Tuesday, March 20, 2012

Tax Tips for Authors #4 – That Pesky Self-Employment Tax


by vivekchugh
Put those pitchforks down! And you, there at the back, douse that torch before something catches fire! 

Nobody likes self-employment tax, I know, but as our authorial success grows, there's a chance that we’ll make a profit for tax purposes. At that point, we’ll need at least a passing knowledge of self-employment tax. Come on, anybody who can write a WHOLE BOOK and then market the thing to make a profit can figure a little self-employment tax!

Now for the disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.

I thought about mentioning this in the post on IRS forms, but really, the self-employment tax is so special that it deserves a post of its own…

by JosephHart
Since your writing business is run by you, the sole proprietor, you are responsible for paying both the employer and employee portion of Social Security and Medicare taxes on any profit you earn.

Before you get in a huff about this, read on: 

If you have a ‘regular’ job – the kind where you get a paycheck every now and then – you already pay the employee portion of Social Security and Medicare taxes. Check a pay stub. It’ll show amounts withheld for Social Security and Medicare – see? That’s the part that you pay. What you can’t see is the portion that your employer pays on your behalf.

Okay, you’re still huffy and reaching for that pitchfork or torch. Why are you, struggling artist, forced to pay twice the Social Security and Medicare taxes that a ‘regularly’ employed person would pay? Never fear, the IRS comes through with a save on this one. After you calculate your self-employment tax, you get to take a deduction for the employer’s portion of the self-employment tax.

The IRS taketh away, then it giveth back.

And it works like this:

by djshaw at http://www.whitespark.ca

You’ve just completed your Schedule C – inputting income, calculating Cost of Goods Sold, and including your expenses – and you do the math to get to the figure on Line 31 to find out whether you’ve made a profit or loss for the tax year. You carry that figure to Line 12 on your Form1040.

Good. You’re done with Schedule C.

And then one of two things happen with regards to self-employment tax:

  1. If you show a PROFIT on Schedule C, Line 31 (congratulations!) – you’ll complete Schedule SE – Self-Employment Tax. Put your profit figure from ScheduleC, Line 31 on Line 2 of Schedule SE and complete the calculations on the form. Input the figure from Line 5 on Line 56 of your Form 1040, and the figure from Line 6 on Line 27 of your Form 1040.
  2. by xcpointx
  3. If you show a LOSS on Schedule C, Line 31, you probably will not complete Schedule SE. However, you should read the criteria on Lines 1a and 1b of Schedule SE to determine if you do not have to file Schedule SE. (The point of the exercise is to net all sources of self-employment income to determine whether you have to pay self-employment tax. For example, if you had a bakery and a writing business, you would net the income or loss from each. If you had net income from both businesses, then you would complete the Schedule SE – a net loss, no Schedule SE.)

And that's all there is to self-employment tax. Not so bad, was it? Go have a cupcake. You can pick up your pitchforks and torches at the back of the room...

Be sure to check out other relevant posts:

Saturday, March 17, 2012

Tax Tips for Authors #3 – IRS Forms


by norriuke
So, now that you’ve identified your income and gathered all the information for your expenses, it’s time to start filling in the tax forms. But before you do that, have a nice sit down and a cup of coffee or a cappuccino. You've earned it.

Now for the disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.

Nice and relaxed? Good, let's get started:

Arrugh! All the letters! Do I use Schedule E or Schedule C?

Much debate rages over whether royalty income earned from book publishing is reportable on:

Schedule E – Supplemental Income and Loss (From rental real estate, royalties, partnerships, S corporations, estates, trusts, REMICs, etc.), or

Schedule C – Profit or Loss from Business.

In fairness, it’s a confusing topic because royalty income is reported as, well, Royalties on your 1099-MISC.

Schedule C was my natural default for this one, but I wanted to make sure this was a good hunch, so I called the IRS. Surprisingly, the agent I talked to wasn’t an ogre. He was rather nice, in fact. My IRS agent, John, said:

If you are actively involved in the business of writing and intend to make a profit through your writing, complete Schedule C. You can claim all the expenses related to running your book writing and publishing business on Schedule C.
by dmpop

However, there are two times when an author would file a Schedule E:

  • if you are no longer actively engaged in the business of writing, but are still receiving royalties from your books, or
  • if you hold the royalty rights to a book you did not produce.

In both cases, the earnings from those books are considered passive. For example, after a writer dies, their books continue to sell and earn royalties. The person who inherits the rights to those royalties is not actively involved in the business of producing that product, therefore, the income is passively earned. Schedule E offers limited possibilities for deducting expenses related to earning passive income.

Schedule C, on the other hand, is designed to capture all the expenses related to running a sole proprietorship, which is what you, as an author, are until you form a partnership or a corporation in some form. Most of us will remain a sole proprietorship for our lifetimes.

by Henkster

What about the office in home expenses?

The IRS rules around deducting expenses related to a home office are documented in handy little tool called Publication 587. Ensure the six rules apply to you, and if they do, complete Form 8829 – Expenses for Business Use of Your Home.

Once you have the figure on Line 35, carry it to Line 30 on your Schedule C.

I’ve filled in my Schedule C or Schedule E, now, where do the numbers go?

The final figure from your Schedule C or Schedule E, whether a profit or loss, rolls to page one of the almighty Form 1040 – U.S. Individual Income Tax Return. There, it is added to your other sources of income to produce your Adjusted Gross Income figure, which is the bottom line on page one.

Make sense? Ask questions below, and I'll do my best to answer them.

Some helpful links:

Instructions for Form 1040

Be sure to check out other relevant posts:

Tax Tips for Authors #2 – Expenses


So, let’s move on to everybody’s favorite topic, expenses… (get a cup of coffee or tea, this post is a bit longer).

The disclaimer: As a reminder, everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). In these posts, we'll cover income, expenses, and which IRS forms to use. My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.


by bubbels

Worried that you’ll have to slice off a thick slab of the writing income you’ve worked so hard to accumulate and give it to the tax man? Well, you might, but not before you deduct the reasonable expenses associated with running your writing business.


Like what kind of expenses?

All sorts! Before you start rubbing your hands in glee, images of tax refunds dancing in your head, take a look at what the IRS says about expenses (included in a handy little tool called Publication535 – Business Expenses - it's still titled "2011", but don't worry, the only change is in mileage rates. For 2012, they're .555 per business mile.):

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.

There are three categories of expenses that you, as an author, need to consider:

Deductible – costs that are deductible this year

Capital – costs that must be spread over several years through depreciation

Cost of goods sold – if you carry an inventory of physical books, you will calculate the cost incurred in producing the books sold during the year to arrive at the true value of your sales (it’s not as complicated as it sounds)

Aww man, this is hard. Can you make it easy?

I’ll try. Here we go:

Deductible Expenses

Most of your business expenses will be deductible in the current year because you’re expected, generally, to get benefit from them for only one year. 

Common items include:

  • Advertising
  • Car and Truck Expenses, or Mileage – that’s right. If you give a presentation at a book club, bookstore, or school, or make a trip to purchase an item for your business, the cost of the miles that you travel for business purposes is deductible. That means that you need a list of the trips you’ve made for business purposes and the total miles traveled
  • Commissions and Fees – paid to your agent or other representative
  • Contract Labor – related to editing, formatting your book, cover design, recording / producing an audio book, secretarial support
  • Office Expense – toner or printer cartridges, pens, paper, files, subscription to online backup facility, copyright, ISBNs
  • Rent or Lease – applicable if you rent a room or office for writing or storage purposes, or rent equipment specific to writing (renting a laptop for travel, for example)
  • Repairs – to business related equipment such as your computer, printer, fax machine
  • Supplies – business cards, blank CDs for backing up your work, laptop case
  • Travel, Meals, and Entertainment – costs related to overnight travel for business purposes, including airfare, hotel, meals, parking, taxis
  • Other Expenses – business portion of cell phone cost, internet subscription, dues for professional organizations, fees for attending conferences, post office box used for business purposes
  • Business Use of Your Home – a delicate subject, but if you write in your home and can define the area that is used for business purposes only, you may be able to deduct a portion of your utilities, property taxes, home insurance, etc. Talk to your accountant about whether this deduction is appropriate for you

Capital Expenses

You’ll classify some expenses as ‘capital’ because you’ll use them for more than one year. Your smart phone, computer, printer, and fax machine fall into this category. Any office furniture purchased specifically for your business, such as a desk and chair, would qualify, as well. If you buy a block of ISBNs and don’t use them all in one year, the remainder might be considered a capital asset – ask your accountant.

by jnatiuk
Instead of taking the full cost of these items as an expense in the year in which they are purchased, you will capitalize them and take a portion of the cost as an expense over a number of years.

For example, as of the 2012 tax year, computers are considered seven year property. (I think this is waaaay too long, but nobody asked me.) That means that the $1,000 you spent on your laptop will be divided by seven, and you’ll expense $142.86 on your tax return each year for seven years.

Cost of Goods Sold (COGS)

This expense is only relevant if you maintain an inventory of physical books or audio books for sale. If you only publish in ebook format, or use a print-on-demand service such as CreateSpace, you won’t need to worry about COGS.

Getting your COGS calculation right is important because it’s a reduction to your gross sales, which reduces your taxable income. The equation is simple and documented on page two of IRS form Schedule C, which we’ll talk about in the next post:

Beginning inventory (books on hand at beginning of year)               $1,000
Purchases of additional books                                                     + $500
Less books withdrawn for personal use (perhaps as gifts)               -  $200
Gives you books available for sale during the year                          $1,300

Less your ending inventory (books on hand at end of year)              -  $200
Gives you Cost of Goods Sold                                                       $1,100

The COGS figure carries to page one of the Schedule C, and you subtract it from gross sales to arrive at your gross profit. For example, if you earned $3,000 from the physical books you sold, your gross profit is $3,000 - $1,100 = $1,900.


If you’ve read this far, you’re serious about the business of writing and, hopefully, about getting your accounting and taxes right. The most important thing to remember about your expenses is that they must be documented. If the IRS audits your tax return, they may ask to see evidence supporting the expenses you’ve claimed.

by Gerbera
The easiest way to document your business related expenses is to keep your receipts and document your mileage

Yup, that’s it.

Ask your questions below and I'll do my best to answer them.

Be sure to check out related posts on:

Tax Tips for Authors #1 – Income


It’s a cringe-worthy topic, I’ll grant you, but if you’re earning ANY income as an author you need at least a passing knowledge of how to prepare for tax season. And I’m just the gal to help you out.  

A crime fiction writer? Indeed.

In my other life, the one where I’m not finding creative ways to slaughter fictional folk, I’m a CPA. During tax season, I prepare a few returns and audit tax returns for a local accountant before he sends the files off to that hellish entity called the IRS. 

Everything you need to know about personal and business tax reporting is available on the IRS website (www.irs.gov). In these posts, we'll cover income, expenses, self-employment tax, and which IRS forms to use. My advice is not intended to replace that of your accountant; I hope simply to help you prepare for your annual tax filing.

So, let’s begin at the beginning:

by jnatiuk

Filthy Lucre (i.e., Sources of Income)

Gold, shekels, hard cash, or payment via Paypal. If you’ve got it coming in, the tax man wants part of it.

But how do I know how much to report?

Never fear, the IRS has a rule for that. For authors, our royalty income is documented on an IRS form called the 1099-MISC (follow the link to see the form). The payer (Amazon, Smashwords, your publisher, etc.) will send you a 1099-MISC to document your royalty earnings for the prior year. You should receive your 1099-MISCs by mid-February.

A copy of the 1099-MISC goes to the IRS, who will match it against the income you report. So it’s important to ensure that you receive a 1099-MISC from each outlet where your books are sold, and to include the royalty income on your tax forms.

And what about all the hard copies of my book I sell to friends and relatives?

by lusi
Good point. Authors also earn income from hawking our wares (physical books) at launches, fairs, book club meetings, signings, etc. You must track the income from these sales yourself, and report it on your tax forms.

You might also earn income from speaking engagements or running workshops (online or face-to-face). If you perform this work as a consultant, each organization that you provide the service for should send you a 1099-MISC if they pay you $600 or more during the year. If you organize the events yourself, you must track this income and report it on your tax forms.

Make sense? If not, feel free to ask questions below and I’ll do my best to provide answers.

Be sure to check out related posts on: