Making money as a writer isn`t easy, and even bestselling authors advise you not to quit your job. While many people are passionate about their writing and strive to make a living from it, not all book authors can claim to be professionals – „for-profit” – in the eyes of the most important to the IRS. Here are some guidelines. Professional writers` income, whether self-published or traditional, may be subject to self-employment tax if they earned $400 or more per year after deducting expenses, provided the author is a U.S. citizen or resident. All income from the sale of books in or outside the United States must be reported as self-employment income. Writers who are at the beginning of their writing career may not be aware of their tax obligations, which can result in an overpayment or underpayment on their tax return. While paying more is comparable to an interest-free loan to the IRS, paying less can result in tax arrears. The most damaging thing about retroactive tax payments is that the amount originally owed increases over time due to penalties and interest until it is paid in full or a resolution is reached with the IRS. To avoid tax arrears, writers should know their tax obligations so they can stay compliant with the law and focus on what matters to them: their writing. Learn more about taxes and the author of the book, including VAT facts for self-published authors. Of course, many authors of self-published books want to make a profit and become a professional (like Donna Fasano), but not everyone will. For this reason, writing is one of the professions that the IRS has considered for further examination because of its potential persecution and appeal as vocations rather than calls for further examination.
(Others include horse and dog breeding, yacht rental, airplane rental, gambling, photography, fishing, agriculture, philately, and bowling). Authors are treated as self-employed because their income does not come from an employer-employee relationship, but from the sale of products. Because authors primarily earn income from royalties from various publishers and do not have an employer in the traditional sense, they are treated by the IRS as small business owners. First, let`s define your writing profession. The IRS will enforce the „loss of hobby” rules based on your seriousness as a writer. If writing is just a hobby or an occasional income-generating activity, you can only deduct your expenses in the amount of your income. In other words, you can`t make losses against other gains. For example, if your hobby generates $1,500 for the year and your expenses are $1,900, you won`t have a $400 loss to other income. You can only deduct $1,500 in expenses, so your net taxable income is zero from written sources. As a self-employed taxpayer or as someone who earns self-employment income, you may have the option of factoring your business expenses into your tax returns. To claim these deductions, you must complete a „Business Profit or Loss” form on Schedule C, which shows how much you earned in the previous year (income) and how much you spent (expenses) to operate your business.
Your business expenses are deducted from your total income, resulting in your taxable income. This means you won`t have to pay taxes on ALL the income you earn, which is good news! For a business expense to qualify, it must be both widely accepted in your business and necessary for your business. Here are 14 common deductions for writers` and authors` business expenses: Disclaimer: This article provides general tax information for self-employed individuals that may apply to writers and writers in the United States, depending on their tax filing status. Users should consult a qualified tax advisor or accountant to learn about the latest tax laws and details on how these rules can be applied to an individual tax situation. You may be wondering. Why is Q2 so short and Q4 so long? I have absolutely no idea. I do not make rules; I`m just filing your taxes. The IRS makes a critical distinction between sole proprietors (and all other amateurs) who practice their trade professionally rather than relying on their papers for a living. Any tax advice for authors and writers should start with the question: Are you an amateur or a professional? Being a „professional” affects what you can deduct from expenses related to your work as a writer, so it`s important to understand the difference.
Most of us probably don`t, and I don`t blame you. I`d much rather explore esoteric dragon mythology or 14th century secret societies than IRS regulations. But as far-fetched and intimidating as taxes may seem, as self-employed workers, we face more rules and deadlines than most. And it`s important that we approach every aspect of our career with the same pride we take in our art. Whether you`re a full-time writer or an amateur, meticulous records make it easy to comply with tax regulations. Since authors receive income from a variety of sources – advances, e-book platforms, awards, awards, etc. – the record is critical to tracking income and taxes withheld. There is no need to create or establish a business entity. Your business is just as legitimate as a sole proprietorship.
Operating a business is simply too expensive unless you earn a net income of $5,000 or more. In this case, don`t worry about hobby rules, but discuss starting a business with a tax professional to save taxes for the self-employed. Many people worry that working from home is a red flag. This was the case in the 1990s when there was a big flap on the use of the home office. A 1992 Supreme Court decision imposed strict restrictions. But the IRS came together a decade ago and removed those restrictions. It assumes that many self-employed workers, including telecommuters, use skilled home offices. They are no longer the red flags they once were.
As long as you follow the rules, you don`t have to worry. Don`t forget to submit with your state too! In PA, for example, Form 40-ES complements Federal Form 1040-ES. The rules vary from state to state. Jane`s Note: I recommend the Self-Publishing Legal Handbook. I received an advance copy and found the information useful and essential for almost all authors. Click here to learn more and download a sample. Set up separate bank accounts and credit cards to cover business income and expenses. But if you make less than $50,000, what happens then? Well, it`s not really worth getting involved. Nothing would change for you, and sometimes your state government will entice you to pay extra money just to deposit as an S-Corp, so you`d likely cost yourself more than you would otherwise pay. But the status you choose this year is not permanent. Maybe S-Corp status will have more benefits for you in the future. Here are some ways to prove business intent so you can profit from the losses in exchange for other income: Even if your business is a sole proprietorship and you never have employees, you`ll get a separate EIN that corresponds to a Social Security number for your business.