wrote a book at all!

The issue with vanity press is, the press prints up your books and than you the author sells the books yourself either at local craft fairs or off a website or rarely from local bookstores. 

You have to keep very careful records of how many books sold where, and if the IRS comes knocking on you door asking for proof you DID NOT sell those book, you sure as hell better have the books right there in your garage to prove you didn't sell them yet, other wise you'll be looking at some hefty fines from the IRS and possible prison time.

It is precisely because things get so sticky with the IRS, that is exactly why I always tell authors to NEVER, EVER, EVER publish through a vanity press. Most authors are good a one thing: writing. Few authors have good math and accounting skills. If you are an author with good accounting skills than maybe you can make vanity press work, but for most authors it's just asking for trouble come tax time.

If you are going to self publish, make sure you go with a company like Amazon or Lulu, one that will keep good royalty records and send you a 1099 form come tax time. It'll save you months of headache.

For more information, please refer to the IRS website and their page written specifically for independent contractors such as yourself. And remember that the IRS changes the rules and laws every single year so what you thought you knew about taxes from last year will probably not apply to your taxes next year. Make sure you read all the fine print on the forms and check their website often for updates.








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