In my real life I’m a tax and finance professional and I’ve been sharing my knowledge with other writers for the past three years. I find many people have problems with the same issues year after year. Are you making these mistakes? If so, you’ll find more ways to solve these problems (and more) in my book Tax Tips for Authors 2014. (Available from Amazon, B&N, iTunes, Smashwords and AllRomance/OmniLit and in print)
1. Calling your hobby a business – or vice versa
The IRS has a pretty strict line between hobby and business, because businesses get to write their losses off against other income (W-2 or investment income) which lets them lower their taxes. To be considered a business you need to have profits in 3 out of the past 5 years. It you’re having more years of losses than profits, the IRS may want you to prove you’re a real business, which means show that you are trying to make money. They look at the ratio of expenses to earnings and the type of expenses you claim: advertising and other promo help you, but travel to conventions may hurt you if you’re not earning enough to justify the expense.
Businesses that claim to be a hobby are seen as avoiding self-employment tax, so if you have increasing hobby income, the IRS may force you to file Schedule C and pay SE tax. Make sure you classify your writing correctly.
2. Not filing quarterly estimated tax payments
This is one of the most confusing aspects of self-employment and for authors it’s even more complicated: earnings and expenses fluctuate wildly during the year. Some people just ignore it, then get both a big surprise balance due in April, plus a penalty for not paying quarterly. There are ways to avoid this, the easiest being to pay at least 110% of last year’s tax bill in quarterly installments. If you overpay, you’ll get a refund, but you’ll definitely avoid a penalty. I go over how to calculate the correct quarterly payments in my book, Tax Tips for Authors 2014.
3. Paying too much self-employment tax
How do you pay too much? By not taking all the deductions you can, and by not keeping a careful running balance of profit and loss during the year. You only pay SE tax when you have over $400 of profits, so if you can reduce profits (by increasing legitimate spending during the tax year) you can save some money. Make sure to do a tentative P and L calculation in early December. It may make sense to register for expensive conventions then rather than waiting till January. Buy a new computer or pre-pay for advertising. Shift only planned spending rather than simply spending down your profits carelessly, so you can build your business rather than just avoid taxes.
4. Missing out on deductions
Most authors I work with don’t keep good records of their spending. This includes mileage driven for “business.” Did you write down every time you drove to the library, book store, airport, etc.? Get in the habit of writing down your mileage and other expenses every day or two—before you forget—and you’ll see how much more you are able to claim. Keep receipts for books, index cars, notebooks, stock photos, domain names, lunch with your writing partner, swag, etc. This will also help you keep a running P and L for filing quarterly payments and making good year-end spending decisions. I have much more information on proper recordkeeping and deductions in the book.
5. Mixing business and personal expenses
Along with the hobby/business issue, this is one of the things IRS loves to investigate. The best way to keep everything separate—even for sole proprietors—is to have separate bank accounts and debit or credit cards. It’s easy to have a separate PayPal account just for your writing business, and you can get a PayPal debit card. An Ally bank account is free and requires no minimum deposit and they issue debit cards as well. Have all your payments made into the separate accounts, and spend only from the business PayPal/Ally debit card. If you need to use a credit card, ask for an additional card from your credit card company and use the new one only for business. At the end of the year you can get a separate statement of your business expenses, which makes recordkeeping and organizing deductions a snap.
Want even more information? Sign up for my Tax Tips Newsletter, or visit the Tax Tips for Authors website. Best of all, pick up a copy of my book Tax Tips for Authors 2014. It’s got new information for filing 2013 returns, a Schedule C walkthrough, chapters on self-employment taxes and quarterly payments and a whole lot more.
The author is a former investment analyst and White House economist. Now she writes erotic romance under a pen name. She loves books where the hero gets the guy and the loving is 11 on a scale of 10. Her Precious Gems series is best described as “Indiana Jones meets Romancing the Stone”—only gayer. The Delectable series is Gay Romance with Taste. Her books are available in print and e-book from Amazon & other book distributors.