[February 2006] Not a terribly sexy topic this month, I’m afraid, but perhaps a practical one. If you are a professional writer, you are probably in the process of scrounging around for all of the receipts and records that represent your income and outflow for the past year. Then comes the task of putting them in some sort of coherent order to present to the IRS.
Writing is not my primary source of income. I have a day job that provides me with a W-2 form. It’s all neat and tidy on that front. Fill out the forms, enter the correct values, brush my hands together and it’s all done.
However, for the past few years my writing income has been sufficient for me to declare it as a second job, one where I am self-employed. My agent provides me with a form 1099-MISC for royalties from mainstream publications. However, the rest of my income comes in dribs and drabs in the form of checks and PayPal transfers. None of these employers provide tax forms at the end of the year. It’s up to me to keep track of this income and report it on a Schedule C.
The bad news is that, because I am self-employed for this part of my income, my tax burden is higher than for my main income. That’s because a traditional employer pays benefits to the government on my behalf (social security, etc.) whereas when I am my own boss, I have to pony up the full allocation. Also, no taxes are deducted from any of this income during the year. If I don’t pay attention, I may end up owing the government a lot of money at the end of the year . . . and paying a fine to boot if I pass their critical threshold. Rather than submitting quarterly installments of my estimated taxes—which is one way to avoid the year-end clobber—I increase my payroll deductions from my day job to try to keep up with my writing income tax burden.
The good news is that every single thing I spend for this enterprise is deducted straight off my business income. It’s not like the rest of the tax form, where only a percentage of certain expenses reduce gross income. Spend 39 cents for a postage stamp to mail a query letter, and that diminishes my writing income by 39 cents. Go to World Horror and many of the expenses involved with that trip can be deducted. Airfare, hotel, ground transportation and, for some quirky reason, 50% of my meals.
However, since the IRS has a team of people out there waiting to pounce on anything fishy in a return, as a self-employed person, I have to be scrupulously efficient in my record keeping. Every time I receive a check or incur an expense, I enter it into an accounting program. Each year I open a new account in Microsoft Money and record transactions as they happen so I don’t forget. You may feel a little foolish typing in an entry for a 39-cent stamp at first, but believe me, when the following spring comes around and you’re looking for whatever you can find to reduce your writing income for tax purposes you’ll be glad you did.
I also make a note on the back of each receipt to indicate what the expense was for (e.g. Submission to Borderlands 6). Sometimes a receipt will contain personal expenses as well as business ones, so I circle any items that are tax deductible. If I pick up a pack of pens for signings while I’m at the grocery store, the whole meat and potatoes receipt goes into the file with that one entry circled.
Some people use one credit card exclusively for their business expenses. That means at year-end all transactions are on a single set of statements instead of interleaved with personal finances. Each February or March I decide that sounds like a good idea, but by then it’s too late to start doing that for the current year. Next year, I say, but then I forget . . . until next February or March.
Money allows me to assign a general category and a subcategory to each expense, so I’m gradually learning from year to year how to classify things to make my life easier at tax time. When I fill out Schedule C (I use TurboTax Deluxe), I don’t enter every single transaction, merely the total amount I’ve spent in general categories like postage or photocopying. If I’ve classified everything correctly, I can get the program to show all my expenses in that area, with a cumulative total. All my receipts go into a file folder or an envelope, and at tax time I’ll go through my Money printout and check off all the receipts in the file just to make sure I haven’t missed anything. I’m funny like that.
Income is, in some ways, easier, so long as I keep records. No one is likely to ask me to prove a declared income item. I get a check, enter it in Money, cash it, and the paper trail ends there. If I wanted to be really careful, I could photocopy the check for my tax file, but I’ve never done that. I can always pull out the bank deposit records if I need confirmation, but, like I said, they aren’t likely to disallow any income I declare. They’re funny like that.
If you are in the habit of purchasing a lot of your books for resale at conventions, then you have to keep track of that income and outflow, too. I prefer turning that responsibility over to vendors at cons. That way I can also avoid worrying about collecting sales tax. I was forced to acquire a sales tax ID number to sell books at a local event recently, which meant that I also had to file a state sales tax return last month.
Understand that I am not an accountant or a tax specialist. (I say that in case you do something based on what you read here and you get audited and sent to jail.) Once you decide you’re a professional writer, there are some fundamental decisions you have to make. One is whether or not to declare part of your house as a business office. If your income is great and you really need the deduction, it might be worthwhile, but I haven’t gone that route. It’s too complicated for my taste. You declare the percentage of your house that is devoted to your office—for me that’s my desk: about ten square feet (twelve if you count the piles of papers and books around it). Almost everything I do in that space is business related, but I also do personal things there, too. The implications of declaring a business office rear their ugly head if you sell your house. It looks so messy that I haven’t gone to the trouble to learn all that’s involved. Just be forewarned that if you go down that road you should have a clear understanding of what it might entail.
Toner, paper, postage stamps, photocopying fees, monthly internet service, conference expenses, those are all fairly straightforward. An area where things get messier is if you buy computers, printers and scanners, digital cameras and other durable items that you will continue to use for several years. Here you get into the realm of amortization and depreciation—you put these items into service the year you purchase them and either declare the expense all at once or amortize it over a number of years. Then you start depreciating their value until they are worthless according to the taxation authority. Since I’m not an accountant (see above), and since I use most of these items personally as well as for business, I don’t declare them as business expenses to avoid that whole depreciation/amortization complication. I could probably have saved myself a few bucks over the years by doing so, but I figure I saved myself enough aggravation to offset the fiscal hit.
Okay, so that takes care of the Taxes part of today’s topic. Now, what about that Death thing? Where do I begin . . .?
