It’s that time of year, though if you’re reading this column for advice, you’d better get hopping. The deadline looms. It often amazes me how scary some people find taxes. Granted, I’m not normal. I started filing my own separate return after I’d finished training as a lawyer, which requires a class in taxation, so I was a little overprepared to do my 1040EZ. Nowadays, I sometimes do my taxes and I sometimes have them done, but it’s *very* important that you know how to do them yourself. Many a time I’ve seen people rave about how great their tax prep professional is because “he just gave us a bunch of worksheets to fill out and then he was done.” If you aren’t laughing now, I hope you will be by the end of this post. So lets start with the basics.
When do you pay your taxes?
If you are making a substantial income from writing, you need to be paying your estimated taxes to the IRS. The specific cutoff is that if you are expected to owe more than $1000 come tax time, you need to have paid that in advance. Here is the page where the IRS walks you through how to calculate your estimated taxes and when to pay them. It includes links to the forms you’ll use, and this system applies to anyone self employed, unless they’ve incorporated themselves. Incorporation is a whole other topic, and if anyone wants me to discuss it, just ask in the comments below.
Paying estimated taxes is essentially the same as employers withholding part of your paycheck and sending it to the IRS. Then, by April 15th every year, you file your tax return where you calculate how much you actually owed, and either pay the difference or receive a refund.
What kinds of tax documents will you need to report your income on your return?
Again, we’re staying basic here. Most of you will know that the document you get to report your income from places like Amazon.com, Smashwords, etc. is a 1099. Anyone who’s ever worked as a contractor knows the 1099 form. It’s a piece of paper on which the company who paid you tells the IRS how much they paid you, and you enter that amount as income on your tax return and file the 1099 with the return.
Now let’s talk about the other kind of document you sometimes get for writing income:
No document. That’s right, a significant portion of your income sometimes will have no documentation from whomever paid you. Writers who sell a lot of short stories to various markets deal with this all the time. They get the money via check or PayPal and that’s it. When you get no document, you need to keep track of the amounts you receive yourself, and this can take a bit of work, especially if you receive a lot of small payments. You will need this in order to properly fill out your tax return.
Schedule C, learn to love it.
All your miscellaneous income, of any kind, you report on the Schedule C of your tax return, assuming you file a 1040. If you file a 1040EZ, then you’re just taking the standard deduction and this doesn’t apply. Income you need to report on the Schedule C includes income you don’t have 1099′s for. Now there are a lot of myths out there about what you “don’t have to pay taxes on,” and they’re all myths. Cash payments are taxable. They’re just hard to track so you likely won’t be caught dodging your taxes. Barter is also taxable – and there’s a very persistent myth that it’s not. If you get paid in something other than cash, the cash value is taxable. Again, though, this is very hard to track. Just let’s be clear, in these situations you are legally obligated to pay the tax, even though many people don’t pay and very few people ever get caught for it. (If you have a rant against taxation you’d like to post in comments, may I kindly redirect you to your nearest political party or lawmaker, as I’m neither and ranting here won’t really do much on that score.)
You will also want to report your expenses with your writing business, and here’s where things get interesting.
What can you deduct as writing expenses?
People like to have a field day with deductions, sometimes, i.e. buying jet skis and slapping an add for their company on the side and counting them as a deduction. Writers can get pretty creative too, but bear in mind that the IRS has very little sense of humor here. What they’re on the lookout for is people calling their hobbies businesses and using them to shelter income. Filing a return is you stating, under oath to the US government that while engaging in a business, this is what you made and this is what you owe, so do think twice before deducting all your groceries as “food in your workplace cafeteria.”
When in doubt, read the IRS’s instructions here.
Some people skip doing deductions altogether, reasoning that they write on a computer they would own anyway, print on a printer they would own anyway, and thus don’t really have anything, but it’s worth taking a second look. Did you pay someone to make you a cover? Deduct it. Did you hire a blog tour operator? Also a straightforward deduction. Did you travel somewhere to give a reading or signing? To go to a convention? Even if you’re the kind of person who would go to conventions anyway, if you went as a guest and as a writer, it’s deductible.
Another gray area worth a second look is research expenses. Now, ideally you take a trip to where your book is set, interview people in who know things you need to know for your plot, and then the resulting book earns more than what you spent. Sometimes, though, you’ll do a side trip while on your family vacation, or you’ll call an expert who’s also a friend and end up chatting about a mix of topics. Often your book earns less than what you expended, and you don’t want the IRS to think you’re dodging taxes by calling your writing hobby employment. You always have to make a judgment call, but it’s worth taking time to tally up things like fees to get copies of documents or fares to go on an informational tour. These can be pretty clear cut and easily pass muster on the Schedule C.
In other words, even if you consider yourself a hobbyist, if you’re making income and you spend money that you wouldn’t have spent but for that book you wrote, you can deduct it. Don’t sell yourself short.
Don’t be afraid of tax forms
The 1040 can be filled out by just about anyone. As intimidating as it may look, it is made to be filled out by hand. The IRS provides a series of worksheets in order for you to calculate your income. You then plug the answers to the worksheets into your 1040. Even easier is to use software like TurboTax, which does the same thing, only faster. I know H&R Block is running a huge ad campaign about the $1 billion dollars that people who did their own taxes didn’t claim, but be sensible here. If your tax professional hands you a bunch of worksheets and makes your return based on those, guess what? You just paid someone to take your answers and plug them in the corresponding spots on the return. It’s certainly worth letting H&R Block review your return for free this year; they only charge you if they get you money. Don’t let this kind of ad campaign though, or general prevailing attitudes drive a wedge between you and management of your money. Even if you hire someone, make sure that you honestly feel you could do it yourself. Otherwise, you don’t know if you’re being ripped off.
If you have questions, feel free to ask them below!