Wednesday, February 15, 2012

Posted by Laurel Garver on Wednesday, February 15, 2012 12 comments
Yes, writing can be creative and fun, but at some point when your work goes into print, it will become something more--a business. With income. Expenses. All that jazz.

I don't see too many writers talking about the need to get your head out of the sand when it comes to treating your writing like a business. I guess it's because many creative people tend to get a glazed look when you mention the T word. Yeah, I mean taxes.

You might think you can jettison this worry onto someone who cares about this stuff--like your accountant. You can't. Not entirely. There are some things only YOU can do. And if you want to avoid a whole lot of headaches and stress, it honestly pays to educate yourself a little about this business-money-tax stuff.

Last week I attended an adult education small business tax workshop just to pick up some of the basics. Now that my head-cold fog is beginning to lift, I thought I'd share a little of what I've learned.

Business or hobby?
One of the first things to consider is whether you believe you will actually bring in some real income from your venture. Having substantial start-up costs and taking a loss is normal for the first few years. But if you plan to deduct all of your writing expenses, you need to post a profit within a few years, or the IRS considers your writing efforts a hobby.

Are you agented and out on submission? There's a good chance you could land a book deal, and with it comes income you will owe taxes on. Take the time now to get all your financial ducks in a row to minimize your tax liability. By that I mean register yourself as a business (likely a sole proprietorship), and track your deductible expenses. There are LOTS--from web design to business cards to your home office utilities. Even if you plan to use an accountant, you will need to keep records of your expenses. The teacher recommended the US Small Business Administration site (http://www.sba.gov/) as a great resource for getting started.

Ditto if you plan to self-publish or to sell short pieces to paying markets (and make more than $250 annually doing so).

If you sell stories or articles and only receive token payments, that's hobby income. The kinds of things you can deduct as hobby expenses are explained here: http://www.irs.gov/publications/p17/ch28.html. Note that you can't deduct losses (expenses that are over and above than what you got paid), you can only claim expenses up to the amount you made as hobby income. Tracking hobby expenses and income is a great way to get up to speed before you land a book deal, so do seriously consider doing some magazine work. Seriously. The writing credits and networking are some additional benefits.

First steps
~Remove your fingers from your ears and stop singing "La-la-la."

~Educate yourself about the rules. You must deal with three taxing entities: the federal government, your state government and your local government. The laws may have some overlaps, and may have some significant differences. An adult education class is helpful, and your local chamber of commerce and the SBA are also great resources.

~Apply for a federal EIN (employer ID number), for free, at the IRS site: http://www.irs.gov/businesses/small/article/0,,id=102767,00.html. You must have one to open a bank account that you dedicate to your writing income and expenses. It's really best to do this--keep your writing business as its own entity. It's much, much easier to track what comes in and goes out when it's not mixed in with your personal finances. You'll also need and EIN to deduct the cost of some services you hire out for, like editing.

Self-publishers take note: if you plan to set up your own press, WAIT to apply for an EIN until after you have registered your press name that you will be "doing business as." More information about is available from the SBA here: http://www.sba.gov/content/register-your-fictitious-or-doing-business-dba-name/.

~Apply for a small business license as required by your state or local government. The SBA has all the needed state links: http://www.sba.gov/content/business-licenses-and-permits. My municipality requires a license for any kind of business, so be sure to check in with your local government to see what their regulations are. Your local chamber of commerce may be able to help with this step. Don't be shy, give them a call if your local regulations are difficult to find.

~Open your checking account, using your EIN as the ID number rather than your SSN. Use it for all your business expenses: your web designer, your caterer for the launch party, etc. Deposit royalty checks here and link it to your paypal or Amazon account. This step will save you a ton of headaches!

What aspects of writing-as-business surprise you? Intimidate you? Was this post helpful? What else would you like to know?

12 comments:

  1. I've already taken many of the steps here. This was helpful. I did not know about the EIN number in order to open a separate banking acct. but it makes sense! And this is for any author for when they start making money!

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    1. Getting an EIN is super easy and free. I think the separate bank account as a way of simplifying one's recordkeeping is such an awesome and easy idea.

      As you approach self-publishing, there's a really good video series out there covering some of this stuff from indie author Allison Moon I tripped across, called "90 days of self publishing." You can find it here: http://www.talesofthepack.com/90-days-of-self-publishing/. (My fictional subject matter is a universe away from hers, but her business and organization advice is spot-on.)

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  2. This was a very helpful post. Thank you! You have a lot of knowledge in this area. I..do not. I don't think I'll ever be able to quit my day job for writing, much as I'd love to. But one day, I'd like to make a little bit of profit.

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    1. That's perfectly ok to write for supplemental income. Whether the IRS considers you a hobbyist or a business depends in part on whether you ever make more than you spend. The motivation for record keeping is to avoid getting socked with lots of taxes either way.

      And FWIW, you have a window of about three years before the IRS expects a new business to post profits rather than losses. During that time, your losses offset dayjob taxes if you keep filing Schedule C for your writing income and expenses.

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  3. Wow! This is a fantastic post. Thanks!!

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    1. Glad to hear it. I think the SBA is an amazing resource writers--esp self-publishers--should check out. As I mentioned to Laura above, Allison Moon's "90 days of self-publishing" video series has great business ideas too: http://www.talesofthepack.com/90-days-of-self-publishing/.

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  4. Totally tagging this post as a must read if I ever get a publication deal. I agree we creative types tend to bury our heads in the sand when it comes to treating our hobby as a business, but this stuff is important!

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    1. When you get closer to thinking pro about your writing, remember the great benefits of all this recordkeeping--being able to deduct the expenses you rack up for paper and toner, reference books, a portion of your office utilities (heat, electricity, internet, phone), conferences, research travel, etc.

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  5. I didn't use an EIN, but did open a separate business checking account. I didn't have any money coming in when I opened it, but by the end of this year, I'll definitely get one for taxes. Naturally, I have to find an accountant first. Math and I don't get along.

    Great post.

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    1. The EIN is especially important if you subcontract. For example, if you pay an editor, you can provide her a 1099 listing what you paid her--a deductible expense. It is also helpful for those of us married filing jointly to keep our spouses' credit a bit cleaner.

      I wouldn't delay getting the EIN. It's free, and something you should be putting on your Schedule C, on line D.

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  6. I'm self-employed, but haven't gotten the EIN yet. But you may just convince me to do so. At least with writing. I agree that it could save a lot of headaches in the future. I'm always scrambling to put together my expenses.

    Really great/informative post!

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    1. I think the teacher's advice to have the EIN even just to set up a sole proprietor bank account makes a ton of sense. Recordkeeping is tons easier when the income and expenses are separate from personal finances.

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